SEC Reporting Impacts on Business Aviation

Oct 10

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 them 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 (SB253 and SB 261) imposing similar climate reporting requirements 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 the EU’s Corporate Sustainability Reporting Directive (CSRD) reporting requirements for EU and UK large companies, is demonstrating a sweeping and quick introduction of new climate change disclosure requirements, under which some entities will need to comply 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.

This increases the complexity of the financial reporting landscape, especially as it applies to aviation operations – which standards apply to my organization? What capabilities do I need to prepare? What happens if I do not? Unpacking other relevant standards and dissecting the proposed legislation can help to understand the impact this brand-new guidance will have on business aviation.

Background

In the past, environmental reporting was a strictly voluntary activity. The recent shift toward required reporting has relied heavily on voluntary frameworks and the finance industry for guidance, so these offer some context for understanding the SEC’s proposed rule. There are a few relevant standards worth defining:

Greenhouse Gas Protocol (GHGP): The GHGP is a set of optional US standards and guidelines for businesses and governments to organize and measure their emissions. GHGP provides guidance on how to digitally account for emissions. Most Fortune 500 companies report using the GHGP.6
Task Force on Climate-related Financial Disclosures (TCFD): The TCFD is an UN-backed disclosure standard that asks companies to answer core questions about their emissions and climate planning, covering four key topics: governance, strategy, risk management, and metrics and targets. TCFD disclosures are required for some companies in the UK and have become the conceptual core for disclosing environmental information—most other disclosure entities build off the TCFD.7 If the GHGP is simply how to calculate emissions, the TCFD is more focused on how to disclose those emissions and other qualitative information.
International Sustainability Standards Board (ISSB): This standards board was created by the International Financial Reporting Standards Foundation (IFRS) and sits alongside the International Accounting Standards Board (IASB), which sets the same groundwork for financial accounting globally. Following the rise of a host of other disclosure entities after TCFD, the ISSB is essentially meant to consolidate many of them. The objective is to increase comparability by establishing a common, global set of sustainability language, definitions, and reporting standards, establishing the bedrock with which individual countries would build their own requirements. It addresses new key topic areas, like biodiversity and water, and is likely to overtake TCFD as it goes more in-depth.8

These are just a few of the large number of frameworks and standards now in existence, and, through the creation of the ISSB, the push is to increase interoperability among them.8 The SEC’s rule is based on TCFD and GHGP, meaning there will likely be interoperability with the ISSB.9

Your organization may already be following a framework or reporting to a standard that (pending final language) could be accepted under the SEC’s rule. Examples of other popular voluntary standards include CDP (previously known as the Carbon Disclosure Project), Global Reporting Initiative (GRI), or targets like Science Based Targets Initiative (SBTi).

Who does the SEC mandate apply to?

The proposal applies to “all public companies with an existing SEC reporting requirement, including all non-US companies with US-traded shares."13 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 the language is currently written, the SEC rule will “grandfather” mandated companies in, stepping up the requirement over time.9 This depends on the registrant’s filer status (learn more about these statuses here), with large accelerated filers set to go first, reporting in 2024:

Source: Enhancement and Standardization of Climate Related Disclosures, SEC

Applying Emissions Scopes 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 define your relationship to an emission and are categorized by 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 emissions are direct emissions, typically from onsite fossil fuel combustion and fleet fuel consumption.
Scope 2 emissions are indirect emissions directly attributed to your business. This primarily includes purchased energy/electricity/heating/cooling for direct use.
Scope 3 emissions are indirect or supply chain emissions (think upstream in the supply chain and downstream). Scope 3 emissions tend to become the “catch-all”, making them difficult to identify and measure.

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 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.

Understanding the Scopes definitions and operational control will help determine how emissions should be categorized in other types of operations.

The Impact of SEC Reporting on Business Aviation

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 only need to be included “if material, or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.”9

What makes Scope 3 emissions material? Materiality is a finance concept that is dependent on business structure but ultimately determines what entities must disclose in their financial reports. 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 vary heavily by each organization and must 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 those emissions to ensure that they do not become material. This will create monitoring obligations that encompass the flight department for Scope 1 emissions or business travel use for Scope 3 emissions. In addition to the measurement of emissions, the SEC rule directly connects business operations to their environmental impact: they will also require information on any climate-related risks to the business in the near and long term, and how those risks might affect strategy, operating models, forecasts, and more.1 Filers will also need to include all the methodologies for how their emissions and risks were calculated and assessed.15

Final details will become clear once the proposal is amended and approved, expected in Q4 2023.

What Can be Done Now?

You can’t manage what isn’t measured. Staying ahead of the game and gathering aviation operations emissions data now is key. This includes annual fuel consumption for aircraft and vehicles, energy consumption, and any metrics available around waste, business travel and more. This will enable you to be prepared for any internal reporting or disclosure requirements while also positioning you to support the 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. 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.3,4 Avoid any future penalties by preparing today.

Emissions reporting and disclosure is only 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 regulations, government contractor requirements, and EU regulation are precursors to additional broader regulation and corporate reporting initiatives coming that will apply far beyond just public companies. No matter the reporting requirement type, there is sure to be an impact on business aviation and it is important to begin creating emissions monitoring and reporting capabilities.

The process is more efficient than DAC today (biomass is more efficient at selecting out CO2 than mechanical processes, for now) and produces a valuable product, so it is expected to be cheaper than DAC. BECCS can be used in combination with sustainable aviation fuel (SAF) production to help sequester additional CO2 during the production process, enhancing the carbon reduction capabilities of SAF.

Endnotes

1. SEC.gov | SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors

2. Federal Register :: Federal Acquisition Regulation: Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk

3. Bill Text - SB-253 Climate Corporate Data Accountability Act. (ca.gov)

4. Bill Text - SB-261 Greenhouse gases: climate-related financial risk. (ca.gov)

5. Corporate sustainability reporting (europa.eu)

6. About Us | GHG Protocol

7. TCFD standards: what companies need to know – Watershed

8. Webinar Recording: Sustainability Reporting: The Evolution From Voluntary Frameworks to Regulated Standards | SCS Global Services

9. Enhancement and Standardization of Climate Related Disclosures, SEC

10. Home - CDP

11. GRI - Home (globalreporting.org)