SEC Enhancement and Standardization of Climate-Related Disclosures: Final Rule Explainer and Fact Sheet - Last Updated: March 7, 2024

What's the SEC's Enhancement and Standardization Rule for Climate-Related Disclosures?

On March 6, 2024, the US SEC (Securities and Exchange Commission) adopted its final ruling on "The Enhancement and Standardization of Climate-Related Disclosures," which requires U.S. listed company registrants to disclose certain climate-related information in their registration statements and annual reports. Finalized two years after its initial proposal the SEC ruling introduces a set of mandatory and voluntary sustainability and ESG reporting requirements publicly traded U.S. companies need to be understand and comply with.

SEC Climate-Related Disclosure Requirements

The new SEC ruling changes the Securities Act of 1933 (“Securities Act”) and Securities Exchange Act of 1934 (“Exchange Act”) requiring registrants to disclose the following climate disclosure information:

1. 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
2. The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook
3. 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
4. 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
5. 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
6. 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
7. 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
8. For large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted, information about material Scope 1 emissions and/or Scope 2 greenhouse gas (GHG) emissions
9. 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
10. 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
11. 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
12. 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

The final rules include a phased-in compliance period for all registrants, with the compliance date dependent on the registrant’s filer status and the content of the disclosure. In all cases, registrants should perform a materiality assessment of their climate-related risks, costs, and greenhouse gas emissions to determine the proper scope, boundaries, and information for disclosure.

SEC Climate-Related Disclosure Presentation and Submission Requirements

The final rules will require a registrant (including a foreign private issuer) to:

1. File the climate-related disclosure in its registration statements and Exchange Act annual reports filed with the Commission
2. Provide the Regulation S-K mandated climate-related disclosures either in a separate, appropriately captioned section of its registration statement or annual report or in another appropriate section of the filing, such as Risk Factors, Description of Business, or Management’s Discussion and Analysis, or, alternatively, by incorporating such disclosure by reference from another Commission filing as long as the disclosure meets the electronic tagging requirements of the final rules
3. Electronically tag climate-related disclosures in Inline XBRL

SEC Climate-Related Disclosure Enforcement Scope

The SEC's "Enhancement and Standardization of Climate-Related Disclosures for Investors" applies to all publicly-listed SEC reporting companies, including foreign private issuers. The first companies who need to complly are what the SEC defines as large accelerated filers (LAF), which are publicly traded companies with a market cap above $700 million.

However, the SEC also includes smaller registrants in its proposal. Under Section 12(g) of the Exchange Act, the SEC's proposed climate disclosure requirements may end up applying to a broader group of registrants, including:

1. Any company with total assets in excess of $10 million and 500 or more record holders of a class of equity security, each measured at the end of its fiscal year
2. Other SEC registrants

For large companies, the SEC's climate disclose requirements will begin in fiscal year 2025. The final rules will be phased in for all registrants with the compliance date dependent upon the status of the registrant as an LAF, an accelrated filer (AF), non-accelerated filer (NAF), smaller reporting company (SRC), or emerging growth company (EGC).

The SEC ruling as provides several phase-in provisions and accommodations, including:

1. 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
2. A safe harbor from private liability for climate-related disclosures (excluding historical facts) pertaining to transition plans, scenario analysis, the use of an internal carbon price, and targets and goals
3. An exemption from the GHG emissions disclosure requirement for SRCs and EGCs
4. An accommodation that allows Scope 1 and/or Scope 2 emissions disclosure, if required, to be filed on a delayed basis. If the filer is a domestic registrant, GHG emissions disclosures are due in 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, 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

SEC Climate-Related Disclosure Rule Precedent

A primary objective of the SEC's new mandatory climate disclosure rules is to standardize and simplify sustainability reporting for companies, as well as ESG-related information for investors. Many companies are currently under pressure to use a wide range of different sustainability reporting standards and frameworks. The SEC ruling aims to standardize these obligations into a common ESG and climate reporting framework that meet the needs of regulators, investors, and other stakeholders.

"We are proposing to require disclosures about climate-related risks and metrics reflecting those risks because this information can have an impact on public companies’ financial performance or position and may be material to investors in making investment or voting decisions" writes the SEC.

The SEC's climate disclosure standards are informed and influenced by TCFD (Task Force on Climate-Related Financial Disclosures, now within the IFRS's ISSB sustainability reporting standards), so we recommend organizations familiarize themselves with TCFD and ISSB guidelines if they haven't alread done so (our ESG reporting platform comes auto-configured with TCFD standards requirements).

The ISSB and TCFD's four core climate risk reporting pillars are:

1. Governance
2. Strategy
3. Risk Management
4. Metrics and Targets

Similarly, SEC filers will need to consider, prepare, and disclose commentary on each of these four themes.

The SEC ruling also mirrors laws introduced in the state of California in 2023, specifically the Climate Corporate Data Accountability Act (SB 253) and Climate-Related Financial Risk Disclosure Act (SB 261), which also introduces mandatory climate reporting provisions for large companies.

