The Securities and Exchange Commission voted to finalize its rules on climate-change disclosures titled, “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” In an about face that the SEC began signaling last month, the Commission cut key provisions from the proposal, including a requirement to disclose Scope 3 emissions, that proponents say would have given investors important insight into what companies are doing in terms of their response to climate change.
In a landmark decision, the SEC voted to implement new regulations requiring public companies to disclose climate change risks and their greenhouse gas emissions. This long-awaited ruling marks a significant shift in corporate reporting, potentially impacting thousands of companies and bringing the U.S. closer to alignment with global efforts on climate transparency.
The SEC’s final rule follows a two-year process that included a proposed rule in March 2022 and culminated in a vote split along party lines. The new regulations aim to address investor concerns about the financial implications of climate change on businesses.
“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings,” said SEC Chair Gary Gensler in a statement. “The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”
The Final Rules in Detail
Specifically, the final rules will require a public company to disclose:
- Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition;
- The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook;
- If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities;
- Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices;
- Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
- Any processes the registrant has for identifying, assessing, and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes;
- Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition. Disclosures would include material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or actions taken to make progress toward meeting such target or goal;
- For large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted, information about material Scope 1 emissions and/or Scope 2 emissions;
- For those required to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level;
- The capitalized costs, expenditures expensed, 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 applicable one percent and de minimis disclosure thresholds, disclosed in a note to the financial statements;
- The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals, disclosed in a note to the financial statements; and
- If the estimates and assumptions a registrant uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted, disclosed in a note to the financial statements.
Climate-Change Disclosure Light?
While these rules mark a significant change in U.S. climate disclosure regulations, they are narrower compared to the SEC’s 2022 draft, with the Commission reducing stringency in several areas.
For example, the SEC removed the Scope 3 disclosures requirement which, if it were in effect, would have obligated specific companies to provide data about the emissions generated by their suppliers and customers.
While the proposed rule required disclosure of Scope 1 (direct emissions from company operations) and Scope 2 (emissions associated with the purchase of energy) in all cases, the final rule requires this disclosure only if the company deems these emissions to be “material.”
The moves angered some proponents of stricter climate-change proposals. “While we are pleased to see the SEC issue its long-awaited climate disclosure rule, we are disappointed the final rule falls far short of what consumers and investors deserve: full, transparent, reliable, and comparable disclosure of greenhouse gas emissions through direct, indirect, supply chain, and product use,” said Cathy Cowan Becker, responsible finance campaign director at environmental advocacy group, Green America. “It’s unfortunate that the SEC would bend to pressure from corporate interests to significantly weaken its proposed rule.”
Others applauded the change. “While the SEC appears to have moved away from some of the most troubling provisions in the original proposal, questions remain about several aspects of the final climate disclosure rule, said Business Roundtable CEO Joshua Bolten in a statement. “The rule contains multiple, highly complex provisions that have not been subject to notice and comment. Business Roundtable will continue to evaluate the rule to better assess its impact and scope.”
The final rules will become effective 60 days following publication of the adopting release in the Federal Register, and compliance dates for the rules will be phased in for all registrants, with the compliance date dependent on the registrant’s filer status. 
Jacob Horowitz is a contributing editor at Compliance Chief 360°