The US Securities and Exchange Commission (SEC) adopted new climate-related risk disclosure rules on March 6, 2024, two years after the SEC proposed new climate-related disclosure rules and three years after the SEC first formally sought public input on new rules. As with the proposed rules issued in 2022, the final rules draw heavily on concepts of the Greenhouse Gas Protocol with respect to quantitative disclosure of greenhouse gas (GHG) emissions and on the “four pillar” narrative climate disclosure framework relating to governance, risk oversight, strategy, and goals and metrics that was developed by the Task Force on Climate-Related Financial Disclosures (TCFD). (The TCFD was formally disbanded as an independent disclosure framework in 2023 but incorporated into climate disclosure standards of the new International Sustainability Standards Board (ISSB).)

As in the case of climate risk disclosure rules adopted in October 2023 by California and applicable to certain private and public companies doing business in California, the new SEC rules are expected to be subject to litigation by one or more general business and industry groups, likely seeking to stay the effectiveness of the new rules and eventually vacate them. On the same day the rules were adopted, 10 Republican-led states sued to challenge them, and other litigation is anticipated, including by activists who believe the rules do not go far enough. Several aspects of the proposed rules were significantly scaled back after a lengthy and voluminous comment process – more than 24,000 comment letters were received, including more than 4,500 unique non-form letters.

Most significantly, unlike the proposed rules, the final rules will not require disclosure by public companies of their so-called “Scope 3” emissions. Scope 3 emissions are GHG emissions relating to indirect upstream and downstream value chains from sources that the reporting entity does not own or directly control, including (but not limited to) purchased goods and services, business travel, employee commuting, and production and use of products. Sustainability disclosure rules under the EU Corporation Sustainability Reporting Directive and those recently adopted by California and the ISSB will require disclosure of Scope 3 emissions in certain circumstances, and many investors will continue to expect companies to provide such disclosure on a voluntary basis. Thus, many companies will continue to collect and report such emissions even without an SEC mandate. The final rules will require disclosure of material Scope 1 emissions (a company’s direct emissions) and Scope 2 emissions (indirect emissions that come from the production of energy that a company acquires to use in its operations).

The final rules also significantly scaled back a proposed disclosure requirement to add a note to financial statements providing disaggregated metrics and related disclosure concerning climate-related impacts included in all affected line items of the financial statements required under existing financial statement requirements. As adopted, the final rules will require only disclosure of disaggregated capitalized costs, expenditures expensed, charges and losses incurred as a result of severe weather events and other natural conditions. Registrants will not be required to make an assessment on whether any such events or conditions are related to climate change.

Numerous other details of the rules were substantially modified to make them less prescriptive, more dependent on materiality, and for the other reasons set forth in the 886-page adopting release. A “redline” comparison of the text of the rules themselves as proposed and as adopted is available here.

The rules apply to disclosures by domestic and foreign companies that file periodic reports or registration statements with the SEC (collectively, registrants). Among other key features, when effective, the rules will require the following:

• 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
• Disclosures regarding a registrant’s activities to mitigate or adapt to a material climate-related risk, including the use of transition plans, scenario analysis or internal carbon prices
• Oversight by the board of directors of climate-related risks and the role of management in assessing and managing the registrant’s material climate-related risks
• 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
• For certain issuers, information about material Scope 1 emissions and/or Scope 2 emissions, together with an assurance report
• The capitalized costs, expenditures expensed, charges and losses incurred as a result of severe weather events and other natural conditions.

The rules, which were approved for issuance by a 3 – 2 partisan vote, will become effective 60 days after their date of publication in the Federal Register. The transition periods for compliance with various aspects of the rules by certain companies are summarized below.

IN DEPTH

BACKGROUND

The issuance of the SEC’s long-awaited final climate-related risk rules is a notable landmark in the trend in capital markets worldwide for more and standardized corporate sustainability disclosures. Investors have sought information about the present and possible future impacts of climate change on companies, leading many registrants to significantly increase their disclosure of information – often outside of SEC filings – regarding climate risks, uncertainties, impacts and opportunities. Investors have questioned, however, whether current voluntary climate-related disclosures are adequate. The new rules are intended to increase the sufficiency, reliability, consistency and comparability of material climate-related disclosures by registrants.

