SEC adopts rules designed to enhance and standardize climate-related disclosures

The Securities and Exchange Commission (SEC) has adopted rules designed to enhance and standardize climate-related disclosures by public companies and in public offerings. The rules are in response to investors’ demand for more consistent, comparable and reliable information about the financial effects of climate-related risks on a registrant’s operations and how it manages those risks while balancing concerns about mitigating the associated costs of the rules.

“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings," SEC Chair Gary Gensler says. "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 will require registrants 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. Additional required disclosures include:

• actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model and outlook;
• if undertaking 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 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 that have affected or are reasonably likely to affect the registrant’s business, results of operations or financial condition that include disclosures on 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;
• those required to disclose Scope 1 and/or Scope 2 emissions must file 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 1 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 affected materially 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 affected, disclosed in a note to the financial statements.

The SEC says before it adopted the final rules, it considered more than 24,000 comment letters, including more than 4,500 unique letters, submitted in response to the rules’ proposing release issued in March 2022.

The adopting release has been published on SEC.gov and will be published in the Federal Register. 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.

A factsheet about the final rules is available here.

The Institute of Scrap Recycling Industries (ISRI), in an alert to its members, says large public companies will be required to report Scopes 1 and 2 greenhouse gas emissions in 2026, while Scope 3 disclosure requirements presented in the 2022 draft have been removed.

Scope 3 emissions result from activities from assets not owned or controlled by the reporting organization but that indirectly affect the organization in its value chain, whereas Scope 1 emissions are direct GHG emissions that occur from sources that are controlled or owned by an organization and Scope 2 emissions are associated with the purchase of electricity, steam, heat or cooling.

“While the final rule is narrower than the SEC’s 2022 draft, it represents a significant shift in the U.S. regulatory landscape for climate disclosure and environmental social governance (ESG)," ISRI says.

The association also says the new rule will provide more visibility into GHG emissions from large public companies, which could drive demand for recycled feedstock to reduce those emissions.

“Although the SEC pulled back requirements that would have impacted a larger swath of recycled materials companies, it is likely that many companies will still request data from their supply chains for voluntary reporting or regulatory requirements from other jurisdictions,” ISRI adds, citing California and EU requirements that remain in place that will require Scope 3 disclosure and affect privately held and smaller firms, either through Scope 3 disclosures or by directly requiring private firms to make climate-related disclosures.