SEC Climate-Related Disclosure Rule Implemenation & Reporting Timeline

To comply with the SEC's new rules, eligible registrants and issuers will need to complete the following disclosures and compliance steps, based on the following eligibility timeline:

Specifically, registrants and U.S. listed companies should:

1. Integrate climate risk and carbon accounting into their regular financial accounting and regulatory reporting cycles
2. Track and disclose the required information - SEC reports will require management commentary and data on a company's:
•  Materiality outlook to on specific, material, climate-related ESG themes, topics, risks, and focus areas
•  Details on how the board and management exercise their oversight and set climate-related targets and goals, as well as disclosure regarding climate-related expertise
•  Sustainability and ESG performance targets, goals, and progress, where material
•  Which climate-related risks are material to the company's performance
•  How sustainability and ESG risks could or are impacting operating results, financial performance, and shareholder value
•  Scope 1 & 2 GHG disclosure
•  Any ESG or climate analytics tools, such as scenario analysis, the registrant uses to assess the impact of climate-related risks on its business and consolidated financial statements, or that support business model resilience in light of foreseeable climate-related risks
3. Third party attestation - The proposed rule requires accelerated filers and large accelerated filers reporting climate-related disclosures to the SEC to include an attestation report from a neutral, trusted, and experienced third party related to their Scope 1 & Scope 2 emissions. This report should also include certain related disclosures about the attestation service provider. We see this as "limited" assurance of the information being disclosed, which is less strict than a financial audit, but still requires working with a credible sustainability reporting partner organization or accounting firm

From today, the timeline for SEC Climate-Related Disclosures Rule:

This means companies should implement their SEC climate disclosure compliance approach across 2024-2025 to be ready and stay compliant. It's not yet know exactly how the SEC will penalize businesses who fail to comply with its upcoming climate disclosure requirements, but according to the Commissions’ requirements, non-compliant eligible organizations may be forced to pay a meaningful fine, in addition to potentially being subject to reputational harm and investor risk.

Additional SEC ESG Regulations

Based on guidance shared by the SEC between 2022 and 2024, the SEC's proposed climate-related disclosure rules appear likely to be one of multiple ESG reporting rules and proposals from the SEC. Other current proposals focus on the 'S' or social pillar of ESG, including board diversity disclosure and a human capital management proposal. The board diversity proposal will require reports from all NASDAQ-listed companies. The human capital proposals will include reporting on hiring practices, workplace culture, employee well-being efforts, and diversity, equity, and inclusion (DEI), among others.

A Few Helpful Recommendations

Your Next Steps With SEC Climate Disclosure Reporting

For organizations in the early stages of their sustainability reporting and SEC climate compliance roadmap, we have a few general recommendations, additional reading, and suggested next steps:

ESG and climate risk leadership structure - Ultimately, the board has a responsibility to oversee ESG issues, and to assess the potential ESG and climate risks to a company’s overall strategy. Clarify the board's role, structure, and processes around ESG, including which committee(s) will review and decide on ESG matters and disclosure. Your company will likely also want to set up one or more ESG working groups, comprising senior management and staff, to report to the board.

Materiality assessment - Before picking standards, collecting data, or thinking about preparing your first report, it’s often beneficial to conduct a “Materiality Assessment” to help determine what your sustainability goals, targets, KPIs, and reporting objectives should be. A materiality assessment is a project which determines and ranks the most material themes for your business based on stakeholder interviews and surveys. For example, a healthcare company might focus on healthcare access, affordability, innovation, and its supply chain. A technology company could focus on data privacy, security, and STEM education access. A bank might designate financial inclusion as its most material theme. Pick and rank the right sustainability themes depending on your organization’s mission, makeup, goals, and ESG maturity. Be sure to think through which climate risks and environmental themes are most relevant and material to your company's business model and financial performance.

Sustainability data systems and process - While this might go without saying, in order to report your organization's GHG emissions, you need to know what they are - with a high degree of accuracy. Your materiality process can help guide you toward the main sustainability themes you may need to focus on and collect data around. Is employee travel a big source of your organization's carbon footprint? Facilities? Manufacturing sites? Your supply chain? Where does that data exist today, and how will you access or collect it?

Many organizations start their sustainability reporting with relatively simple spreadsheets, surveys, and documents, but things can get complex fast - particularly for larger companies. If you're an organization with a medium-to-large or complex environmental footprint, you likely need dedicated sustainability reporting and data management software, like the kind we design here at Brightest to help organizations stay ESG compliant. Ongoing report archiving, version control, and governance is also important to think about, since you'll be reporting every year.

Further reading - Our free guides to sustainability measurement and ESG reporting provide additional, detailed guidance and insights on how to measure and report your sustainability performance. Or, if you've already mastered the basics, up-level your sustainability reporting and SEC climate compliance efforts with a dedicated, best-in-class tool.