The SEC previously provided guidance on climate-related disclosures in an interpretative letter issued in 2010 (2010 guidance), advising registrants on how the SEC’s existing disclosure requirements apply to climate change matters in periodic reports and registration statements. The 2010 guidance focused on two issues: the impact of climate change regulations and the impact of changing climate conditions. The 2010 guidance also noted that the SEC’s regulations provided a framework for disclosures concerning these two topics, and that, depending on the circumstances, information about climate change-related risks and opportunities might be required in a registrant’s disclosures related to its description of Business (Regulation S-K, Item 101), Legal Proceedings (Regulation S-K, Item 103), Risk Factors (Regulation S-K, Item 105[1]), and Management’s Discussion and Analysis of Financial Condition and Results of Operations (Regulation S-K, Item 303). The SEC has cited a review of S&P 500 registrants’ filings, which found that in the years after the 2010 guidance was issued, registrants did not quantify risks or past impacts relating to climate change, and stated that registrants tended to use “boilerplate language of minimal utility to investors.”

Since the issuance of the 2010 guidance, both the science and law regarding climate change have evolved significantly. Scientifically, there is even greater and more widely accepted information about the potential harmful impacts of changing climate conditions. In the December 2015 Paris Climate Agreement, more than 190 countries agreed on climate change targets, including limiting increases in the global average temperature to less than 2° Celsius from pre-industrial levels and achieving by the end of this century a balance between human-caused GHG emissions by sources and removals by sinks of GHG. By some accounts, however, the reported threat of dire climate change in this century remains stark. Even when accounting for existing national pledges to mitigate carbon emissions, Earth is on track to warm by about 2.5° Celsius (4.5° Fahrenheit), according to a report from United Nations scientists.

Legally, there are now many more programs regulating climate change in the United States and globally. In December 2009, the US Environmental Protection Agency (EPA) issued an “endangerment and cause or contribute finding” for GHG emissions under the Clean Air Act, which enabled the EPA to craft rules to directly regulate GHG emissions. On January 1, 2010, for the first time, the EPA began requiring large emitters of GHG to collect and report data with respect to their GHG emissions. In parallel to these regulatory changes, a robust market for carbon offsets has developed as most larger companies (e.g., 92% of the S&P 100) have or plan to set GHG emission reduction goals, often including “net zero” commitments and other climate pledges.

Additionally, since the issuance of the 2010 guidance, the Financial Stability Board – at the request of the G20 finance ministers and central bank governors – convened the TCFD to address physical, liability and transition risks of climate change. In 2017, the TCFD released recommendations for climate change disclosures, organized under four broad thematic categories: governance, strategy, risk management, and metrics and targets. The TCFD framework reflects a belief that disclosing climate-related risks, opportunities and financial impacts is critical for a company’s reputation, ensures compliance with regulations, and promotes the management and assessment of potential business strategy effects. The SEC’s rules do not adopt or incorporate the TCFD’s disclosure recommendations, but portions of the rules are closely modeled on them.

The SEC noted that the TCFD and the GHG Protocol have developed concepts and vocabulary that companies commonly use when providing climate-related disclosures in their sustainability and related reports. Although the SEC’s new rules do not adopt the TCFD framework or GHG Protocol wholesale, they incorporate some of their concepts and vocabulary, which the SEC believes are familiar to many registrants and investors.

DETAILED SUMMARY OF THE FINAL RULES

The final rules amend the SEC’s Regulation S-K and Regulation S-X to add the following disclosure requirements (as summarized by the SEC):

