The Enhancement and Standardization of Climate-Related Disclosures for Investors

On March 6, 2024, the U.S. Securities and Exchange Commission (SEC) finalized its climate-related rulemaking, entitled, “The Enhancement and Standardization of Climate-Related Disclosures for Investors.”

The SEC’s proposed draft rule in 2022 received more than 16,000 public comments. This final rule shows significant change from the draft climate rule, including the removal of Scope 3 reporting requirements and other reductions in breadth and intensity of requirements. Legal challenges to the final rule are expected, which may affect the timeline of implementation.

Chairman Gary Gensler stated that the requirements were in line with current voluntary reporting demanded by the market. The SEC found that in the Russell 1000 Index, some 90% of issuers are already providing climate-related information, although the current reporting may be of varying quality and accuracy.

The new rule brings an added set of requirements to the rapidly expanding global patchwork of environmental, social, and governance (ESG) and climate disclosure regulations.

Who is Covered By the Rulemaking?

The rule applies to all “domestic and foreign registrant firms.” In total, the SEC estimates that under this rule, approximately 7,000 domestic and 900 foreign companies will be required to report their climate disclosures. However, different registrant types have different requirements and timelines.

What Needs to Be Disclosed?

The rule covers the following five disclosure topics, further detailed below: (1) material climate-related risks and activities to reduce risk; (2) processes for identifying, assessing, and managing climate risk; (3) governance for climate risks; (4) climate targets or goals that are material to the business; and (5) for certain firms, quantitative greenhouse gas (GHG) emissions also need to be disclosed.

Material¹ Climate-Related Risks

Under the final rule, companies may be required to disclose a suite of climate risk information. Some highlights include: (1) if they had or are reasonably likely to have material impact on strategy, results of operations, or financial condition related to climate topics; (2) if determined to be material, whether risks are likely to be recognized in the short term (over the next 12 months) or the long term (beyond the next 12 months) and capitalized costs and charges incurred as a result of severe weather and other natural conditions subject to a threshold of 1% (or pretax income of $100,000) and de minimis disclosure thresholds; and (3) expenditures and losses noted on income statements as a result of severe weather and other natural conditions subject to a threshold of 1% of absolute value for stockholders’ equity (or deficit or $500,000) and de minimis disclosure thresholds. The final rules state that aggregate amounts must be determined before consideration of recovery from insurance.

Process for Identifying, Assessing, and Managing Climate-Related Risks

Some examples of processes companies may be required to disclose include: (1) mitigation or adaptation strategies the firm has undertaken; (2) the use of internal carbon prices; (3) transition plans or use of scenario analysis; (4) policy and/or processes related to oversight and the management of climate risks; and (5) risk management process for material climate-related risks.

Governance of Climate Topics

Governance disclosures may include: (1) board oversight of climate-related risks, and (2) management’s role in managing climate risk. The final rule removes the proposed requirement to disclose director experience with climate risk.

Material Climate Targets

Firms may be required to disclose material climate-related targets and goals and progress, including capitalized costs, expenditures, and losses related to carbon offsets and renewable energy credits to meet targets and goals. A safe harbor may protect companies from liability related to targets, goals, scenarios analysis, transition plans, and internal carbon pricing.

GHG Emissions

Some registrant classes are required to disclose quantitative Scope 1 and 2 GHG emissions. Additionally, some registrant classes are also required to achieve limited assurance of those figures and eventually reasonable assurance. The SEC has allowed flexibility in determining the organizational boundary for emission reporting.

Large Accelerated Filers and Accelerated Filers are required to establish materiality for Scope 1 and Scope 2 emissions. According to the rule, “materiality” is not determined solely by the quantity of emissions but “whether an investor would consider the disclosure of an item of information…important when making an investment or voting decision, or such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available.”

Timelines, Phase-Ins, and Carve-Outs

Reporting for Large Accelerated Filers includes data from the fiscal year beginning (FYB) in 2025. The most complex portions of the rule (reasonable assurance of GHG emissions) go into effect in 2033. The timeline and start dates will depend on the size of the firm and its filing status. Below is a summary of the reporting timelines.

