Navigating the SEC's final rule on climate-related disclosures

On March 6, 2024, the Securities and Exchange Commission (SEC) issued a final rule to enhance and standardize climate-related disclosures for investors. The SEC's final rule mandates companies to disclose information regarding their governance structures, strategies, risk management practices, and metrics and targets related to climate-related risks and opportunities. This aims to provide investors with consistent, comparable, and decision-useful information to assess companies' exposure to climate-related risks and opportunities.

This article summarizes the changes introduced by the SEC's final rule and considerations for implementing the final rule.

Summary of changes

The final rule requires the following climate-related disclosures:

• Climate-related risks identified by entities that have had or are reasonably likely to have a material impact on the registrant, including its strategy, results of operations, or short-term financial conditions (next 12 months) and long-term financial conditions (beyond the next 12 months)
• Actual and potential material impacts of identified climate-related risks on the registrant’s strategy, business model, and outlook
• Whether an entity’s strategy includes activities to mitigate or adapt to a material climate-related risk, a quantitative or 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 transition plan has been adopted 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 impacts to the business, results of operations, or financial condition, and quantitative and qualitative disclose of material expenditures incurred and material impacts on financial estimates and assumptions as a direct result of the disclosed actions
• Identified climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition as a result of a scenario analysis
• The use of material internal carbon price in how an entity evaluates and manages the material climate-related risk
• Oversight by the board of directors over climate-related risks and the role of management in assessing and managing material climate-related risks
• The processes over the identification, assessment, and management of material climate-related risks and, if an entity is managing those risks, whether and how the processes are integrated with the entity’s overall risk management system or processes
• Climate-related targets or goals that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition
• Material Scope 1 emissions and/or Scope 2 emissions metrics for large accelerated filers or an accelerated filer. Entities required to disclose Scope 1 and/or Scope 2 emissions are required to include an assurance report at the limited assurance level for a Large Accelerated Filer and, following an additional transition period, at the reasonable assurance level required.
• Capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, subject to applicable one percent 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 an estimate and assumptions an entity uses to produce financial statements have been 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

Presentation and submission of climate-related disclosures

Entities are required to include climate-related disclosures within their registration statements and Exchange Act annual reports. The disclosures under Regulation S-K, except for Scopes 1 and/or 2 emission disclosures, are required to be disclosed in a separate and appropriately captioned section of the registration statement or annual report, in another appropriately captioned 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, by incorporating the disclosure by reference from another filing as long as the disclosure meets the electronic tagging requirements of the final rule.

For domestic registrants that are required to disclosure Scope 1 and 2 emissions, disclosure is required in its annual report on Form10-K, in its quarterly report on Form 10-Q for the second fiscal quarter in the fiscal year immediately following the year in which greenhouse gas (“GHG”) emissions metrics disclosure relates with reference to the Form 10-K, or in an amendment to its 10-K filed no later than the due date for the Form 10-Q for its second fiscal quarter. For foreign issuers, the disclosures are required in the Form 20-F annual report or 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 an entity is filing a registration statement, the disclosures should be included in the registration statement as of the most recently completed fiscal year, which is at least 225 days prior to the date of effectiveness of the registration statement.

Safe harbor for certain climate-related disclosures

The final rules include a “safe harbor” provision that protects issuers from private liability for forward-looking climate-related disclosures. This safe harbor applies to transition plans, scenario analysis, the use of an internal carbon price, and stated climate targets and goals.

Effective dates

The final rules are effective 60 days after they are published in the Federal Register. Compliance dates for the rules depend on an entity’s filer status.

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