• Any climate-related risks identified by the registrant that have had or are reasonably likely to have a material impact on the registrant, including on its strategy, results of operations or financial condition in the short term (i.e., the next 12 months) and in the long term (i.e., beyond the next 12 months)
• The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model and outlook, including, as applicable, any material impacts on a non-exclusive list of items
• 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, in management’s assessment, directly result from such mitigation or adaptation activities
• If a registrant has adopted a transition plan to manage a material transition risk, a description of the transition plan and updated disclosures in the subsequent years describing the actions taken during the year under the plan, including how the actions have impacted the registrant’s business, results of operations or financial condition, and quantitative and qualitative disclosure of material expenditures incurred and material impacts on financial estimates and assumptions directly resulting from such plan
• 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
• If a registrant has set a climate-related target or goal that has materially affected or is reasonably likely to materially affect the registrant’s business, results of operations or financial condition, certain disclosures about such target or goal, including 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
• If a registrant is a large accelerated filer (LAF), or an accelerated filer (AF) that is not otherwise exempted, and its Scope 1 emissions and/or its Scope 2 emissions metrics are material, certain disclosure about those emissions
• 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 1% and de minimis disclosure thresholds
• The capitalized costs, expenditures expensed and losses related to carbon offsets and renewable energy credits or certificates if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals
• 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, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures and sea level rise, or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted.

Under the final rules, a registrant that is required to disclose Scope 1 and/or 2 emissions and is an LAF or AF also must file an attestation report in respect of those emissions subject to phased-in compliance dates. An AF must file an attestation report at the limited assurance level beginning the third fiscal year after the compliance date for disclosure of GHG emissions. An LAF must file an attestation report at the limited assurance level beginning the third fiscal year after the compliance date for disclosure of GHG emissions and file an attestation report at the reasonable assurance level beginning the seventh fiscal year after the compliance date for disclosure of GHG emissions. The final rules also require a registrant that is not required to disclose its GHG emissions or to include a GHG emissions attestation report pursuant to the final rules to disclose certain information if the registrant voluntarily discloses its GHG emissions in an SEC filing and voluntarily subjects those disclosures to third-party assurance.

Presentation Requirements

The final rules provide for detailed presentation requirements under which registrants would have to adhere to the following mandates:

• File the climate-related disclosure in its registration statements and Exchange Act annual reports
• Include the climate-related disclosures required under Regulation S-K, except for any Scope 1 and/or 2 emissions disclosures, in a separate, appropriately captioned section of its filing or in another appropriate section of the filing, such as Risk Factors, Description of Business, or Management’s Discussion and Analysis of Financial Condition and Results of Operations, or, alternatively, by incorporating such disclosure by reference from another SEC filing as long as the disclosure meets the electronic tagging requirements of the final rules
• If required to disclose its Scope 1 and 2 emissions, provide such disclosure:
  • If a registrant filing on domestic forms, in its annual report on Form 10-K, in its quarterly report on Form 10-Q for the second fiscal quarter in the fiscal year immediately following the year to which the GHG emissions metrics disclosure relates incorporated by reference into its Form 10-K, or in an amendment to its Form 10-K filed no later than the due date for the Form 10-Q for its second fiscal quarter
  • If a foreign private issuer not filing on domestic forms, in its annual report on Form 20-F, or in an amendment to its annual report on Form 20-F, which shall be due no later than 225 days after the end of the fiscal year to which the GHG emissions metrics disclosure relates
  • If filing a Securities Act or Exchange Act registration statement, as of the most recently completed fiscal year that is at least 225 days prior to the date of effectiveness of the registration statement
• If required to disclose Scope 1 and 2 emissions, provide such disclosure for the registrant’s most recently completed fiscal year and, to the extent previously disclosed, for the historical fiscal year(s) included in the filing
• If required to provide an attestation report over Scope 1 and Scope 2 emissions, provide such attestation report and any related disclosures in the filing that contains the GHG emissions disclosures to which the attestation report relates
• Provide the financial statement disclosures required under Regulation S-X for the registrant’s most recently completed fiscal year, and to the extent previously disclosed or required to be disclosed, for the historical fiscal year(s) included in the filing, in a note to the registrant’s audited financial statements
• Electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL.

