Reporting on Your Emissions Footprint, Now In the US

In March 2022, the Securities & Exchange Commission (SEC) released a draft rule mandating that public companies report elements of their environmental footprint, introducing new financial reporting challenges for United States’ entities.

In November of 2022, the Federal Acquisition Regulation (FAR) Council proposed a rule that would effectively mirror the SEC requirements and apply to large federal government contractors, requiring contractors to disclose their greenhouse gas (GHG) emissions, climate-related financial risks, and science-based reduction targets.

And in September of 2023, California passed new rules (SB 253 and SB 261), which impose new climate reporting requirements along the same track on large companies doing business within the state. Additional legislation may impact anyone who sells to California-based customers and who uses carbon offsets to support environmental claims.

While the SEC is far from the first to propose regulated climate disclosures, it, along with EU CSRD reporting requirements for EU and UK large companies, is demonstrating a sweeping and quick introduction of new climate change disclosure requirements with compliance requirements for some entities as soon as March of 2024.

Even if you are not a public company, a large government contractor, nor do business within California, these regulations could create reporting burdens for your company. If you support, manage, or sell to any company that meets this definition, you could have to prepare emission reporting to support their reporting requirements.   

Who Does the SEC Mandate Apply to?

Focusing on the SEC requirements, the proposal applies to “all public companies with an existing SEC reporting requirement, including all non-US companies with US-traded shares." In the context of business aviation, this would directly impact corporate flight departments or managed aircraft for large public companies as direct assets of the business. It will also directly impact any aviation operators that are currently or are considering going, public. However, this could also indirectly impact any company that provides lift, whether a charter operator, broker, or fractional operator, or a company that supports a corporate flight department or managed aircraft, as the regulations require the disclosure of supply chain and indirect emissions as well. One of the largest sources of indirect emissions is a company’s business travel, and this will include any use of private aviation, no matter the form.

Over time, public reporting standards also inform standards for private organizations and institutional investors (and the EU/UK regulations will apply to large non-public companies over time as well), so these regulations could indirectly create more emission reporting obligations to support companies and customers even if they are not directly regulated as well.

Identifying Emissions Scopes Related to the Corporate Flight Department

Emissions can be broken down into three categories, called “Scopes,” which is how they will be organized for reporting. Scopes are really a definition of your relationship to an emission and a categorization of how much control you have over that emission. Most schemes require reporting of Scope 1 and Scope 2 emissions, but some are going to include a broader Scope 3 category:

• Scope 1 are direct emissions, typically from onsite and fleet fuel consumption. These are emissions from assets owned and controlled by your organization.

• Scope 2 emissions are indirect emissions directly attributed to your business. This primarily includes purchased electricity or energy for heating/cooling.
• Scope 3 emissions are a final catch-all that includes indirect or supply chain emissions (both upstream and downstream). Scope 3 includes emissions that are caused-to-happen by your organization, but not controlled by your organization. This makes them difficult to identify and measure, but business travel on the airlines or non-owned aircraft is almost always included as a large source of Scope 3 emissions. In the case of business travel, your Scope 3 business travel emissions are the aircraft operator’s Scope 1 emissions. 
  

Specifically, within aviation, Scope 1 emissions include fuel consumption from any flights or emissions from owned or controlled aircraft and vehicles (Jet-A, diesel, etc.). Scope 2 emissions would consist of indirect emissions such as purchased energy for electricity, heating, and cooling.  Finally, Scope 3 emissions would include purchased goods and services, employee commuting and business travel, supplier activities, and emissions from aircraft utilized but not under your operational control (i.e., supplemental lift). 

Business aviation’s wide spectrum of asset ownership types and aircraft usage structures can make identifying Scope categorization of emissions challenging. Generally, financial ownership is the primary determination of emission ownership: whoever owns the asset at the end of the day will report those emissions as their Scope 1.

However, in situations of shared or leased ownership, the emissions assignment can get more complicated. While there is no direct guidance for aviation or this type of shared ownership, guidance for reporting emissions from leased assets gives a framework for working through and introducing the idea of operational control to emission assignment. Allocating the emissions from an aircraft with a complicated ownership structure requires factoring in both the operational control and financial ownership of the asset.

Will business aviation really matter to SEC reporting?

Under the proposed SEC requirement, public companies must report their gross Scope 1 and Scope 2 emissions. This means that if the corporate flight department or aircraft emissions would fall into the Scope 1 category for a public company, this would need to be part of their emissions reporting. There will be a phase-in period for Scope 3 emissions disclosure and possibly an exemption for smaller companies. Scope 3 emissions will likely only need to be included “if material, or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.”

Whether or not disclosing certain emissions is “material” to the overall organization will depend heavily on that organization’s size, structure, and reporting/audit requirements. There may be materiality reporting thresholds within Scope 1 reporting as well, but this will again vary heavily by each organization and have to be determined for their unique situation, rather than by an overall SEC-level guidance.

Moreover, emissions being immaterial will likely not preclude organizations from needing to measure and monitor their emissions to ensure that they do not become material. This will still create monitoring obligations that encompass the flight department for Scope 1 emissions or business travel use for Scope 3 emissions.

Being prepared to monitor and report your own emissions for internal or direct reporting, or to support your customer’s emissions monitoring indirectly will be paramount needs for most operators as these regulations unfold.

What does this mean for SAF?

Corporate guidance for emission reduction accounting is still being finalized by groups like GHGP and SBTi (common corporate emission reporting standards). While standards like CORSIA and ETS programs exist within the industry, their Scope is limited to reporting within the industry, and different standards are usually used for reporting aviation emissions at a corporate level. This emerging guidance will be key towards appropriately documenting SAF reductions within corporate Scope 1 and Scope 3 reporting.

As currently written, the SEC rule does not require reporting any emission reductions or offsetting, though this information is relevant to a business’s overall strategy. Once this guidance is more finalized, there should be better direction about accounting for SAF as a reduction against these emissions – obviously key towards making sure reductions from SAF realize their full corporate accounting value.

Climate-Related Risks

In addition to the measurement of emissions, the SEC Rule will also require disclosures on any climate-related risks to business and how those risks might affect strategy, operating models, forecasts, and more. Filers will also need to include all the methodologies for how their emissions and risks were calculated and assessed. These two reporting requirements of emissions and climate risk disclosures parallel the requirements under the California regulation, however the California rules will apply to a broader set of organizations.

More details will become clear once the proposals are finalized and approved, expected later in 2023 and early 2024.

How to prepare?

You can’t manage what isn’t measured. Staying ahead of the game and setting up procedures to collect aviation emissions data now is key. This will enable you to be prepared for any internal reporting or disclosure requirements while also positioning you to support emission reporting needs of your customers. These types of processes need to be documented as many of the regulations will require the emission data to be independently attested to.

This type of emissions reporting and disclosure is becoming more prevalent, even outside of government regulation. Suppliers are increasingly asking for emissions data so they can meet their own supply chain reporting initiatives. For example, Amazon is updating its supply chain requirements in 2024, potentially adding GHG reporting requirements for suppliers.

While the SEC’s current proposal may only impact a few businesses, the additional California regulation, government contractor requirements, EU regulation, and all of its impact on business aviation customers are precursors to additional broader regulation and corporate reporting initiatives coming that will apply far beyond just public companies. Deadlines for initial compliance are measured in months and fines for non-compliance are significant, with the California scheme alone imposing a fine up to $500k for non-compliance, emphasizing the need to get ahead of these reporting requirements.