New Rules by SEC for Standardizing Climate-Related Disclosures

SEC Chair Gary Gensler said, “Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take as long as companies raising money from the public make complete and truthful disclosures. Over the last 90 years, the SEC has updated, from time to time, disclosure requirements underlying that basic bargain and, when necessary, provided guidance with respect to those disclosure requirements.”

Key Takeaways for SEC Climate Disclosure

• The SEC has adopted a new climate disclosure rule requiring companies to prepare for compliance, despite current legal challenges.
• Scope 3 emissions are not required to be disclosed, focusing instead on material Scope 1 and 2 emissions.
• Companies must report material climate-related risks, their financial impacts, management strategies, and climate-related goals.
• The rule will be implemented in phases, with deadlines varying based on company size.
• Climate-related disclosures must be tagged using iXBRL for enhanced readability and accessibility.
• Despite the rule’s pause, companies should integrate sustainability into their corporate strategies and use technology to ensure accurate ESG reporting.
• Investor demand for assured ESG data highlights the importance of transparent and reliable sustainability reporting.

Understanding SEC’s Climate Disclosure

Owing to these requirements, the Securities and Exchange Commission, on March 6, 2024, implemented new regulations to enhance and standardize climate-related information reported by publicly traded corporations and during public offerings. These SEC climate disclosure rules are the result of the Commission’s efforts to meet investor demands for more uniform, comparable, and reliable data on how climate-related risks affect a company’s operations and risk management strategies. It also addresses concerns about the costs of complying with these regulations.

SEC Climate Disclosure Rule Requirements

Applicability: All companies that are SEC registrants (including foreign private issuers).

Disclosure requirements: According to the final SEC climate rules, a registrant must disclose the following:

1. Impact of climate-related hazards and risks on the company’s strategy and methods employed to identify, assess, and manage significant climate-related risks.
2. Information on transition plans, scenario analysis, or the implementation of internal carbon pricing methods to adapt to a material climate-related risk and the financial impact of climate-related risk mitigation measures.
3. Roles and responsibilities of the company’s board of directors and management in evaluating and dealing with major climate-related challenges.
4. Climate-related objectives or goals that have had or will have an impact on the company’s operations, results, or financial situation.
5. Information on material scope 1 emissions and/or scope 2 emissions.
6. An assurance report at the limited assurance level by Large Accelerated Filers (LAFs) and Accelerated Filers (AFs) not qualified for exemptions and at the reasonable assurance level by LAFs in subsequent phases.
7. Information as part of a note to the financial statements on capitalized costs, expenditures expensed, charges, and losses incurred because of severe weather disasters and other natural phenomena or incurred as a material component of a company’s plans to achieve its climate-related targets. This includes a qualitative report on the estimates and assumptions made by the company that were materially impacted by the associated risks and uncertainties of such disasters.

Also read – Coping with SEC’s New Climate Disclosure Requirements

Key Areas of SEC Climate Disclosure Requirements

The SEC climate disclosure requirements encompass the following key areas:

Greenhouse Gas Emissions

• Report Scope 1 and Scope 2 emissions if they are financially material.
• Scope 3 emissions are not required.

Climate-Related Risks

• Provide qualitative and quantitative disclosures of material physical and transition climate risks impacting business strategy, operations, or financial condition.
• For specific physical climate risks, disclose financial impacts exceeding 1% of profits before taxes, including capitalized costs, expensed expenditures, and incurred charges and losses.

Climate-Related Governance

• Outline board governance of climate risks.
• Describe processes for identifying, assessing, and managing material climate-related financial risks.
• Include existing transition plans, scenario analysis, or internal carbon pricing if deemed material.

Supporting Information for Climate-Related Targets

• Detail activities and actions to meet climate-related targets.
• Disclose capitalized costs, expensed expenditures, charges, and losses related to carbon offsets and renewable energy credits or certificates (RECs) used in achieving climate-related targets.

Highlights of the New SEC Climate Disclosure Rules

The new rules mandate disclosure in annual reports and registration statements on the following:

Climate-Related Goals, Targets, and Risks

• Disclose climate-related goals and targets, as well as material climate-related risks that have had or are likely to have a material impact on the company’s business strategy, operations, or financial condition. This includes the actual and potential material impacts of any identified climate-related risks on the company’s strategy, business model, and outlook.

Mitigation and Adaptation Activities

• Provide details on activities to mitigate or adapt to material climate-related risks, including both quantitative and qualitative descriptions of material expenditures incurred and their financial impacts. Include information on the use of transition plans, scenario analysis, or internal carbon pricing.

Governance and Risk Management

• Outline the board’s oversight of climate-related risks and the role of management in assessing and managing these risks. Describe processes for identifying, assessing, and managing material climate-related risks and how these processes are integrated into the company’s overall risk management system.

