Counting Carbon: How the SEC Rule Approaches GHG Accounting

Publishing note: At the time of this article’s publication, the current status of the SEC climate disclosure rule has been voluntarily stayed pending judicial review of consolidated challenges by the Court of Appeals for the Eighth Circuit.¹

With the pending implementation of the SEC’s new climate disclosure rule, public companies now know how to measure their emissions to be in compliance with the pending implementation of the SEC's new climate disclosure rule. Understanding how the rule approaches greenhouse gas (GHG) emissions accounting is critical for public registrants. The regulation will likely require thousands of large accelerated filers (LAF) and accelerated filers (AF) to report GHG emissions—many for the first time (See our article, “SEC’s Climate Disclosure Rule (Stayed)”).^2,³ Using the financial data provider Refinitiv’s database,⁴ the SEC estimates that less than half of LAFs and 15% of AFs disclosed GHG emissions in 2022, illustrating the need for guidance on how to estimate and report GHG emissions.

To better understand the impact of the SEC’s disclosure rule, organizations may find themselves faced with the following questions regarding the reporting of the GHG emissions metrics section in the final SEC rule,⁵ including:

How do organizations determine which GHG emissions are material?
What emissions does an organization need to report?
What standard should be used to report emissions?
When and where do organizations need to report?
What steps can be taken to prepare for SEC GHG reporting?

How to Determine Which GHG Emissions Are Material?

The key to GHG emissions reporting is understanding whether the registrant’s emissions are material. For questions on what constitutes material, the SEC defers to the 1976 U.S. Supreme Court case TSC Industries Inc. v. Northway, Inc., which notes “a substantial likelihood that the ... fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” ⁶

The SEC offers example instances⁷ in which GHG emissions could be considered material for the registrant:

The emissions calculation and disclosure are significant enough to create a climate transition risk that will likely impact the business, its operations, or its financial condition.
The requirement to report emissions under a foreign or state law, e.g., California 2023 Senate Bill 219 (See “California Enacts GHG & Climate Reporting Laws Requiring Major Action by U.S. Companies”), or the EU’s Corporate Sustainability Reporting Directive (CSRD).
An update on progress against public GHG emissions reduction targets or goals.

What Emissions Does an Organization Need to Report?

If material to the LAF or AF, a registrant must disclose its Scope 1 emissions and/or its Scope 2 emissions. Scope 1 emissions are direct GHG emissions that stem from sources that a reporting entity controls. For example, a comprehensive report stretches across the footprint of the company—including international operations if applicable.

Applicable SEC registrants will need to report Scope 1 and Scope 2 emissions. Scope 1 includes the emissions directly attributable to the company’s operations. Scope 2 emissions are associated with the purchase of electricity, steam, heating, and cooling.

Scope 2 emissions are indirect GHG emissions “largely from the generation of purchased or acquired electricity consumed by the registrant’s operations.” ⁸

There are two Scope 2 accounting methods:

Location-based: Averaged emissions intensity of the electricity grids where the energy consumption occurs.
Market-based: Emissions from electricity that companies have chosen through contractual instruments, such as power purchase agreements and renewable energy certificates.⁹

Depending on the methodology used, a registrant could be required to report both location- and market-based methods for organizations with operations in markets with electricity contractual instruments. In addition, a registrant must disclose individual GHG emissions gas of the disclosed emissions if individually material and, if so, report it disaggregated from the other gases. The SEC lists greenhouse gases below:

Carbon dioxide (CO2)
Methane (CH4)
Nitrous oxide (N2O)
Nitrogen trifluoride (NF3)
Hydrofluorocarbons (HFCs)
Perfluorocarbons (PFCs)
Sulfur hexafluoride (SF6)

For example, an oil and gas company might need to report methane emissions separately because the organization has public methane emissions reduction targets.

What Standard Should Be Used to Report Emissions?

Registrants reporting their Scope 1 and/or 2 GHG emissions will need to describe the underlying methodology used to calculate those emissions, significant inputs, and significant assumptions. The registrant will also need to disclose:

If the organizational boundaries materially differ from the scope of operations included in the registrant’s consolidated financial statements, the registrant will provide a brief explanation of this difference in sufficient detail for a reasonable investor to understand.¹⁰
A brief discussion of the approach to categorization of emissions and emissions sources.
A brief description of the protocol or standard used to report the GHG emissions, including:
- the calculation approach
- the type and source of emission factors, which is a representative value that relates an activity, e.g., burning natural gas, to carbon dioxide equivalent (CO₂e) emissions for that activity
- calculation tools used to calculate GHG emissions

The SEC rule preamble notes the GHG Protocol, ISO 14064, and EPA¹¹ as example of methodologies that the registrant could use, though the organization could rely on other methodologies. It is important to note that GHG emissions disclosures will require assurance by an independent third party beginning as soon as 2029, depending on an organization’s filing status. Therefore, selecting a methodology that is appropriate for the business and maintaining records on the calculation methods employed warrants attention when setting up the GHG emissions reporting program.

When & Where Do Organizations Need to Report?

An organization’s reporting deadline corresponds with its filing status. LAF registrants reporting under the rule will start to report GHG emissions data for fiscal year 2026 data in 2027, and AF registrants will start to report FY 2028 data in 2029 (below figure). Any GHG emissions metrics required to be disclosed on Form 10-K may be incorporated by reference from the registrant’s Form 10-Q for the second fiscal quarter in the fiscal year immediately following the year to which the GHG emissions metrics disclosure relates.¹²

Registrant Type	Report	Report FY Emissions	FY Emissions Assurance Requirements
LAF	Scope 1 & 2	2026	Limited: 2029 Reasonable: 2033
AF	Scope 1 & 2	2028	Limited: 2031

What Can Be Done to Prepare for SEC GHG Reporting?

First, LAFs and AFs should work closely with investor relations personnel to discuss whether emissions reporting is material to the organization and, if so, whether it is Scope 1, Scope 2, or both. Even more granular emissions reporting could be material for companies that have set individual emission-type reduction targets, such as a methane emissions reduction target.

Next, companies should create a GHG inventory management plan that sets up the firm for future success in reporting emissions by clearly outlining the key organizational information, surfacing data management practices, establishing a base year of emissions reporting, and identifying the pathway to assurance.

GHG inventory management plan that sets up the firm for future success in reporting emissions by illuminating the key organizational information, surfacing data management practices, establishing a base year of emissions reporting, and identifying the pathway to assurance

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