Ep. 6: What the SEC’s climate rules mean for sustainability communication

After two years of consideration and more than 24,000 comments, on March 6, 2024 the United States Securities and Exchange Commission (SEC) finally adopted its “rules to enhance and standardize climate-related disclosures by public companies and in public offerings.” These rules are part of an effort to respond to investor demand for more “consistent, comparable and reliable” information about the financial effects of climate-related risks on a company’s operations — and how those risks are managed while balancing concerns about mitigating costs.

To better understand what made it into the final SEC climate rules, and how this impacts sustainability communication moving forward, Mike caught up with Derek Young, VP of ESG at the REIT CBL Properties. 

Read the full transcript of the conversation below. You can also listen to this episode on Spotify, Apple Podcasts, Amazon Music and YouTube. 

Mike Hower: Hey, everybody. I'm here today with Derek Young, VP of ESG at CBL Properties. CBL Properties is a U.S.-based real estate investment trust (REIT) that invests in shopping centers and owns shopping malls, primarily in the southeastern and midwestern United States. Derek has an extensive background in ESG strategy and communications. He previously led ESG consulting services at Summit Strategy and has held a wide variety of corporate sustainability roles, including my personal favorite — creating the first responsible business function for the company that owns TGI Fridays. Derek also is a top LinkedIn voice, so be sure to follow his content on LinkedIn to stay up to date on all things ESG. 

Thanks for being here today, Derek.  

Derek Young: Thanks, Mike. It's a pleasure to be here. Really happy to be on the show. 

Mike: Awesome. Thanks for jumping on this really quickly. I know last week there was a lot going on with a lot of things in the world — but particularly with the SEC rule that we've all been following for several years that finally was approved. And so, I wanted to start off with just talking a little bit about that. And I know some of our listeners are kind of newer to this space. So, they might not be as familiar with the SEC rule, while others might be more familiar. Can we just start out with — from a high level, what is this rule and where did it originate and what is the final rule — like the cliff notes version of the final rule that everyone should know?

Derek: Yeah, so let's step back for one second. And for those that don't know, the SEC is the Securities and Exchange Commission, which is the federal regulatory agency that has responsibility — among other things — for determining what we are regulatory required to provide investors who need to make informed choices about how those investments are governed and what risk factors are involved. The SEC covers a wide range of topical areas and a number of issues. However, over the last two to three years, there's been an increased focus on ESG issues and in particular climate issues. The rule that you're referencing, which was officially passed last week, but originally introduced in, I believe, March 2022 was and is intended to provide institutional investors in particular, but investors in general with specific, consistent and comparable disclosure around ESG, Information related to climate risk and climate performance that might influence or affect an investor's decisions.

So, that's the overarching intent. And it's driven by the fact that over the last several years, investors have repeatedly indicated that climate risk in particular — and there is a difference between climate risk and climate performance, and we can talk about that if you wish — but climate risk in particular can and does have a very material bearing on investment decisions. And so, this rule really tries to do a number of things and it's broadly focused on providing consistent annual disclosure that's comparable between businesses for investors to make informed choices. So, what the rule does, first and foremost, it requires companies when we talk about companies, they're divided into large accelerated filers and accelerated filers that's based on the size of your business. But for large, accelerated and accelerated filers, first and foremost, it requires that you are annually reporting on your climate risk.  And it  mostly uses the Task Force on Climate-related Financial Disclosure (TCFD) framework for how that risk reporting should be carried out. 

Secondly, it will require Scope 1 and Scope 2 greenhouse gas emissions reporting. However, this is a difference from the original rule. And it's worth noting the original rule — when it was  released in 2022 — has been revised considerably. Because the SEC, I believe, received the most comments they've ever received on a proposed rule in history — I believe it was somewhere in the vicinity of 14 or 15 thousand comments, you know, specific to this rule.

And as a consequence, they revised it and in some ways, loosened some of the requirements that they had intended initially to produce. And so, one of the changes they made from the original rule is that they've added a condition to the  greenhouse gas emissions reporting requirements to say that companies only need to report that if those emissions are deemed to be material. 

This is really important because it applies to both the Scope 1 and Scope 2 emissions reporting. So, in other words, you could deem Scope 1 emissions material and not Scope 2 emissions, and therefore only have to include Scope 1 reporting in your annual disclosure. And they define “material” as impacting your business strategy, your operations or your financial performance. There's a little bit of room here for companies to make determinations as to what's deemed material. I think there'll be some continued conversations about how this actually nets out in the real world when they have to determine what is required for disclosure. But that is the second piece of the rule.

They did remove Scope 3 reporting from the rule entirely. So, that is no longer part of this particular rule. One interesting thing is it does have a component in the rule that requires financial statement footnote disclosure. So, in other words, what they're asking companies to do is when a severe weather related event occurs, if substantial financial damage is done to your business — that you actually have to report that, in order to let the SEC know that there's been a potential disruption to business service or potential disruption to business performance. 

Mike: And Derek, can you define Scope 3 for those listeners who aren't familiar with the terminology? 

