The U.S. Securities and Exchange Commission Rules on Climate Disclosure are official!
The U.S. Securities and Exchange Commission (SEC) has officially approved long-awaited climate-related disclosure rules for U.S. public companies. These rules mandate that companies disclose critical information in their annual reports and registration statements. Specifically, they must address climate risks, outline mitigation plans, assess the financial impact of severe weather events, and, in certain cases, report greenhouse gas emissions stemming from their operations. This marks a significant step toward greater transparency and accountability in corporate climate reporting.
The SEC’s new rules will impact 12,000 registered companies, making this decision globally significant for advancing sustainability and esg. This will cause a ripple effect similar to what we see with CSRD in Europe. While requirements will be phased in, there’s no doubt that climate reporting by U.S. companies will significantly accelerate.
While the new SEC rule doesn’t mandate all companies to report Scope 1 or 2 emissions, it’s important to note that many companies will still need to disclose in these areas. This is due to reporting requirements being introduced in other jurisdictions. For instance:
The EU’s Corporate Sustainability Reporting Directive (CSRD) extends reporting obligations to non-European companies generating over €150 million in the EU. It also includes Scope 3 reporting.
California Governor Gavin Newsom recently signed a bill into law, effectively compelling large U.S. companies operating in the state to disclose their full value chain emissions.
“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.”
Summary
Here’s a summary of the SEC’s final rules on climate-related disclosures:
Disclosure Requirements:
Registrants must disclose material climate-related risks.
Information about board oversight and management’s role in managing these risks is mandatory.
Climate-related targets or goals must be disclosed if material to business, operations, or financial condition.
Greenhouse Gas Emissions:
Larger registrants must disclose Scope 1 and/or Scope 2 greenhouse gas emissions when material.
Attestation reports covering these emissions are also required on a phased-in basis.
Financial Statement Effects:
Disclose financial impacts of severe weather events and other natural conditions.
Compliance dates vary based on registrant status and disclosure content.
David Carlin put together the comparison below with the International Sustainability Standards Board (ISSB)'s IFRS S1 and S2 and the EU's CSRD and ESRS to see how the new U.S. Securities and Exchange Commission rule stacks up.
Background
The importance of climate-related disclosures for investors has grown as investors, companies, and the markets have recognized that climate-related risks can affect a company’s business and its current and longer-term financial performance and position. The Commission has amended its disclosure requirements many times over the last 90 years based on the determination that the required information would be important to investment and voting decisions. The Commission for the last 50 years has also required disclosure about various environmental matters. More recently, the Commission published the 2010 Guidance, explaining how the Commission’s existing disclosure rules may require disclosure of the impacts of climate change on a registrant’s business or financial condition. The final rules are a continuation of the Commission’s efforts to respond to investor need for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant’s business, as well as information about how the registrant manages those risks.
Content of the disclosures
The final rules will require a registrant to disclose:
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, an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level;
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.
Presentation of the Disclosures
The final rules will require a registrant (including a foreign private issuer) to:
File the climate-related disclosure in its registration statements and Exchange Act annual reports filed with the Commission;
Provide the Regulation S-K mandated climate-related disclosures either in a separate, appropriately captioned section of its registration statement or annual report or in another appropriate section of the filing, such as Risk Factors, Description of Business, or Management’s Discussion and Analysis, or, alternatively, by incorporating such disclosure by reference from another Commission filing as long as the disclosure meets the electronic tagging requirements of the final rules; and
Electronically tag climate-related disclosures in Inline XBRL.
