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What are the new climate disclosure rules adopted by the SEC?
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On March 6, 2024, the US SEC (United States Securities and Exchange Commission) finalised new rules that aim to both enhance and standardise climate-related disclosures. The move will provide clarity to companies and investors alike, however, the final draft represents a scaled-back version of the original proposal with Scope 3 emissions dropped from the text.
The new rules are also under threat after the Fifth US Circuit Court of Appeals granted an administrative stay, casting doubt over its future.
This article will cover everything you need to know about the new SEC climate-related disclosure rules, read on to find out more.
👉 What are the new climate-related disclosure rules? Who will they impact? And when will they come into effect?
What are the SEC’s new climate disclosure rules?
On the 6th of March 2024, the SEC announced that it had formally adopted the highly-anticipated climate-related disclosure rules. Over 900 pages long and two years in the making, these rules aim to bring clarity and uniformity when it comes to climate-related disclosures by public companies and in public offerings.
The highly anticipated disclosure requirements come in response to increasing investor demand for more uniform and comparable information on the financial implications of climate-related risks. The rules will provide more transparency into how a company manages such risks, allowing investors to better assess investment opportunities.
The rules are also good news for companies, who finally have more clarity on what is expected of them in terms of disclosures. Companies will have to include the required information in their SEC filings (e.g in their annual reports and registration statements), effective from 2025.
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Background to the SEC’s climate-related disclosure rules
The SEC has up until now steered clear of mandating the disclosure of climate-related risks, and has in the past only issued guidance (the last guidance related to climate disclosure was issued in 2010). The new rules, which were finalised on Wednesday 6th of March are the first time that the SEC has issued mandatory nationwide climate disclosure obligations.
The rules are the culmination of over two years of consideration and drafting and come in response to the increasing acknowledgment that climate change can, and does, impact a company’s financial performance.
💡 Up to USD 5 trillion annually is projected to be invested in sustainability by 2025, representing the largest capital reallocation in history. Consumers and investors alike are increasingly factoring in sustainability and climate risk when it comes to their investment decisions. This realignment of priorities will transform business in the US.
The new SEC rule has grown out of a wider global shift. Increasing numbers of countries and jurisdictions, such as the UK, Japan, and the EU, are implementing their own mandatory reporting of climate-related risks and opportunities. Additionally, a number of international institutions have published guidelines for voluntary disclosures - guidelines such as the Task Force of Climate-related Financial Disclosures (TCFD) which has been endorsed by over 2,600 companies.
Investors in the US were calling for a US rule to mandate similar reporting requirements, For investors, climate change has become a significant concern in recent years. Yet, in the US, without any obligated reporting, disclosures from companies were at times scant, and even when provided didn’t always facilitate easy comparison of data between companies.
This is why on March 21, 2022, the US SEC proposed a climate disclosure rule, requiring companies to provide information on their greenhouse gas emissions and environmental impact. The proposed rule was designed to provide clarity both about the company’s environmental impact and the impact of climate change on the organisation's profitability and operations. Armed with this information investors would be able to make more informed decisions about the companies they choose to invest in.
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What is in the SEC’s climate-related disclosure rules?
SEC Commissioners voted with a 3 to 2 majority in favour of passing the new rules. However, the final draft is considerably less ambitious than the initial proposal. Still, the new obligation will likely impact thousands of companies across the US, requiring them to report their greenhouse gas emissions, material climate impacts, and any targets or transition plans.
Who is impacted by the new SEC rules?
The new SEC rules impact all domestic and foreign companies that file documents with the Securities and Exchange Commission. Otherwise referred to as registrants these companies are those conducting initial public offerings (IPO) and companies that file periodic reports.
There are a few exceptions to the above. Asset-backed issuers for example are exempt from the new rules, and SRCs (smaller reporting companies)), EGCs (emerging growth companies), and non-accelerated filers are exempt from GHG reporting but must provide all other disclosures.
💡 Around 5,300 corporations will fall under the scope of the new SEC rules. Including major organisations such as Chevron, Wells Fargo, and Amazon.
What disclosures do the new rules require?
The new SEC climate disclosure rules include:
- GHG emissions - This disclosure covers material Scope 1 and Scope 2 greenhouse gas emissions. Scope 1 and 2 GHG emissions include emissions that are generated by a company’s own operations and those linked to the energy that it purchases. This disclosure requirement applies to large accelerated SEC filers and accelerated SEC filers only.
- Governance - This disclosure mandates information on the governance and oversight of all material climate-related risks. Information to be provided includes how the company’s board of directors and management oversee climate-related risks and progression toward climate targets.
- Strategy, business model, and outlook - Information to be provided includes the material impact of climate-related risks on the company’s business model, strategy, or performance outlook.
- Risk management - This disclosure covers the company’s processes for the management of climate-related risks, including the detection, evaluation of, and management of said risks.
- Targets and goals - Climate targets and goals that materially impact or are likely to materially impact the business, results, or financial status must be disclosed.
- Material expenditures and impacts - Disclosure of quantitative and qualitative information on material expenditures and impacts on financial estimates that relate to climate-related adaptation or mitigation, climate transition plans, or disclosed targets or goals.
- Severe weather and other natural conditions financial statement impacts - This disclosure covers the impacts of severe weather events and other natural conditions on a company’s financial statement and material impacts on financial estimates and assumptions. This information should be included in the footnotes to the financial statements.
- Carbon offset and renewable energy credit (REC) information - Information must be provided on the roll forward of carbon offsets and renewable energy credits or certificates (RECs), where these are a material component of meeting climate-related targets. This information should also be included in the notes to the financial statements.
