Over recent years, there has been a notable surge in regulations governing environmental, social, and governance (ESG) as well as climate-related disclosures, with regulators worldwide developing country-specific and regional legislation to standardize reporting requirements to achieve net zero targets by 2050. One such long-awaited climate-risk disclosure rule was passed by the Securities and Exchange Commission (SEC) for the United States of America in March 2024. This blog will aim to explore some of the new rule’s requirements imposed on companies and its implications for businesses. 

What is the SEC’s Climate Disclosure Rule?

US regulators voted to approve the Climate Disclosure Rule of the Securities and Exchange Commission (SEC) on March 6, 2024, to standardize climate-related disclosures by large publicly listed companies. The scope of the first nationwide climate disclosure rule has been significantly scaled back from the original draft proposal. The final rule requires publicly traded companies in the United States to annually disclose details about their assessment, evaluation, and management of risks associated with climate change. The disclosure includes greenhouse gas emissions as an indicator of a company’s vulnerability to climate-related risks.

The goal is to establish a uniform framework for climate disclosures, allowing investors to better understand climate change’s potential impact on companies they invest in.

Which companies are in the scope of SEC Climate disclosure?

SEC regulations apply to large public companies registered with the SEC, mandating them to report climate-related financials in their financial filings, including greenhouse gas (GHG) emissions. The adoption timeline is extended to 2 years for most disclosures, 3 years for disclosing GHG emissions, and 6 years to acquire assurance over the emissions.

What are the SEC Climate disclosure requirements?

• Material Scope 1 and Scope 2 GHG emissions on a phased-in basis.
• Third-party verification of Scope 1 & 2 emissions.
• The material impact of climate risks on a company’s strategy, business model, and outlook.
• Risk management process of material climate-related risks
• Material impact on climate-related targets or goals

What are the key changes from the proposed rule?

While the SEC received unprecedented amounts of input on making the rule considerably less stringent compared to its proposed draft issued in March 2022, the final rule is a compromise that attempts to balance the need for climate-related information with the concerns raised by businesses.

The key changes addressed by the final rule are highlighted below :

Adoption Timeline – Extends the adoption timeline, providing large accelerated filers nearly two years for most disclosures, three years for phased-in GHG emissions reporting depending on the classification of filers, and six years to obtain limited assurance over GHG emissions.

Materiality Criteria – Sets a materiality criterion for GHG emissions. While previously mandatory, Scope 1 and 2 emissions disclosures are required only if deemed material, exempting smaller reporting companies.

Organizational Boundary Flexibility – Gives companies flexibility in determining the organizational boundary for their GHG emissions, with an explanation of how it varies with the scope of consolidated financial statements.

Financial Statement Impact Evaluation – Eliminates the need to review financial statement effects on a line-by-line basis, instead mandating disclosure when aggregate amounts reach 1% of pretax revenue or total shareholders’ equity.

Scope 3 GHG Emissions – Eliminates the requirement for Scope 3, which is indirect GHG emission disclosure from upstream and downstream activities in a company’s value chain.

Exemption of smaller entities – Exempts smaller reporting companies, emerging growth companies, and non-accelerated filers from providing GHG emission disclosures and related attestation. 

How to implement the Climate disclosure requirements into your process?

Overall, companies need to take proactive steps now to understand the final rule and develop a plan for implementing its disclosure requirements. Companies should consider the key action points:

Governance and Risk Management – Establishing clear governance around climate disclosure requires companies to demonstrate how their boards oversee climate risks and integrate them into overall risk management, potentially mitigating their financial impact.

Identifying Gaps – The rule mandates that companies understand and disclose the inventory climate-related information that has previously been obtained to identify the gaps currently existing in climate-related reporting in financial statements.

Setting Climate-related targets and goals – Companies with climate-related goals, such as reducing emissions or adapting to climate change impacts, need to establish their reporting capabilities, data requirements, and processes to comply with the new regulations effectively. This will hold them accountable for taking action on climate change.

Developing an action plan – A detailed action plan for implementing the climate-related rule will set forth how the plan can significantly affect the strategy, finances, and overall performance of your company.

Preparing for the third-party verification process – Familiarizing yourself with the standards that third-party verifiers will use to assess your disclosures will ensure all the relevant climate-related data is readily available for the verifier to review.

The shift from voluntary to regulated reporting ensures that emissions data is traceable, transparent, and reliable. This will help businesses comply with the SEC Climate Rule and manage their carbon footprint more efficiently and effectively. Companies will also end up providing valuable information to investors, allowing them to assess the financial stability of the company in the face of climate change.

The SEC Climate Rule’s finalization is a priority, with a grace period for companies to adjust reporting practices.