The Enhancement and Standardization of Climate-Related Disclosures for Investors

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.

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. 

 

 

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 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.

 

 

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.

 

 

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

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 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)