When will the new rules come into effect?
| Scope 1 and 2 GHG emissions | Material expenditures and impacts | Financial statement disclosures and all other disclosures | |
| SEC registrant type | |||
| Large accelerated filer | 2026 | 2026 | 2025 |
| Accelerated filer (excludes SRCs and EGCs) | 2028 | 2027 | 2026 |
| Non accelerated filer, SRCs, and EGCs | Not required | 2028 | 2027 |
*Disclosures to be included in annual reports or registration statements that include financial statements for the year ending December 31st.
Other important points to note regarding the implementation of the SEC climate disclosure rules include:
- Timing for disclosures - Companies are required to integrate climate-related disclosures - excluding Scope 1 and Scope 2 greenhouse gas (GHG) emissions - in their annual reports at the time of filing. For US domestic registrants, emission data can be reported in their Form 10-Q3 for the second quarter following the relevant fiscal year. Foreign private issuers have a different timeline. They can provide these disclosures via an amendment to their annual report on Form 20-F, due 225 days after their fiscal year ends.
- Filing requirements for GHG emissions - GHG emission disclosures must be included for the most recent fiscal year in registration statements, filed after 225 days from the fiscal year’s end. Other disclosures should align with the fiscal years presented in the annual financial statements within the filing.
- Provision of Information - Domestic registrants must present information, including GHG emissions, in a newly designated section of Form 10-K. Foreign private issuers should include it in Form 20-F.
Meaning of material
Many climate disclosure regulations have introduced the concept of double materiality, which means that a company must provide information covering both how the business is impacted by sustainability issues, and how their activities also impact the environment and society. Many hoped that the SEC climate-related disclosure rules would also implement this higher materiality standard, however, the SEC opted to adopt the concept of single materiality, which focuses on climate impacts on a company’s financial performance.
The SEC has clarified that with regard to the new climate disclosure rules, the term ‘materiality’ should align with the US Supreme Court's definition. According to this definition, “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 the omission of the disclosure as having significantly altered the total mix of information made available.”
SEC overreach or not far enough?
Not long after the SEC announced the approval of the finalised rule several US states announced a coalition intending to challenge the rule in the US Court of Appeals, stating that they believed the rule to be “illegal and unconstitutional”. They argue that the SEC has over-extended its power and that its new rule may also potentially violate First Amendment rights by requiring businesses to “disclose information that they might not otherwise want to”.
In a more recent update, on the 18th of March, 2024, a US appeals court placed a pause on the new rules in response to a lawsuit filed by oil-field-services firms Liberty Energy and Nomad Proppant Services. This may be the first of many attempts to prevent the rules from coming into effect. As the various lawsuits work their way through the US court system, it's possible that some companies may choose to delay their compliance.
Yet, the SEC is no stranger when it comes to pushback from Republican officials and businesses and has vowed to defend the climate-risk disclosure rules. However, the move to challenge the legality of the new rule may not just stem from Republican-led states, several environmental groups are also considering challenging the rules for an entirely different reason.
These groups criticise the watering down of the original proposal, calling it the “bare minimum”. The original proposed rule was greater in scope in that it not only covered Scope 1 and 2 emissions but also Scope 3 emissions. Given that for the average company over 70% of GHG emissions are related to Scope 3 it’s easy to understand why this omission from the final draft is seen as falling short.
Additionally, the Scope 1 and 2 disclosures have been narrowed down to include only those that are considered to be material for large-sized SEC-registered companies. Under the final rules, only 40% of US companies registered with the SEC will be large enough to meet the requirements for Scope 1 and 2 disclosures, if their emissions meet the materiality threshold.
SEC Commissioner, Caroline Crenshaw who voted in favour of the rule expressed her disappointment, stating “While these are important steps forward, they are a bare minimum”.
What should companies do to prepare for the new climate disclosure rules?
As companies gear up for the new climate disclosure rules set by the SEC, a well-structured approach is essential for seamless compliance. Here’s a strategic roadmap for companies to prepare effectively:
Enhance climate governance
It's important to strengthen the company’s climate governance framework. This involves educating and aligning the board of directors, management, and employees with the details of the new SEC rule. Companies may need to either establish or refine their governance structures regarding climate issues, ensuring clear roles, responsibilities, and charters are in place for effective oversight.
Evaluate current climate disclosures
Companies should conduct a thorough review of the climate-related information they currently collect and disclose. This step involves creating an inventory of existing data, alongside an assessment of the processes and controls that manage this information. Understanding the present state of climate disclosure provides a foundation for future improvements.
Identify and address gaps
Another important aspect is identifying gaps in climate-related data, controls, and reporting practices. This includes examining disclosures both within and outside financial statements. Recognising these gaps will guide companies in making necessary adjustments to their reporting processes.
Assess reporting and data management needs
Preparing for the new disclosure requirements might require additional resources. Companies should evaluate their current capabilities in terms of personnel, processes, and technology, and plan accordingly to meet reporting timelines efficiently.
Develop an action plan
Creating a detailed action plan for implementing the final rules is important. This plan should integrate with existing efforts related to other climate reporting requirements where applicable.
Execution and adaptation
Finally, companies should start executing their action plan. As they progress, they may need to adapt to new developments and learnings in order to ensure continuous improvement and compliance.
What about Greenly?
At Greenly, we can help you to assess your company’s carbon footprint, and then give you the tools you need to cut down on emissions. Why not request a free demo with one of our experts - no obligation or commitment required.
If reading this article has inspired you to consider your company’s own carbon footprint, Greenly can help. Learn more about Greenly’s carbon management platform here.