A landmark decision for climate disclosure requirements

The SEC received record levels of feedback on the proposed rule, and in such feedback, registrants raised significant concerns. The final rule addresses certain aspects of that feedback by:

• Establishing a materiality threshold for scope 1 and scope 2 GHG emissions and allowing registrants to delay disclosure of such information, and any related attestation, by permitting them to file it by the due date of their second fiscal quarterly report for the following year.

• Giving registrants flexibility in determining the organizational boundary for their scope 1 and scope 2 GHG emissions, with appropriate disclosure of how the boundary differs from the scope of the consolidated financial statements.

• Eliminating the scope 3 GHG emission disclosure requirement.

• Removing the requirement to evaluate financial statement impacts on a line-item-by-line-item basis and instead requiring disclosure of amounts reflected directly in the financial statements when such aggregate amounts exceed 1% of pretax income or total shareholders’ equity, subject to a de minimis threshold.

• Lengthening the adoption timeline, giving large accelerated filers nearly (1) two years to provide most disclosures, (2) three years to provide GHG emission information and certain other disclosures, and (3) six years to obtain limited assurance over GHG emissions.

• Exempting smaller reporting companies (SRCs), emerging growth companies (EGCs), and nonaccelerated filers from the requirement to provide GHG emission disclosures and related attestation.

The final rule requires registrants to disclose the following in the footnotes to the financial statements:

In addition, the final rule requires registrants to provide quantitative and qualitative disclosures outside the audited financial statements in certain SEC filings as follows:

Registrants must provide disclosures other than those related to scope 1 and scope 2 GHG emissions in annual reports at the time of the filing. Domestic registrants may disclose emission information in their second-quarter Form 10-Q for the year after the year to which the emission disclosures are related. Foreign private issuers may provide the disclosures in an amendment to their annual report on Form 20-F due 225 days after the end of their fiscal year. For registration statements, the GHG emission disclosures would be required for the most recent fiscal year for registration statements filed 225 days after the end of the fiscal year, whereas all other disclosures would be required for the fiscal years presented in the annual financial statements of the filing.

Except for the financial statement disclosures outlined in the table above, domestic registrants must present other information, including GHG emissions, in a newly created section of Form 10-K (Item 6) immediately before MD&A or in another appropriate section of the filing (e.g., risk factors, MD&A). Foreign private issuers must present it in Form 20-F (Item 3.E).

The SEC states in the final rule that the definition of materiality used by a registrant should be consistent with that established by the US Supreme Court; namely, “a matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote or such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available.” The final rule also emphasizes that materiality is based on facts and circumstances and takes into account qualitative and quantitative factors.

In addition, the final rule provides a safe harbor to protect registrants from liability for disclosures related to transition plans, scenario analysis, internal carbon pricing, and targets and goals, other than disclosures that relate to historical facts.

The financial statement disclosures will be subject to existing financial statement audit requirements and management’s internal control over financial reporting (ICFR). For large accelerated filers and accelerated filers that are not EGCs, the independent registered public accounting firm’s audit of ICFR will similarly assess controls over these disclosures.

All disclosures outside the financial statements will be subject to management’s disclosure controls and procedures (DCPs), which the registrant’s principal executive officer and principal financial officer must periodically assess and certify. The scope 1 and scope 2 GHG emission disclosure will be subject to limited assurance for large accelerated filers and accelerated filers (other than SRCs and EGCs) and, following a phase-in period, reasonable assurance for large accelerated filers.

All domestic and foreign registrants, except for asset-backed issuers, must provide the disclosures. SRCs, EGCs, and nonaccelerated filers are exempt from the scope 1 and scope 2 GHG emission disclosure requirements but must provide all other disclosures. Disclosures may be provided prospectively upon adoption.

The final rule becomes effective 60 days after it is published in the Federal Register. For a registrant with a calendar year-end, the mandatory compliance dates are as follows:

Non-calendar-year-end registrants would provide these disclosures for the fiscal year beginning in the calendar years shown above. For example, a large accelerated filer with a June 30 year end would be required to first provide all disclosures except disclosures about material expenditures and impacts and GHG emission disclosures for its annual report for the year ending June 30, 2026, because that fiscal year began in calendar 2025.

