Demystifying the New US SEC Climate Related Disclosure Rules: A Concise Guide for Companies
Introduction
In a landmark decision on March 6, 2024, the US Securities and Exchange Commission (SEC) voted 3 to 2 to adopt its 886-page long new rules mandating extensive climate change-related disclosures for public companies. The move signifies a significant step towards enhancing transparency and accountability regarding climate-related risks within the financial sector.
Highlights of the Final Rules:
- The new rules represent a significant departure from the status quo, requiring comprehensive disclosure of climate-related risks and impacts. These include:
- Climate-related risks and impacts: Companies must disclose material climate-related risks that could affect business strategy, operations, or financial condition. This encompasses both physical and transition risks, reflecting the evolving landscape of climate change challenges.
- Mitigation and adaptation activities: Companies must detail efforts to mitigate or adapt to climate-related risks, including associated expenditures and financial impacts. This includes the use of transition plans, scenario analysis, and internal carbon pricing mechanisms.
- Governance and oversight: Disclosure requirements extend to board and management oversight of climate-related risks, emphasizing the importance of robust governance structures in addressing these challenges effectively.
- Financial statement disclosures: The rules require disclosure of financial impacts stemming from severe weather events and other natural conditions, as well as from carbon offsets and renewable energy credits. This includes detailed footnotes outlining capitalized costs, expenditures, and losses related to climate-related factors.
- GHG emissions disclosure:
- Large, accelerated filers and accelerated filers that are not smaller reporting companies or emerging growth companies—will be required to disclose their Scope 1 and 2 GHG emissions, expressed in the aggregate in terms of CO2e, if such emissions are material. GHG emissions data in gross terms, excluding any use of purchased or generated offsets, must be disclosed, accompanied by independent attestation reports ensuring accuracy.
- They must also disclose climate-related targets and their financial implications. For those required to disclose Scope 1 & 2 emissions, an assurance report at the limited assurance level will be required.
- For Large Accelerated Filers (the largest companies who are already reporting with the SEC), the disclosure items will start to be required in their 2025 annual report published in early 2026, with Scope 1 and 2 emissions data being reported in their 2026 annual report published in early 2027.
- For Emerging Growth Companies (EGCs), various climate change disclosures must be reported in 2027 or later during registration and in annual reports. EGCs are exempt from providing Scope 1 and 2 emissions as long as they remain EGCs.
- The SEC will eventually require various stages of audits of the GHG emissions data provided by companies, beginning as early as annual reports filed for 2029 for (LAFs) at a limited audit level, moving up to full reasonable assurance level audits for annual reports filed for 2033.
Legal Challenges and Current Status:
The road to implementation is not without obstacles. Legal challenges have emerged since adoption, with federal appellate courts granting a temporary stay pending judicial review. There are concerns regarding the scope and authority of the SEC's mandates, leading to a flurry of litigation and political maneuvering. The outcome of these challenges will significantly impact the fate of the new disclosure rules as the SEC has voluntarily agreed to stay the new rules, therefore not requiring implementation till the legal challenges are resolved.
Conclusion
The SEC's adoption of new climate-related disclosure rules marks a watershed moment in corporate transparency and accountability, adding to the growing landscape of existing ESG rulings like the California regs and the CSRD in Europe. By mandating comprehensive reporting on climate-related risks and impacts, the SEC aims to equip investors with essential information to navigate the evolving landscape of climate change challenges.
While the implementation of these rules faces legal hurdles and uncertainties, companies should recognize that ESG disclosures from the SEC are still expected to come into effect and they should start taking measures now to clean up their data, set standards and strengthen reporting systems and processes. This will not only ensure compliance but also foster investor trust and resilience in the face of climate-related risks and set companies up for financial success.
Citations & Sources
https://www.hklaw.com/en/insights/publications/2024/03/sec-adopts-landmark-climate-disclosure-rules
https://www.sec.gov/files/33-11275-fact-sheet.pdf
