by Nick Kemp
The Securities and Exchange Commission has adopted final rules detailing requirements for companies to disclose their climate-related risks and GHG emissions. These rules were developed to standardize how companies report climate-related disclosures to convey this information to investors. The initial proposed rules would have required all listed companies to report Scope 1, 2, & 3 emissions. The scaled back, finalized rules require “large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted” to disclose “information about material Scope 1 emissions and/or Scope 2 emissions”. Scope 3 emissions, or value chain emissions, which can comprise the majority of a corporation’s emissions, are not required to be reported. Scope 1 emissions must be reported only if they are deemed to be material, providing leeway to corporations to make this determination for themselves.
The relaxed final rules are viewed as disappointing by climate advocates, perceived as minimizing near-term burdens to corporations while enabling contributions to a growing climate crisis. Those opposed to the rules cite the unfair burdens these rules place on large businesses. Regardless of position – businesses must continue to focus on climate-related risks as they continue to experience the consequences of climate disasters. For example, as detailed in NOAA’s 2023 Billion-dollar disaster report, the US experienced 28 weather and climate disasters in 2023 with a total associated price tag of $92.9 billion resulting in 492 reported deaths.
Taking The Next Step Toward Preparing for a SEC Climate Disclosure
With the passage of these rules, it’s important to understand what they mean for your business and how to comply. Some suggested steps include:
Determine if you are an accelerated filer, or large accelerated filer to determine requirements to report on GHG emissions. Please refer to SEC rule 12b-2 to understand what it means to qualify for either category.
Identify gaps between currently available data and required disclosures.
Develop a plan to close the gap and prepare for necessary disclosures, enlisting internal and external resources to execute your plan.
When required, report relevant climate-related disclosures to necessary parties.
Timing For Compliance
Compliance with requirements will be completed on a staggered basis beginning 60 days after publication in the federal register, as seen from phasing schedule in the SEC ruling:
Figure 1. Compliance dates under final SEC Climate-Related Disclosure Rules
To elaborate on certain Items required by all registrants:
Item 1502(d)(2) will require a registrant to describe quantitatively and qualitatively the material expenditures incurred and material impacts on financial estimates that directly result from efforts to mitigate or adapt to climate-related risks.
1502(e) will require a registrant to describe a transition plan if one has been enacted to manage a material transition risk.
Lastly, 1504(c)(2) references disclosure requirements regarding material impacts directly resultant from actions taken by a registrant to achieve a disclosed target or goal.
Additional Climate Related Requirements
While GHG emissions disclosures often receive the spotlight, the finalized rules also include requirements for additional climate-related topics for all registrants. Key amongst these disclosures:
Climate-related risks that are likely to have a measurable impact on the registrant’s “business strategy, results of operations, or financial condition”;
Magnitude of the impacts that these risks might have on the registrant;
Board level oversight of climate-related risks and associated management of said risks;
Costs incurred by the registrant associated with severe weather events;
Costs incurred by the registrant related to carbon offsets and renewable energy credits in service as a mechanism of the registrant’s plan to achieve its disclosed climate related target/goals.
In addition to the SEC’s Climate-Related Disclosure Rules, other regions both nationally and globally are moving forward on similar requirements. California’s Climate Corporate Data Accountability Act (Senate Bill 253) requires certain U.S. companies to report on their GHG emissions (Scope 1 and 2 by 2026, Scope 3 by 2027). The EU has also adopted more stringent and impactful rules on corporate sustainability reporting with the passage of the Corporate Sustainability Reporting Directive (CSRD) which takes effect in FY2024. Additionally, the U.S. has made strides with the passage of the Inflation Reduction Act - the largest carbon pollution reduction investment in U.S. history.
Additional Resources
To learn more about the SEC’s Climate-Related Disclosures for Investors and Climate Change: