SEC adopts long-awaited climate disclosure rules

The Securities and Exchange Commission (SEC) has adopted long-awaited rules to enhance and standardise climate-related disclosures by large public companies. The Enhancement and Standardization of Climate-Related Disclosures Rules: Final Rules represent the first nationwide climate disclosure rules in the USA.

Requirements

The final rules require SEC registrants to disclose, amongst other things:

• climate-related risks that have had or are likely to have a material impact on a registrant’s strategy, results of operations, or financial condition;
• activities to mitigate or adapt to such risks (including the use, if any, of transition plans, scenario analysis or internal carbon pricing);
• information about the registrant's board of directors' oversight of climate-related risks;
• management’s role in managing material climate-related risks; and
• information on any climate-related targets or goals that are material to the registrant's business, results of operations, or financial condition.

Disclosure of Scope 1 and/or Scope 2 greenhouse gas emissions is also required under the final rules for certain larger SEC registrants where those emissions are considered material, the filing of an attestation report covering the required disclosure of such registrants’ Scope 1 and/or Scope 2 emissions, and disclosure of the financial statement effects of severe weather events and other natural conditions including, for example, costs and losses.

The final rules will become effective 60 days following publication of the adopting release in the Federal Register. Compliance dates for the rules will be phased in for all registrants, starting with the financial year beginning 2025 and with the compliance date dependent on the registrant’s filer status.

For more information on the requirements and implementation timetable, see the SEC’s Enhancement and Standardization of Climate-Related Disclosures: Final Rules, Fact Sheet.

Scaling back

Whilst marking a major milestone in America, climate activists have criticised the ‘watering down’ of the final rules from the initial draft proposed in March 2022. The most notable changes are the removal of the requirement for registrants to report on Scope 3 emissions (ie those originating in their value chain) and a move away from mandated disclosure of Scope 1 and/or Scope 2 emissions to disclosure only where those emissions are considered to be of significant important to investors. Additionally, only the largest companies will be subject to assurance requirements. In response, the SEC has cited heavy industry lobbying, public feedback and the prospect of an onslaught of legal challenges as key reasons for the scaling back.

Interaction with other reporting regulations

The SEC’s Enhancement and Standardization of Climate-Related Disclosures Rules share some similarities with other reporting requirements such as the EU’s Corporate Sustainability Reporting Directive, California’s Emissions Bills and the UK’s Taskforce for Climate Related Disclosures (TCFD-aligned disclosures being mandated in the UK for large companies). However, the latter all necessitate Scope 3 emission reporting, meaning compliance with the SEC’s final rules may not be sufficient for registrants to satisfy these standards and separate reports may be required.

Edit: On March 15th 2024, the US appeals court temporarily paused the SEC climate disclosure rules amid litigation challenging the new regulations. This blog will be regularly updated as the situation evolves.