Despite its limitations, the SEC rule will change U.S. companies and the voluntary carbon market (VCM)

Overview (CEEZER’s Viewpoint)

SEC Climate-Related Disclosure regulations were announced and are weaker than many hoped.
This is not the end of regulations in the US it is the beginning.
Based on the response to the EU CSRD laws, we predict companies will feel the pressure to be more transparent and, therefore, more cautious when it comes to quality.
Regulations are not the only driving force for stronger sustainability practices. Shareholder pressure to voluntarily adopt these disclosures will increase.
CEEZER is prepared to meet the needs of companies looking to comply with current and future regulations.

Note: CEEZER’s SVP of Business Development, Kathy Kearns, took part in a panel discussion about the SEC climate disclosure rule on April 10, 2024. You can view the entire event here or below.

Last month, the SEC announced the long-awaited Climate Disclosure Rule. This rule will require some U.S.-based public companies to report their greenhouse gas (GHG)emissions and climate risks. The publication of the rule triggered almost immediate legal action, which has resulted in a stay while litigation is underway.

Regardless of the legal maneuvering, many in the climate community viewed the “weakened” regulations as disappointing. These regulations, however, are not the end of emissions disclosure policy in the U.S., they are the beginning. Even watered-down regulations will have far-reaching impacts on corporate sustainability and the voluntary carbon market (VCM). Here’s what to expect:

The SEC rule will trigger more climate transparency from U.S. companies

The SEC rule is less stringent than the Corporate Sustainability Reporting Directive (CSRD) laws in the EU, the California Climate Corporate Data Accountability Act (the CCDAA), and Climate-Related Financial Risk Act (the CRFRA). As companies comply with those regulations, we have seen carbon credits play an increasingly important role in meeting corporate sustainability pledges. Disclosures triggered by the SEC rule increase the premium on high-quality, low-risk, higher-priced credits as companies anticipate more scrutiny of their purchases.

The rule requires companies to address carbon credit risk in reporting. By facilitating a more transparent environment and formally linking climate and financial risk, the rule will push companies–even those not subject to its requirements–toward disclosing their carbon impact and reducing their GHG emissions. In turn, those same companies will demand more data sharing and transparency from the suppliers of their carbon credits. The informational asymmetry between carbon project developers and credit buyers has long been an obstacle to scaling the VCM, and will only become more of an impediment to a healthy and expanding market under the SEC rule and other regulatory regimes.

A new reason to plan carbon credit purchases and create diverse portfolios

When creating sustainability plans that include carbon credit purchases, companies must take price risk into account. With the SEC rule and other tightening regulations intensifying focus on quality among buyers on the VCM, the highest-quality credits are likely to increase in price. An effective sustainability strategy that includes operational changes to reduce emissions must include the short- and long-term cost projections for those changes. Similarly, a carbon mitigation strategy that includes credit purchases must include cost considerations and factor in the risk of those costs increasing due to market forces. A diverse portfolio of carbon credits that mirrors a well-mixed portfolio of financial assets will mitigate that price risk while also lending support to a variety of climate projects that enrich a company’s sustainability story.

Stakeholder pressure for disclosure continues to build

Companies at the forefront of risk management are already taking action to measure and mitigate their climate risk, largely in response to pressure from investors, customers, employees, and other stakeholder groups. These stakeholders’ calls for accounting for climate risk, emissions reductions, and progress toward net-zero goals will continue to grow louder, independent of new or changing rules and regulations. Disclosing climate risk, whether required or not, will provide stakeholders with the transparency and data they require to make informed decisions about their own investments. By highlighting companies’ transparency and disclosure practices as important criteria for their decisions, investors and fund managers can and will stimulate climate progress in the private sector, with the most transparent and proactive companies reaping financial and reputational benefits.

Companies currently using carbon accounting and portfolio management tools already have all the information needed to comply with the new SEC rule or, as the case may be, to advance to the forefront of sustainability under the conditions the rule has created. CEEZER is well equipped to help companies meet these and future requirements by helping enterprises create future-proof, high-quality carbon credit portfolios with one global view of all data in one central location. This allows for easy reporting that is preformatted to all major rules and regulations, like the SEC Climate Disclosure Rule and more.

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