GHG Emissions Disclosure

• Disclose material Scope 1 and Scope 2 GHG emissions for large accelerated filers and accelerated filers (unless exempted). This includes an independent assurance report at a limited assurance level, which will escalate to a reasonable assurance level for large accelerated filers after a transition period.

Financial Statement Disclosures

• Provide disclosures on the financial effects of severe weather events and other natural conditions, including costs and losses. This also applies to costs and losses related to carbon offsets and renewable energy credits if they are material to plans for achieving climate-related targets or goals. Include a description of how severe weather events and other material conditions have impacted estimates and assumptions used in the financial statements.

Key Differences in SEC Climate Disclosure Rules

The SEC Climate Disclosure adopted rules differ from the proposed rules in some important respects. Key differences include:

Compliance dates for new SEC regulations:

The new regulations will take effect 60 days after the adoption release is published in the Federal Register. Compliance effectively starts for LAFs from the financial year beginning 2025 for disclosure and 2026 for inline XBRL tagging and phased in for all other registrants based on their registrant type and level of disclosure.

Bottom Line

The new climate disclosure rules adopted by the SEC require companies to stay abreast and improve the filing of their climate-related information. DataTracks can make your regulatory reporting easy. The professionals at the company keep updated with the latest regulations and ensure error-free reports. The team has prepared more than 400,000 reports for 28,000+ clients in 19 years. So what are you waiting for? Get in touch with us at +1 (646) 904-8324 or email enquiry@datatracks.com.  

FAQs on SEC Climate Disclosure Rules (New)

What are the key disclosure requirements under the new SEC climate disclosure rules?

The new SEC climate disclosure rules require companies to provide information on:

• Climate-related goals and targets.
• Material climate-related risks that impact business strategy, operations, or financial condition.
• Activities to mitigate or adapt to these risks, including material expenditures and financial impacts.
• Board and management oversight of climate-related risks.
• Material Scope 1 and 2 GHG emissions for large accelerated filers and accelerated filers.
• Financial impacts of severe weather events and natural conditions, and related costs and losses.

How do the new rules address greenhouse gas (GHG) emissions disclosure?

The new rules specify:

• Scope 1 and 2 GHG emissions must be disclosed if they are financially material for large accelerated filers and accelerated filers.
• Smaller reporting companies (SRCs), emerging growth companies (EGCs), and non-accelerated filers are exempt from GHG disclosure and attestation requirements.
• Scope 3 GHG emissions disclosure is not required for any issuers.

What governance information must companies disclose under the new rules?

Companies must disclose:

• The board’s oversight of climate-related risks.
• The role of management in assessing and managing these risks.
• The processes used for identifying, assessing, and managing material climate-related financial risks.
• Any existing transition plans, scenario analyses, or internal carbon pricing if deemed material.

What changes were made to the proposed financial statement disclosure requirements in the final rules?

The scope of financial statement disclosures has been narrowed to focus on:

• Discrete actual expenses related to severe weather events and other natural conditions.
• New financial footnote disclosures for financial impacts, costs, expenditures, and losses associated with carbon offsets and renewable energy credits.
• Elimination of the requirement for individual financial statement line item disclosures for impacts from severe weather events and other natural conditions.

What are the phase-in periods and accommodations provided in the new rules?

The new rules provide extended phase-in periods, with:

• Large accelerated filers required to comply starting with fiscal year 2025, with filings made in 2026.
• An accommodation allowing delayed filing of Scope 1 and 2 emissions disclosures after the fiscal year end.
• Expanded private liability safe harbor to include forward-looking disclosures related to transition plans, scenario analysis, internal carbon pricing, and climate-related targets and goals.

When do large accelerated filers need to comply with the SEC’s climate disclosure requirements?

Large accelerated filers are required to comply with the SEC’s climate disclosure requirements starting with the fiscal year 2025, with disclosures to be included in filings made in 2026.

Are there any accommodations for delayed disclosures under the SEC’s climate rules?

Yes, the SEC provides an accommodation that allows companies to file Scope 1 and 2 GHG emissions disclosures on a delayed basis after the fiscal year end, providing additional time for preparation and accuracy.

What is the impact of the extended phase-in periods on companies’ disclosure preparations?

The extended phase-in periods allow companies more time to:

• Develop and implement systems for gathering and reporting climate-related data.
• Ensure the accuracy and completeness of their disclosures.
• Integrate climate-related risk management processes into their overall risk management frameworks.

What are the estimated compliance costs for governance and risk management disclosures under the SEC’s Final Rules?

The SEC estimates the compliance costs for governance disclosure, disclosure regarding the impacts of climate-related risks on strategy, business model, and outlook, and risk management disclosure will be:

• $327,000 in the first year of compliance.
• $183,000 annually in subsequent years.