Derek: Of course. So, when we look at the Scope, Scope 1 are direct emissions — anything that is directly generated as a consequence of running your business. Scope 2 are emissions generated from the power that you purchase. So gas, natural gas, any kind of direct power purchasing through a utility. And then Scope 3 are all of the indirect emissions that are not generated as a direct result of operating your business, but as an indirect result of that. So, for example, any emissions from within your supply chain — emissions from, let's say, employees working from home, emissions that are the consequence of procurement and purchasing, there are a number of categories  that they qualify under the greenhouse gas protocol for scope three emissions.

And this indirect emissions reporting is generally not always, but generally is the largest  percentage of emissions that a company would have from a reporting point of view, but it is also the hardest to secure and the hardest to ensure comparability and completeness for. So, most of those comments — those 14, 15 thousand comments that the SEC saw had some pushback on the premature inclusion of Scope 3. 

Just as a footnote or as a side note here, what's interesting to be aware of is that while the SEC has chosen to remove Scope 3 from its rule,  you know, just prior to us seeing the SEC rule released, we've seen several other pieces of regulation around the world and even here in the U. S. pass that does include Scope 3. So, the State of California has a Senate bill, I believe it's 251. Which requires any company that has revenue in excess of a billion dollars and does any business in the state of California subject to emissions reporting requirements, which includes Scope 3, and then the, the European Union's CSRD — which is the Corporate Sustainability Reporting Directive — also requires Scope 3, and that also applies not only to companies based in the European Union But anybody that in any company that does business in Europe over a certain financial threshold annually, so we're seeing Scope 3 kind of engaged in other places, even though the SEC presently has chosen to remove it and then the other two kinds of key pieces to the rule right now.

And there's a million summaries out there. If anybody's interested, all you need to do is look it up on the internet, but I'm giving definitely the high level overview here is, attestation and assurance. So basically, this is important from a communications perspective, companies who are submitting and providing this annual disclosure are going to be required to have third party auditing firms review and assure the accuracy of that data.

And then the timeline for disclosure in this rule was also adjusted, and what we're seeing is that initially 2025 was supposed to be kind of the early piece of the kind of timeline arc for rolling out requirements. It's now been pushed to 2026, and the reporting requirements have been set up in a way where you can actually roll your reporting into Q2, into your 10K or 10Q  rather than having to do it in the 10K and, and so you have a little bit more time every year to get this out. It doesn't have to be folded into that initial financial disclosure that you usually put out in Q1.  So, that's the broad overview of the rule. Again, there's a number of summaries out there from just about everybody that you know that knows anything about this that go into far more depth. 

One other really interesting and notable change is that the SEC initially in its first draft of this rule required that emissions disclosure be passed cumulative of three consecutive years. So, if you were reporting in 2026, you had to have three years of consecutive data in that disclosure — that's been removed. And it's now just going to be instead of looking back, it's going to look forward. So, when the 2026 deadline hits instead of having to have 2023, 24, 25 data, you'll only need that 2025 data and then it'll grow cumulatively forward from that point. That's a big change for companies who are looking at how to handle this because they don't have to have that broad cumulative collective emissions inventory that they would otherwise have had to compile. 

Mike: You already mentioned that there's lots of different regulations popping up in Europe and in California, and this is the  latest one coming out of the federal government in the U.S. Does this rule impact any companies that are already working to address CSRD, for example, like would this alter their plans at all? Or is this kind of just another thing  to check the box on?  

Derek: You know, that's going to be a little bit to be determined, but to the best of my understanding, the way the rule has been written and the way in particular the EU and even the state of California have structured their regulations, the SEC rule will not supersede the requirements of those other regulations because it isn't as substantial. Part of the reason for the delay and the release of this rule — amongst many other things — was that Chairman Gensler at the SEC was looking to see if there was a way to match the European Union's disclosure requirements in which point the EU had indicated that it would absolve U.S. companies from having to comply. But not having done that, my suspicion is that if you are under the reporting requirements for CSRD you still are — as would be the state of California as well.  

Mike: Awesome. So, I know that there's going to be plenty of podcasts that tear this rule apart from all angles. And for this particular show, we're really focused on how do you talk about the storytelling piece of sustainability? And so, if you were a comms or marketing professional that's working with a big company that is now required to disclose under these new rules — or even if you're a sustainability strategist that's trying to work with their marketing teams or comms teams — what advice would you give them today in light of these new rules, particularly the SEC rule of how do you approach communicating sustainability, not just the reporting piece, but just generally  how you would approach communication strategy right now? 

Derek: I think there are three terms that are going to become fundamentally required for any kind of communications work that gets done going forward: completeness, accuracy and comparability. I mean, the whole point of this rule is to ensure that we're putting information out that is capable of being annualized and integrated into financial reporting and is consistent and can be used to compare performance, or contrast and compare performance.

One thing to note is that kind of running parallel to this rule has been a relative explosion of emphasis and focus on policing greenwashing claims — and climate reporting disclosure has been an area of focus. So, the accuracy piece to this is going to be fundamental. Another area that I think is going to be really important is making sure that you're not releasing information piecemeal — that you're not dripping things out, but rather really putting together a complete picture of your required reporting expectations and  that information has the capacity to be and has been validated for that accuracy component.

