On March 6, 2024, the U.S. Securities and Exchange Commission (SEC) adopted its long-anticipated final Climate Disclosure Rule which will require public companies to provide climate-related information in certain SEC filings (e.g., registration statements and annual reports). Subject companies will be required to disclose information related to their climate-related risks and strategies for managing and mitigating them. The rules will become effective 60 days after publication in the Federal Register. The SEC has had guidance in place regarding the inclusion of climate risks in certain SEC disclosures since 2010, however, this rulemaking seeks to increase consistency, comparability, and reliability in climate-related disclosures to facilitate use by investors. While many public companies voluntarily provide information regarding their annual greenhouse gas (GHG) emissions and climate strategies in their sustainability reports and on their websites already, having such disclosures regulated by the SEC brings a new level of rigor to the development, reporting and auditing of that information to meet the Commission’s requisite disclosure controls and procedures. Climate-related disclosures under the rule will be considered “filed” information which is thereby subject to the same liability as other important business and financial information disclosed to the SEC.
The SEC proposed “The Enhancement and Standardization of Climate-Related Disclosures for Investors” rulemaking in March 2021 and it underwent extensive public comment with the receipt of over 24,000 comment letters. The resulting final rule is less stringent and less prescriptive than originally proposed, particularly as it relates to requirements for disclosure of certain information such as climate-related risk, board oversight and risk management.
Certain disclosures, like the impacts of climate-related risks, the use of scenario analysis, the use of internal carbon pricing, and established climate targets and goals, are required only if that information is deemed “material” to the company’s business strategy, results of operations or financial condition.
The SEC considers a matter to be 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 includes safe harbor provisions regarding the disclosure of transition plans, scenario analyses, internal carbon pricing, and established targets and goals.
With respect to GHG emissions quantification reporting, the contentious proposed requirement to disclose Scope 3 GHG emissions has been eliminated in the final rule. The reporting of Scope 1 and Scope 2 GHG emissions remains, but has been limited to large accelerated filers (LAFs) and accelerated filers (AFs), exempting the smaller reporting companies (SRCs) and emerging growth companies (EGCs) that were included in the proposed rule. In alignment with SEC financial disclosures, reporting under the rule is on a fiscal year basis. However, most companies quantify GHG emissions on a calendar year basis for compliance with other regulatory programs (e.g., EPA’s mandatory GHG reporting rule and state reporting requirements). Hence, for companies whose fiscal year does not align with the calendar year, compliance with the SEC rule may require additional data management capabilities in order to track and pull activity data to meet both timeframes.
The disclosure requirements for affected companies will be phased-in as follows:
- LAFs will begin disclosing all climate risk-related information (except for certain cost data for which disclosure is delayed as described below) for any fiscal year beginning (FYB) in calendar year 2025. AFs will begin disclosing this information for FYB 2026 and SRCs and EGCs will begin disclosure for FYB 2027.
- LAFs will begin disclosing material costs associated with mitigating climate-related risks, implementing a transition plan, or resulting from actions taken to achieve a target or goal for FYB 2026. AFs will begin disclosing this information for FYB 2027 and SRCs and EGCs will begin disclosure for FYB 2028.
- The SEC is delaying GHG emissions disclosure to enable companies to enhance or implement new policies, processes, controls, and system solutions that may be necessary. Hence, LAFs will begin disclosing their Scope 1 and Scope 2 GHG emissions for FYB 2026 and AFs will begin disclosing GHG emissions for FYB 2028. SRCs and EGCs are exempt from GHG emissions reporting requirements.
Third party-verification of GHG emissions disclosures will also be phased-in with LAFs submitting attestation reports starting for FYB 2029 and AFs starting for FYB 2031. Initially, limited assurance verification will be sufficient to meet the requirements. However, LAFs will need to seek reasonable assurance of their GHG emissions data starting with FYB 2033.
The rule relies on definitions and concepts from both the GHG Protocol for emission reporting and Taskforce for Climate-Related Disclosures (TCFD), however neither is incorporated by reference. That said, a good understanding of the underlying standards and related guidance will be critical for companies disclosing under the SEC rule, or other similar voluntary and mandatory disclosures such as the International Financial Reporting Standards (IFRS), European Corporate Sustainability Reporting Directive (CSRD), or California Climate Bills.
Trinity’s Sustainability and Digital Solutions Teams can provide compliance support, strategic advisement, and data management and analytical solutions to help your company prepare for disclosure and assurance in accordance with the final SEC rule. For assistance, please contact Wendy Merz, Trinity’s Director of Sustainability Services ([email protected]).
