SEC Approves Climate Disclosure Rules


After a lengthy decision-making process, on Wednesday, the Securities and Exchange Commission (SEC) announced changes to its climate disclosure rules. These will require standardized climate-related disclosures for companies starting in the beginning of fiscal year 2025, enhancing and standardizing climate-related disclosures by public companies and in public offerings.

The goal is to provide investors with more consistent, comparable, and reliable information about the financial effects of climate-related risks on a company’s operations and how it manages those risks while balancing concerns about mitigating the associated costs of the rules.

The SEC now requires companies to disclose certain climate-related information, including material climate-related risks and opportunities, material Scopes 1 and 2 GHG emissions, and certain climate-related financial metrics. Scope 3 emissions have been removed from the rule, but they are still included in the emissions disclosure rules passed recently by the state of California.

The final rules are lighter than the draft requirements published two years ago, but the final rules will still require companies to disclose significant information.

What Will Companies Need to Disclose?

According to the SEC, companies will be asked for, at a minimum, to disclose the following:

  • Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition;
  • The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook;
  • If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities;
  • Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices;
  • Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
  • Any processes the registrant has for identifying, assessing, and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes;
  • Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition. Disclosures would include material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or actions taken to make progress toward meeting such target or goal;
  • For large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted, information about material Scope 1 emissions and/or Scope 2 emissions;
  • For those required to disclose Scope 1 and/or Scope 2 emissions, limited assurance of this data;
  • The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds, disclosed in a note to the financial statements;
  • The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals, disclosed in a note to the financial statements; and
  • If the estimates and assumptions a registrant uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted, disclosed in a note to the financial statements.

The final rules incorporate a phased-in compliance period with the aim of helping companies to achieve a smooth transition as they adapt to these new requirements. The compliance date is dependent on the registrant’s filer status and the content of the disclosure. The timing of these requirements varies depending the size of your company, with the earliest reporting requirements expected to begin in fiscal year 2025.

Final Rules Address Significant Feedback Volume

In his remarks announcing the release of the finalized rules, SEC Chair Gary Gensler noted the significant feedback that the proposal received, including 24,000 comments from companies, investors and other stakeholders, leading to the changes in the final requirements, aimed at addressing the concerns of many of the comments about the costs of complying with the new reporting rules.

One of the most significant changes is the removal of requirements by any filers to report on Scope 3 emissions. Additionally, the SEC rule scales back Scope 1 and 2 emissions requirements, which will apply only to large filers, and only when they are deemed to be material. For companies that are required to report on emissions, the rules also provide more time, allowing for reporting to be made with the second quarter financial report, instead of with the annual report.

While the SEC has tried to craft its final rules to withstand legal challenges from industry, it may have invited legal action from environmental campaigners. Republican politicians and business interests had previously threatened to sue to block the rules, and there is no guarantee they won’t litigate to block the agreement, especially if Donald Trump returns to the White House.

While the new SEC rule won’t require some companies to report Scope 1 or 2 emissions, or any companies to report Scope 3, Gensler noted that many companies will be required to disclose on these areas to comply with reporting requirements being introduced in other jurisdictions. The EU’s Corporate Sustainability Reporting Directive (CSRD), for example, extends the reporting requirements to non-European companies that generate over €150 million in the EU, and also includes Scope 3 reporting. Similarly, California Governor Gavin Newsom recently signed a bill into law which will effectively require large U.S. companies that do business in the state to disclose their full value chain emissions.

Following the approval of the new rules, Gensler said:

“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”

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