SEC Climate Risk Rule Feeds Wave of Sustainability Requirements

The Securities and Exchange Commission’s final rule on climate-related disclosures culminates a multiyear effort to place sustainability reporting on similar footing as financial reporting in the US.

But while the SEC was ironing out the details of its investor-focused requirements, the California legislature, European Financial Reporting Advisory Group, and International Sustainability Standards Board were busy rulemaking and standard-setting as well.

The result: a wave of sustainability reporting requirements that encompass the lion’s share of organizations doing business in the US. These are poised to transform how organizations approach sustainability strategy and reporting.

Here are the top questions we’re hearing about the future of sustainability reporting.

Who should be responsible for it? It is tempting to think that compliance with the SEC climate rule will fall just on the financial reporting function.

In many cases, finance will be the driving force to pull it all together, but reporting applies across an organization. Forty-one percent of respondents to KPMG’s 2024 ESG Organization Survey cited internal silos and limited communication between departments as key impediments to integrating sustainability strategy into broader business goals.

In response to heightened regulatory activity, we’re seeing some organizations institute an ESG controller responsible for reporting and controls. Others have instituted a chief sustainability officer within the legal department who is responsible for setting climate strategy. Assessment of climate risk is also a critical component of the rule, and enterprise risk management teams are stepping up to assist with this analysis.

Regardless who is at the helm, sustainability impacts every part of a business, and the organizational chart needs to reflect that.

What should companies do to address different state, national, and international reporting standards? A natural question among organizations scoped into multiple reporting systems is whether disclosures in one jurisdiction will fulfill requirements in another. This is the basis of interoperability and equivalence.

While it’s too early to know where equivalence might be granted, when it comes to interoperability, we are seeing substantive differences in jurisdictions’ adoption of standards. Organizations must review the specifics of the SEC climate rule to understand how it compares to existing standards. This includes the European Sustainability Reporting Standards, International Sustainability Standards Board standards, and California climate laws.

All require disclosure of information aligned to governance, strategy, risk management, targets, and metrics. But they diverge in their definitions of materiality, range of sustainability disclosures, treatment of Scope 3 greenhouse gas emissions, and implementation timelines.

Additionally, the SEC climate rule is the only one that requires a disclosure within financial statements. Despite this incremental effort, we’re finding that multinationals preparing for the ESRSs, ISSB Standards, or California climate laws are well positioned for SEC compliance, as the former have more extensive requirements and aggressive timelines.

When should we start thinking about assurance? The SEC pushed out the timeline for limited and reasonable assurance over Scope 1 and 2 greenhouse gas emissions disclosures to 2029 and 2033, respectively, for large accelerated filers.

Organizations should still focus on assurance in the near term to comply with other jurisdictions’ requirements. California will require limited assurance over greenhouse gas emissions disclosures from 2026 and reasonable assurance from 2030. Organizations doing business in the EU must plan for limited assurance over the entire CSRD report as soon as 2025.

The ISSB standards strongly encourage assurance but leave it up to each adopting jurisdiction to decide whether to require it. Either way, third-party assurance is a valuable mechanism that organizations can employ now to enhance the degree of confidence in their reported sustainability information.

Where do we start with data management? KPMG found in its 2024 ESG survey that 83% of organizations believe they are ahead on ESG reporting, but 47% still use spreadsheets to manage this data.

In considering how to enhance their programs, 58% plan to use artificial intelligence. AI and generative AI offer a promising path to report and unearth insights that drive strategy more effectively.

AI technologies, coupled with other data and analytics capabilities, can empower organizations to track progress against their sustainability goals and make real-time, data-informed strategy adjustments. They also will be better able to measure return on investment and allocate resources to sustainability activities.

It’s crucial, however, to remember that AI requires high-quality data. Organizations must prioritize enhancing data collection and measurement processes and controls first. This will lead to greater comparability across reporting standards and better strategic decision-making, while paving the way for AI integration.

Why does Scope 3 matter if it’s no longer in the rule? Scope 3 may be out of the SEC’s climate rule, but it’s still in scope for the ESRSs, ISSB standards, and California climate laws. Regulatory relief in one jurisdiction doesn’t alter the burden imposed in others.

This is why US multinationals need to consider how they collect, measure, and disclose their Scope 3 greenhouse gas emissions to meet other regulatory requirements.

Stakeholders in organizations’ value chains are increasingly requiring diversity, equity, and inclusion metrics; emissions reduction targets; and even Scope 3 greenhouse emissions data when setting up contractual agreements. Disclosing Scope 3 emissions is more than a regulatory matter—it’s a cost of doing business.

How can we advance our sustainability strategy without getting lost in compliance? Sustainability reporting is going to be a heavy lift, and resources in any organization are finite and require strategic allocation.

Compliance and strategy aren’t mutually exclusive, though. Organizations need to establish a clear line of sight through all their reporting requirements and must map those requirements to their business strategy, commitments, and targets.

The regulators’ areas of focus and the elements of sustainability that will drive financial value for a specific organization likely aren’t the same. Organizations that prioritize the elements of their sustainability strategies that generate long-term financial returns, while ensuring compliance within that broader strategy, will better realize the full value sustainability initiatives can bring to their business.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Maura Hodge is ESG audit leader and audit partner in KPMG US’ Boston office.

Rob Fisher is KPMG US ESG leader and global advisory ESG leader.

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