On March 6, 2024, the U.S. Securities and Exchange Commission (SEC) finalized rules that expand and standardize company disclosures about their carbon emissions and other climate-related metrics. The final rules aim to provide investors with a more uniform and effective mechanism to assess information about the effects of climate-related risks on businesses and how they are responding. The rules also retain disclosures for larger companies about their progress on reducing carbon emissions.
The rules were scheduled to become final on May 28, 2024; however, on April 4, 2024, the SEC issued an order staying the implementation of the final climate disclosure rules pending completion of judicial review of the numerous petitions challenging the rules. The administrative stay will remain in place until resolution of the pending litigation.
While it is difficult to prognosticate whether or when the entire rule or portions thereof will apply to companies, we believe companies should be aware of these rules as they work with their advisors to determine their next steps.
Noteworthy changes from the rules first proposed in 2022 include:
Certain other climate disclosures for larger accelerated filers start as early as fiscal year 2025, with different phase-ins depending on company size.
The new subpart 1500 added to Regulation S-K, titled Climate-Related Disclosure, requires both domestic and foreign private issuers to include climate-related disclosures, including:
The final Regulation S-K would require climate-related disclosures (other than Scope 1 or 2 emissions disclosures) to appear in a separate, appropriately captioned section of a company’s registration statement or annual report (Form 10-K for domestic filers) or in other appropriate sections of the filing, such as Risk Factors, Description of Business, or Management’s Discussion and Analysis. Alternatively, they can be incorporated by reference from another commission filing that also meets the electronic tagging requirements of the final rules.
Scope 1 and 2 emissions for domestic companies will be disclosed on Form 10-K and be required on subsequent Form 10-Q quarterly reports. Foreign private issuers will disclose those emissions on their Form 20-F as will companies filing a first-time registration statement.
There are two levels of governance disclosure. The first focuses on the board’s actual oversight activities relating to climate-related risks. Specifically, the final rules require disclosures of the identity of any board committee or subcommittee responsible for the oversight of climate-related risks and the processes that inform the board or board committee of climate-related targets, goals or transition plans. In a change from the proposed rules, the final rules do not require the disclosure of the directors’ expertise in the area of climate-related risk.
The second governance disclosure focuses on management’s role in assessing and managing climate-related risk. There is a greater emphasis here on who does what and how management positions or committees are organized to deal with climate risks, and whether they report to the board about such risks. This disclosure also requires a description of management’s expertise in this area.
When it comes to strategy, the threshold question is whether any climate-related risks have materially impacted or are reasonably likely to have a material impact on the registrant, including on its strategy, results of operations or financial condition, in both the short term (i.e., the next 12 months) and the long term (i.e., beyond the next 12 months). Actual and potential impacts of any climate-related opportunities also could be presented, if applicable.
These disclosures could fall into one of two categories:
Quantification of relative risks and time horizons also need to be described.
This section is really the mirror of the prior section, in that a company would describe its processes for identifying, assessing and managing physical and transition risks and whether any such processes are integrated into the registrant’s overall risk management system or processes. Some companies may decide to combine this section with the prior section.
Every company should conduct in a consistent manner the materiality assessment to determine the need for disclosure. The final rule notes that, in line with existing SEC rules and Supreme Court precedent, a matter is “material” with substantial likelihood that a reasonable investor would consider it significant when determining whether to buy or sell securities or how to vote, or that he or she would view omission as significantly altering the information available. Materiality assessments should incorporate both quantitative and qualitative considerations, consider disclosure thresholds under Regulation S-X (see below), and align to other regulatory requirements, including the European Union’s Corporate Sustainability Reporting Directive (CSRD).
The rule requires disclosure if targets or goals were established that have materially affected, or are reasonably likely to materially affect, the company’s business, results of operations or financial condition.
Such disclosure would include:
The company must disclose progress made toward meeting the targets or goals, updated for each fiscal year by describing the actions taken during the year. Targets or goals may be related to reducing GHG emissions or any other climate-related target or goal, such as actual or anticipated regulatory requirements, market constraints or other goals established by a climate-related treaty, law, regulation, policy or organization.
Finally, if carbon offsets or renewable energy credits or certificates are a material component of the plan to achieve climate-related targets or goals, those would be disclosed separately.
The final rule requires only disclosure of Scope 1 and Scope 2 emissions, subject to the same materiality standard as applies throughout subpart 1500 of Regulation S-K. Such disclosure is only required by larger filers and not SRCs or EGCs. Large, accelerated filers must file these disclosures starting for the fiscal year beginning 2026.
The definitions of GHG emissions are similar to those established by the GHG Protocol, including: carbon dioxide, methane, nitrous oxide, nitrogen trifluoride, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride.
The definitions of scopes 1 and 2 are below:
Scopes 1 and 2 emissions are to be disclosed separately, each expressed in total, in terms of carbon dioxide equivalents, while any constituent gas of the disclosed emissions that is individually material must be disaggregated from the other gases. Emissions are to be disclosed in gross terms by excluding the impact of any purchased or generated offsets. SRCs and EGCs are exempt from these requirements.
In an important change to the final rules, the SEC will allow companies to use reasonable estimates when disclosing their GHG emissions if they also describe the methodology, significant inputs, underlying assumptions and reasons for doing so.
Starting in fiscal year 2029, a limited assurance attestation disclosed in the company’s 10-K will be required for large, accelerated filers. For the fiscal year beginning in 2033, a reasonable assurance attestation will be required. These attestations will require a GHG emissions attestation provider to attest to certain assurance levels that ramp up over time.
Companies may do this work themselves or they may choose to obtain voluntary assurance from a third party; however, SRCs and EGCs must obtain voluntary assurance.
The final rule amends Regulation S-X to require the disclosure in consolidated financial statements of information on the impact of both physical and transition risks on the company’s business. Whereas the proposed rule required disclosure on a line-by-line basis, the final rule requires registrants to disclose expenditure and capitalized cost metrics, as well as financial assumptions and estimates materially impacted by transition plans and severe weather events (and other natural conditions). Registrants must also disclose if aggregate expenditures are presented on the income statement or balance sheet.
Companies must disclose any capitalized cost, expenditure expensed, charge, loss or recovery where the event is a significant contributing factor in incurring the capitalized cost, expenditure expensed, charge, loss or recovery. Companies also must disclose if estimates or assumptions used to produce the consolidated financial statements were materially impacted by exposures to risks and uncertainties associated with, or known impacts from these events, along with a qualitative description of how the estimates or assumptions were developed.
Organizations should begin planning to meet the requirements of these rules. Note, recently enacted laws in the European Union and California require similar and sometimes overlapping public climate-related disclosures.
The disclosure rules would be first effective for large, accelerated filers in fiscal year 2025. For the fiscal year beginning in 2026, the following quantitative and qualitative disclosures about material expenditures and material impacts to financial estimates and assumptions go into effect:
Large, accelerated filers must file GHG disclosures starting for the fiscal year beginning in 2026. Starting in fiscal year 2029, a limited assurance attestation must be disclosed for large, accelerated filers. In fiscal year 2033, a reasonable assurance attestation will be required for large, accelerated filers.
Organizations should continue working with their advisors to assess the materiality and financial impact of climate risks and opportunities, maintaining a focus on mitigating risk and fostering sustainable growth and resilience, while monitoring the legal challenges and status of the final climate disclosure rules.