Compliance Dates and Accommodations for Certain Issuers

The final rules will be phased in for all registrants with the compliance date dependent upon the status of the registrant as an LAF, AF, non-accelerated filer (NAF), smaller reporting company (SRC) or emerging growth company (EGC). The rules provide several accommodations, including:

• Additional phase-in periods for disclosures pertaining to material expenditures, GHG emissions, the assurance requirement and the electronic tagging requirement if the registrant is an LAF (see compliance date table below)
• An exemption from the GHG emissions disclosure requirement for SRCs and EGCs
• An accommodation that allows Scope 1 and/or Scope 2 emissions disclosure, if required, to be filed on a delayed basis as follows:
  • If a domestic registrant, in its Form 10-Q for the second fiscal quarter in the fiscal year immediately following the year to which the GHG emissions disclosure relates
  • If a foreign private issuer, in an amendment to its annual report on Form 20 F, which shall be due no later than when such disclosure would be due for a domestic registrant
  • If filing a Securities Act or Exchange Act registration statement, as of the most recently completed fiscal year that is at least 225 days prior to the date of effectiveness of the registration statement.

As set forth in the table below, which was provided in the adopting release, an LAF will be required to make its first disclosure under the new rules in reports following its fiscal year ending in 2025 (for example, an LAF with a January 1 fiscal year start and a December 31 fiscal year end date will not be required to comply with the climate-related disclosure rules, other than certain disclosures pertaining to GHG emissions and the discrete other new SK items if applicable, until its Form 10-K for fiscal year ended December 31, 2025, due in March 2026). AFs (other than SRCs and EGCs), would have an additional year to make the new disclosures while NAFs, SRCs and EGCs would have two additional years.

Emissions Calculations

Many large industrial companies in the US are already required to report their GHG emissions to the EPA. There is no perfect overlap between the EPA’s reporting requirements and the SEC’s new disclosure requirements. Most importantly, the EPA’s GHG reporting rule (40 C.F.R. Part 98) is generally facility-specific with some limited exceptions. The SEC’s rule focuses instead on each registrants’ emissions, which may include emissions from many separate facilities. Thus, a registrant that collected all the information necessary to comply with the EPA’s requirements might have to collect additional emissions-related information to comply with the SEC’s GHG emission disclosure requirements.

Materiality

In the new rules, to a greater extent than in the proposal, certain disclosures are required only when “material.” In that regard, the SEC reaffirmed adherence to the definition of materiality set forth in both its rules and past Supreme Court of the United States opinions: Information is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding how to vote or in making an investment decision – or, put another way, if the information would significantly alter the total mix of available information to investors.[2] Accordingly, as materiality for purposes of the new rules (as with SEC disclosures generally) is to be viewed from the perspective of reasonable investors in the registrant, the final rules reject the request of some commenters to expand the definition of materiality to encompass company-induced impacts occurring external to the company, including those in the economy, the environment, people, the so-called “double materiality” standard adopted in Europe and other jurisdictions for corporate sustainability disclosures. The SEC did emphasize the dynamic nature of materiality determinations that registrants must make under US securities laws, particularly with regard to potential future events.

Liability Issues

The final rules do not provide a broad liability safe harbor for the new climate-related disclosures, but they do extend the safe harbor from private liability under the Private Securities Litigation Reform Act for forward-looking statements (i.e., other than historic facts) to certain disclosures required under the new rules: those pertaining to a registrant’s transition plan, scenario analysis, internal carbon pricing, and targets and goals. The adopting release notes that the existing safe harbors for forward-looking statements under the Securities Act and Exchange Act also will be available for other aspects of the climate-related disclosures.

CONTINUING SEC CLIMATE-RELATED DISCLOSURE GUIDANCE

Many commenters in the 2021 input process suggested that the SEC simply expand upon its 2010 guidance. In September 2021, the SEC referenced the 2010 guidance in providing a sample comment letter to illustrate comments it might make regarding climate change disclosures, or lack thereof, in SEC filings. Prior to their phase-in compliance date for the new rules, registrants should continue to carefully consider the 2010 guidance, as augmented by the discussion in the release of the new rules, and the 2021 sample comment letter in preparing climate change-related disclosure. Additionally, the adopting release for the final rules notes in a footnote that even after adoption of the final rules, the 2010 guidance is still relevant because it discusses existing SEC rules, such as those pertaining to a registrant’s description of its business and certain legal proceedings, which require disclosure regarding, among other things, compliance with environmental laws and regulations that are only tangentially covered in the new rules. The release advises registrants to continue to consider the 2010 guidance as they evaluate their disclosure obligations in their Description of Business, Risk Factors, Legal Proceedings and Management’s Discussion and Analysis.