GHG Planning and Disclosure in Oil and Gas: SEC Regulations Are Coming

On March 21, 2022, the Securities and Exchange Commission (SEC) voted 3-1 to release a proposed rule titled “Enhancement and Standardization of Climate-Related Disclosures for Investors”. At the earliest, new disclosure requirements will be effective in fiscal year 2023 and apply to SEC filings in 2024.

This rule will mark the first mandatory ESG reporting requirements for U.S. companies.

At a minimum, it requires businesses to disclose Scope 1 and 2 GHG emissions. Accelerated or Large Accelerated Filers must report scope 3 GHG emissions “if the material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.”

While the rule only directly applies to publicly-traded companies, it affects privately-held companies. The regulations will likely become the de facto standard for private entities. Publicly-traded companies will probably require private partners to account for GHG emissions.

EPA Reports vs. SEC Regulations

The proposed SEC rule is significantly different from typical EPA reporting requirements. EPA reporting doesn’t necessarily affect how you evaluate company assets financially. SEC regulations, conversely, have potential tax implications that directly impact cash flow, valuation, and investors.

Processes and procedures to report and forecast GHG emissions need to evolve. Workflows need to match new SEC reporting regulations. Oil and Gas companies need a new approach.

We need to empower teams to manage, forecast, plan, and report GHG emissions. This gives the SEC and investors consistent, transparent, defensible, and accurate disclosures. It also gives engineers ways to model climate-related financial risk.

Trust the Process

The process to report GHG emissions typically falls into one of three categories; manual, third-party, and integrated. Each approach has its pros and cons. Let’s look at how they compare on consistency, transparency, auditability, and accuracy.

Manual Data Entry and Emissions Reporting Software

With manual data entry, you have multiple teams across disparate disciplines. Each team must gather, process, and manually transfer emissions data between spreadsheets and software.

Multiple groups with divergent reporting practices produce low consistency. Tracking is time-consuming and labor-intensive, so transparency is limited. It’s equally time-consuming to identify issues in large databases making manual work difficult to audit. Naturally, it’s easy to make mistakes when you’re manually entering data, so accuracy can be an issue.

Combine Manual Entry with Third-Party Consulting Services

In this scenario, your teams still gather data and manually enter it into reporting software. However, rather than analyzing it internally, you pass it to third-party firms to calculate and prepare GHG reports.

Every third-party firm takes a different approach to preparing GHG reports, so consistency is low. Outsourcing analysis saves time and money, but results come from a “black box” with little transparency. However, financial regulations and industry best practices mean opaque calculations require audibility, so you have some oversight. Expert analysts are only as good as the data they have to work with. While they can produce precise results, their accuracy still depends on manual data.

Integrated Emissions Reporting & Economic Calculations

The integrated approach sets you free from manual errors. Rather than gathering and entering data by hand, you automate the entire process. Leveraging public and private data APIs, you write scripts to automatically transfer emissions information into economics software.

This allows you to combine and execute disparate workflows in one place producing highly consistent, transparent, and accurate results. The best-integrated systems are audited by external committees to verify SEC compliance. In other words, this is the most efficient and reliable way to produce GHG reports.

Regulations Are Inevitable

No matter which way you go, the time to be proactive is now. Prepare and plan your GHG emissions reporting strategy today. Begin compiling consistent, transparent, defensible, and accurate disclosures. Give regulators and investors a full picture of your climate-related financial risk. In the long run, this will minimize your costs and attract capital for years to come.

Reach out to r.garza@combocurve.com with any questions