The Securities and Exchange Commission (SEC) Climate Disclosure Rule is a regulation enacted by the SEC. It aims to standardize how publicly traded companies disclose climate-related risks and their impact. The rule was first announced in March 2022. Originally expected to be finalized by December 2022, it has been delayed twice due to feedback and comments from various organizations.
On March 6, 2024, the SEC finalized and officially published the Climate Disclosure Rule. The final rules will become effective 60 days following publication of the adopting release in the Federal Register, and compliance dates for the rules will be phased in for all registrants, with the compliance date dependent on the registrant’s filer status.
It is important to note that the ruling comes with much criticism and has been labelled as “over-reaching” and “politically driven”. Critics of the ruling have also protested some of the ambiguity in the text. For example, companies would only have to report Scope 1 and Scope 2 emissions if they believe they are “material” — in other words, significant — to investors — a decision that ultimately allows companies to decide whether they need to disclose emissions-related information. And small or emerging companies don’t have to report emissions at all. Because of this, some experts believe the ruling to be challenged in court.
Scope 1 emissions refer to a company’s direct emissions, and Scope 2 are indirect emissions that come from the production of energy a company acquires for use in its operations.
Below is a breakdown of some of the key climate disclosure rules as registrant is required to disclose:
- Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition.
- The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook.
- Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices;
- Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
- For those required to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level;
- For those required to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level;
- Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition. Disclosures would include material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or actions taken to make progress toward meeting such target or goal.
You can read the full list of disclosures from the SEC Press Release: https://www.sec.gov/news/press-release/2024-31
What the SEC Climate Disclosure Rule Means for the Pallet Industry
The original proposed ruling, submitted in March 2022, contained language that would make it mandatory for publicly traded companies to report on Scope 3 emissions – which includes supply chain activities. After receiving over 24,000 comments from companies and other organizations, the SEC revised the ruling to omit mandatory Scope 3 reporting.
However, this does not mean that pallet companies will not play an important role in a publicly traded company’s climate impact and sustainability story moving forward. In fact, an SEC member during the open call on March 6, 2024 mentioned that investors still see a company’s Scope 3 activity as fundamentally important. So while the ruling itself will not require pallet companies to report carbon emissions to their publicly traded customers and vendors, pallet companies may expect to see increased interest from these customers on the quantifiable environmental impact of wooden pallets – which research shows to be positive compared to other alternatives.
This interest may also increase depending on the customer or vendor’s subjective opinion on the material importance pallets play in reaching their climate related goals and/or mitigating climate related risks.