The final rule follows on the heels of numerous recent voluntary and mandatory climate and ESG-related disclosure requirements that have been issued or adopted in the last two years, including the IFRS® Sustainability Disclosure Standards, the EU Corporate Sustainability Reporting Directive (CSRD) and related European Sustainability Reporting Standards, and the California climate legislation. Like this other guidance, the SEC’s final rule leverages existing disclosure frameworks such as those established by the GHG Protocol and the Task Force on Climate-Related Financial Disclosures (TCFD). However, while the IFRS Sustainability Disclosure Standards and the CSRD broadly address sustainability and ESG matters, the SEC’s final rule addresses climate-related disclosures only. The SEC did not recognize other standards (e.g., the IFRS Sustainability Disclosure Standards) as an alternative to the disclosures required by the final rule, but Commissioner Caroline Crenshaw recommended that the SEC explore this in the future.

While 97 percent of Fortune 500 companies mentioned climate change in their most recent annual report, they primarily addressed general risk factors associated with the physical effects of climate change, increased regulation, and reputational risk. The final rule significantly expands a registrant’s disclosure requirements, and the vast majority of companies will need to use the transition period to develop their reporting capabilities, data requirements, and processes and controls.

On April 4, 2024, the SEC voluntarily stayed the effective date of the final rule pending judicial review of petitions challenging it, which have been consolidated for review by the US District Court of Appeals for the Eighth Circuit. The SEC stated that it “will continue vigorously defending the [climate rule’s] validity in court” but issued the stay to “facilitate the orderly judicial resolution of” challenges presented against the climate rule and to avoid “potential regulatory uncertainty if registrants were to become subject to the [climate rule’s] requirements” before the legal challenges were settled. The stay does not reverse or change any of the final rule’s requirements nor does it affect the SEC’s existing 2010 interpretive release on climate-change disclosures. Since the outcome of the litigation is unknown and the review may take several months or longer, it is uncertain whether the SEC will retain or extend the final rule’s existing mandatory compliance dates. Irrespective of this uncertainty, companies will need to make decisions related to implementing the rule’s requirements.

Currently, many SEC registrants voluntarily disclose climate information, and beginning in 2025, certain companies will be subject to the EU CSRD and the California climate legislation. Beginning with their first year of reporting, companies subject to the EU CSRD will need to provide more extensive disclosures than they would under the SEC climate rule, including obtaining assurance over all their climate disclosures rather than only those pertaining to GHG emissions. If the SEC climate rule is ultimately delayed, many SEC registrants will disclose climate-related information in EU CSRD or California reports before having to provide comparable disclosures in their SEC filings. Therefore, as they prepare for reporting under the EU CSRD or the California climate legislation (or provide voluntary disclosures), companies should consider their data, governance, processes, and controls over climate-related information given that they may need to disclose the same or similar information in future SEC filings.

In a manner similar to the adoption of other significant accounting or reporting changes, successful implementation of the final rule’s requirements starts with a clear, well-developed plan. Companies should consider taking action related to the following:

• Establish or refine climate governance—Educate the board of directors, management, and employees about the final rule and build organizational capacity. Establish or refine board and management oversight, and define clear roles, responsibilities, and charters.

• Understand the current state of climate disclosure and information—Inventory climate-related information that has already been gathered or disclosed and understand the data, processes, and controls over this information.

• Identify disclosure and control gaps—Identify and assess gaps related to data, controls, and reporting, including disclosures both in and outside the financial statements.

• Assess reporting and data management—Consider resources (e.g., people, processes, technologies) needed for meeting reporting deadlines.

• Prepare for attestation (if applicable)—Understand attestation requirements and develop plans to provide sufficient support.

• Develop an action plan—Create a detailed action plan for implementing the final rule and integrate it with plans for applying other climate reporting requirements (e.g., the CSRD) that are already underway (if applicable).

• Execute—Begin executing each step of the action plan while adapting it for future developments.