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