So, I think from a communications professional's point of view, there's really two different types of communication now that are unfolding. Whereas, historically, we put all this into the CSR, ESG report, and that became kind of the fundamental vehicle for everything we were releasing on any information that was relevant to that company's previous year's performance. You now really have two different vehicles for communicating. You have your annual financial disclosure documents — your 10K, your 10Qs, your proxies — where this requisite data is going to have to live as part of your annualized SEC filings, and then you have your ongoing reporting. 

And I think one of the things that's going to be important is to make sure that those two documents are absolutely 100 percent aligned — that you're not putting something out to the SEC that then somehow looks different when you put your ESG report out and vice versa. And that the ESG report — while still inclusive of that data — is allowed to be a little bit more broadly defined from a storytelling point of view. Because your disclosure on these particular issues is going out through this financial format, but I think what we're generally seeing overall is an effort to try to create more focused, consolidated and data-driven communications on ESG in general. So, you know, how you align these types of reporting platforms is going to be really important and how you protect your business from potential backlash from inaccuracy or over embellishment — whether it's intentional or otherwise — has gotta be top of mind for any communications professional. 

Mike: The 2024 presidential election is starting to heat up and there's a lot of  apprehension about what will happen one way or the other, depending on the outcome. And we're not here to talk too much about the political side of things — but I think given all these policy changes, there is a lot of wonder around what's going to happen depending on the outcome of this election when it comes to the SEC rule and just climate policy in general.

So I'm just curious if you have any thoughts — let's say Donald Trump wins — what happens to this rule? Does it go away? Does it stay? What are your thoughts on that?  

Derek: Well, there are a few different things going on right now. So, first of all, well before the election takes place, we have a couple of things that are likely going to have substantial impact on not just the rule, but climate policy in general — and even some of the broader environmental policy issues. One is that there's already been one lawsuit filed against the FCC challenging its authority relative to this rule. There will be many more. And so there's going to be a lengthy legal battle that is probably going to unfold over the course of the remainder of 2024 to determine what ultimately is allowable by law for the SEC in terms of  its execution of this rule.

The second thing is that this summer the United States Supreme Court will be hearing a case questioning what's called the Chevron Doctrine — or the major decisions doctrine. Without getting into details, too many nuances and nuts and bolts in essence, but that rule provided for — and it was passed about 40 some odd years ago — is it gives federal agencies the authority to act on their subject matter expertise. If it's overturned, it would mean that those agencies could only act when given the express authority by Congress. So, if Congress doesn't specifically say the SEC is authorized to act on climate issues, as an example, then anything that the SEC does on climate could then be challenged as legally on shaky ground. So, we don't know what's going to happen. There's a possibility that instead of overturning it, they might just weaken it a little bit. But whatever happens as part of that Supreme Court decision, we'll have a bearing on the ability to enforce some of this — again, not just the SEC rule, but really all of the federal agency infrastructure on how and what  it's capable of doing. And I should say, I'm not a legal scholar — so, this is the 50,000 foot level understanding. 

But then you have the election. And you know, you and I were talking earlier, 2024 isn't just an election year. It's probably THE election year. About 49 percent — and I did check this — but about 49 percent of the global population is voting in 2024. And that includes some of the biggest markets in the world as it relates to global climate policy. So, in addition to the United States, you have the EU, for example, electing a new president. You have India, you have Brazil, you have you have a number of places where climate policy has been advanced that are putting candidates on the ballot and where this issue may or may not become part of the elective discourse. But here in the U.S., I think to answer your question, look, you know, no one knows for sure. But  if the Republican Party and Donald Trump wins the election — and if we go by past experience — there is a good chance we would see a rollback, if not an elimination of authorities around the federal infrastructure and its ability to push climate policy forward.

And that is a concern that I think all of us are paying attention to. The silver lining in that is that during the previous Trump administration,  ESG reporting and climate reporting increased every year, year over year. So, despite the absence of regulation, companies were still advancing their efforts in this space. 

And once again, while we might see a rollback of the regulatory requirements, which are trying to create organization out of chaos. What I don't expect to see rollback is the stakeholder expectations that are being met by these types of reporting requirements. I think investors will still want to see annual reporting data. I think customers and consumers will still look for this type of information. So, you might not have the formal requirements, but the external stakeholder requirements that we've all been governing ourselves by over the last five or 10 years are not going to suddenly dissipate with the election.

And so we'll have to see what happens should that unfold. But I think part of the rush to get this codified into law and to adjust the level of aggressiveness in the rule was to allow it all to be resolved before the election so that in an ideal world that policy is in place and locked before  the presidential election happened so that it removes some of the threat of having it rolled back and turned over.

Mike: Well, thank you so much for providing your insights today. I know on LinkedIn you wrote that the SEC rule wasn't the rule we wanted, but at least it gives us a foundation from which to work with. And, I think that's kind of  the common trend with sustainability in general. It's never gonna be perfect and we just gotta work with what we got and move forward. Thank you so much for your insights today.  
Derek: Thank you. It's my pleasure.