The S.E.C. New Climate-Related Disclosure Rules

Anna Triponel

March 8, 2024
Our key takeaway: The U.S. Securities and Exchange Commission (S.E.C.) adopted the final rules on what it expects companies to disclose in relation to their material climate-related risks and impacts and, specifically, how climate change, extreme weather events, and carbon credits and renewable energy certificates impact their business, operations and financial performance over the short-and-long-term. This is in response to growing investor demand for greater clarity and standardisation of companies’ climate-related disclosures, and draws on the Task Force on Climate-related Financial Disclosure (TCFD) and the GHG Protocol as the basis for these rules, albeit with some key differences. While there are some provisions of the rules that will be helpful in enhancing climate-related disclosures, the final rules are significantly pared back compared to the initial proposed rules, and this will impact the scope and quality of the disclosures. For instance, the provision that companies are to disclose their climate-related risks and impacts on their value chain has been removed, which excludes people and communities further upstream and downstream companies’ supply chains. The final rules also removes companies’ obligation to disclose their scope 3 emissions, and limits the disclosure of scope 1 and 2 emissions to certain companies. In addition, the final rules exempt smaller companies (defined as smaller reporting companies and emerging growth companies) from disclosure obligations altogether, and removes the requirement that companies disclose whether members of the board have climate expertise. We expect to see legal challenges against the new rules by certain U.S. states and civil society organisations going forward, albeit based on very different reasons. What is clear, however, is that companies are continuing to voluntarily disclose their climate-related risks and impacts, and investors are increasingly demanding this information.

The U.S. Securities and Exchange Commission (S.E.C) has adopted new climate-related disclosure rules that will apply to public companies (known as registrants under the rules). The information provided here comes from three sources: 1) the text of the final rules; 2) the U.S. S.E.C’s press release; and 3) the New York Times article titled ’S.E.C Approves New Climate Rules Far Weaker Than Originally Proposed’ (March 2024):

Objectives of the rules:

  • To respond to investor and market expectations for companies to disclose their physical and transition-related climate risks and how these risks materially impacts the business and its financial performance
  • To standardise the various climate-related disclosure standards that we see across the world, which is why the S.E.C. states that the new rules are based on the Task Force on Climate-related Financial Disclosure (TCFD) and the GHG Protocol. It is hoped that the new rules will give investors access to “more consistent, comparable, and reliable information.”

Obligations of companies:

Under the new rules, registrants are expected to disclose climate-related risks and impacts in their registration statements and annual reports. Disclosures must include: 

  • Any climate-related risks - which encompasses both physical and transition risks - and its actual and potential material impacts, that have had or are reasonably likely to have a material impact on the registrant’s strategy, operations, or financial condition in the short-term (in the next 12 months) and in the long-term (beyond the next 12 months) 
  • The activities that the registrant is taking to mitigate or adapt to a material climate-related risk, as well as the costs associated with these measures and how it materially impacts the registrant’s financial estimates 
  • Provided that the registrant has adopted a transition plan to manage a material transition risk, a description of the transition plan and the actions taken to manage the risks, as well as how the measures taken have impacted the registrant’s business, operations or financial condition
  • Scenario analysis provided it has been used by the registrant to determine that a climate-related risk is reasonably likely to have a material impact on its business, operation or financial condition 
  • Internal carbon price provided it is used by the registrant to evaluate and manage a material climate-related risk 
  • The role of the board of directors and management in overseeing and assessing the registrant’s material climate-related risks
  • Processes for identifying, assessing and managing material climate-related risks and whether such processes are integrated into the registrant’s overall risk management system
  • Climate-related targets or goals, including costs incurred as a direct result of, or the actions taken to meet, the target or goal. 
  • Scope 1 emissions and/or scope 2 emissions for registrants that are large accelerated filer (LAF) or an accelerated filer (AF)
  • The costs, expenditures, charges and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures and sea level rise subject to certain thresholds
  • The costs, expenditures, and losses related to carbon offsets and renewable energy credits or certificates provided they are used to achieve the registrant’s climate-related targets or goals 

Omissions of the final rules when compared to the initial proposed rules

The final rules adopted by the S.E.C. contain significant modifications compared to its initial proposed rules. The modifications include: 

  • Removing the need for registrants to disclose the climate-related risks and impacts on their value chain unless such impacts have materially impacted or are reasonably likely to materially impact the registrant’s business, results of operations, or financial condition
  • Eliminating the proposed requirement to describe board members’ climate expertise
  • Eliminating the proposed requirement for all registrants to disclose Scope 1 and Scope 2 emissions
  • Exempting smaller reporting companies (SRCs) and emerging growth companies (EGCs) from the Scope 1 and Scope 2 emissions disclosure requirement
  • Eliminating the proposed requirement to provide Scope 3 emissions disclosure
  • Requiring registrants to disclose ‘material’ direct emissions (at the discretion of registrants to assess whether emissions are material)

What next?

The final rules will become effective 60 days following publication of the adopting release in the Federal Register and compliance dates for different registrants will be phased in over time.

We may see a proliferation of legal challenges to the new rules by various U.S. states (some of which believe that the rules are too onerous for businesses and the S.E.C. is acting beyond the remit of its role) as well as by civil society organisations (some of which believe that the final rules fall short and the S.E.C. has arbitrarily removed key provisions).

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