Timeline for Disclosures

Climate Disclosure Timeline Chart

Notably, the GHG emissions disclosure requirements phase in based on filing status. Large Accelerated Filers falling under the materiality requirements of the final rule will disclose GHG emissions in 2026, with limited assurance in 2029 and reasonable assurance in 2033. Accelerated Filers will begin disclosing GHG emissions in 2028, with limited assurance in 2031. Accelerated Filers will not need to obtain reasonable assurance.

How to Disclose

Companies may need to disclose the following items under Regulation S-K and Regulation S-X in the following manner:

File climate-related disclosure in registration statements and Exchange Act annual reports
Inclusion of climate-related disclosures in Regulations S-X financial statements
Regulations S-K mandated disclosures in either separate section of a firm’s registration statement and/or annual report and/or annual filing as long as disclosure meets the electronic tagging requirements
Emissions information may be disclosed on a domestic registrant’s 10-Q in the second quarter for the year, after the year the emission disclosures are related

Key Differences from the 2022 Proposed Rule

The changes from the proposed to final rule generally made the rule less stringent. Notable changes from proposed to final rule include:

The removal of Scope 3 reporting requirements
Scope 1 and 2 now only mandatory for some firms
Goals and target disclosure now only required if determined to be material
Physical risk disclosure is less specific and narrower (e.g., removal of value chain from risk assessment)

Interaction With Other ESG and Climate Disclosure Rules

Global corporations continue to face an expanding patchwork of regulations across the globe, including the State of California’s Climate Rules (SB 253/261), the European Union’s Corporate Sustainability Reporting Directive (CSRD), and existing or proposed rules from New Zealand, UK, Japan, France, China, Brazil, and others.

This SEC rule is arguably more narrow in scope than many of those other rules on key topics (e.g., excluding Scope 3, imposing single materiality rather than double materiality thresholds). However, the final rule does not include an equivalency provision that would accommodate other ESG and climate disclosure standards and rules.

How Guidehouse Can Help

Many firms are already including some form of climate-related risk considerations in their business operations and beyond compliance disclosures. The SEC rule may expand the breadth and depth of mandatory reporting. This expansion creates new, higher expectations for the quality of disclosure and the processes and data that underpin it.

Guidehouse can help firms:

Understand gaps and needs — With each update to the global landscape of ESG rules, including SEC, CSRD, EFRS Foundation International Sustainability Standards Board (ISSB) standards, and California Climate Bills (253/261), firms need up-to-date understanding of where they are in compliance and where their gaps are—in terms of process, analyses and approaches, data-quality, and disclosure-readiness.

Conduct climate risk analyses — Many of these rules mandate risk-specific analyses, calculations of environmental impact, targets for reduction, action plans, and governance. Firms need to prepare these analyses to an appropriate level of rigor and confidence for their unique reporting landscape.

Systematize approaches and data systems to prepare for disclosure — Firms need to develop the confidence to make compliant qualitative and quantitative disclosures that are ready for public and regulator consumption. Building the data systems, data management process and controls, vetted language, and multiple years of practice can all place organizations in positions to succeed.

This summary assumes that the reader complies fully with relevant laws and regulations applicable in its area of operations and usage unless otherwise stated and that the reader manages in a competent and responsible manner. Guidehouse assumes no responsibility for legal advice or legal due diligence services and, Guidehouse makes no representations concerning interpretations of either the law or contracts. Guidehouse assumes no responsibility for the acceptability of the approaches used in this summary as legal evidence in any court or jurisdiction. The suitability of this summary and opinion for any legal forum is a matter for the reader and reader’s legal advisor to determine.

This article is coauthored by Alma Angotti, Britt Harter, Ted Kowalsky, Kathryn Rock, Kate Sylvis, and Aliesa Adelman.

¹ Under the final rule, “materiality” will be defined using the US Supreme Court’s definition that a fact is material if there is a “substantial likelihood that the fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.”

The Enhancement and Standardization of Climate-Related Disclosures for Investors

Key Takeaways from the SEC Rule.

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