SEC Finalizes Climate Disclosure Rule

March 12, 2024

On March 6, 2024, the SEC issued a final rule requiring registrants to disclose climate-related information in their registration statements and annual reports. These rules were initially proposed on March 21, 2022.

The final rule differs in several key aspects from the proposed rule, most significantly in changes to:

The financial statement footnote disclosures
Reductions to the scope of and number of registrants subject to the greenhouse gas emission (GHG) disclosures

Below is a synopsis of the new requirements, highlights of how the final rule differs from the proposed rule, and important dates associated with the final rule.

What’s Required

The final rule requires registrants to disclose certain climate-related information in registration statements and annual reports, including both financial and nonfinancial disclosures. Here’s a summary of what registrants should expect to report in each category.

Nonfinancial Statement Disclosures (Regulation S-K)

The final rule adds Subpart 1500 of Regulation S-K to enhance disclosure about the material risks that companies face and how companies manage those risks by requiring registrants to disclose 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.
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 these 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, if any.
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 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.

Greenhouse Gas Emission Disclosures

On a phased in basis, the final rule requires Large Accelerated Filers (LAF) and Accelerated Filers (AF) to disclose Scope 1 and Scope 2 GHG emissions when those emissions are material.

As further demonstrated in the compliance table below, registrants that are required to disclose Scope 1 and Scope 2 emissions must also obtain an assurance report on a phased in basis, beginning with limited assurance. Only LAFs, following a transition period, will be required to obtain an assurance report at the reasonable assurance level.

Emerging growth companies (EGCs) and smaller reporting companies (SRCs) are exempt from the Scope 1 and Scope 2 emission disclosures.

Financial Statement Disclosures (Regulation S-X)

The final rule adds Article 14 of Regulation S-X and requires a registrant to disclose the following in the notes to the financial statements:

Capitalized costs, expenditures, 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. The disclosure of expenditures and losses incurred is required if the amount equals or exceeds 1% of the absolute value of income or loss before taxes for the relevant fiscal year—unless the amount is less than $100,000. The disclosure of capitalized costs and charges is required if the amount equals or exceeds 1% of the absolute value of stockholders’ equity or deficit as of the end of the relevant fiscal year—unless the amount is less than $500,000. A registrant isn’t required to make a determination as to whether the severe weather event or other natural condition was caused by climate change in order to trigger these disclosure requirements.
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 plan to achieve its climate-related targets or goals.
If financial statement estimates and assumptions are materially impacted by risks 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 were impacted.

Differences Between Proposed and Final Rule

The final rule made several changes from the proposed rule. Key changes are as follows.

Nonfinancial Statement Disclosures

Eliminates requirement to describe board members’ climate expertise.
Eliminates the requirement to disclose any material change to the climate-related disclosures provided in a registration statement or annual report in a Form 10-Q.

Greenhouse Gas Emission Disclosure

Eliminates Scope 3 emission disclosure requirements.
Smaller reporting companies (SRCs), emerging growth companies (EGCs) and non-accelerated filers (NAFs) are exempt from the GHG emission disclosure and related attestation requirements.
For LAFs and accelerated filers (AFs), the final rule establishes a materiality threshold for Scope 1 and Scope 2 emissions, only requiring disclosure of these emissions if the threshold is met.
For applicable LAFs and AFs, an extension is provided allowing applicable registrants to postpone the filing of Scope 1 and Scope 2 emission disclosures for the most recent year until the deadline of their second fiscal quarterly report.
Only LAFs are required to shift from limited assurance to reasonable assurance in a phased-in approach. AFs only need to obtain limited assurance.
More time is provided to obtain third-party assurance than what was initially proposed, with the first limited assurance report required three years after the GHG emissions compliance date with a move to reasonable assurance by LAFs required after seven years.
Applicable registrants can determine the organizational boundary for their Scope 1 and Scope 2 GHG emissions but must disclose the method used to determine the organizational boundaries and disclose any material differences in the boundaries used for GHG emissions from the boundaries included in the financial statements.

Financial Statement Disclosures

Removes the requirement to disclose the impact of severe weather events and other natural conditions and transition activities on a line-item by line-item basis.
Requires disclosure of expenditures and losses incurred and capitalized costs and charges directly related to climate-related activities reflected in the financial statements when aggregated amounts exceed 1% of pre-tax income or total shareholder’s equity, respectively, subject to a de minimis threshold.
Extends safe harbor from private liability for climate-related disclosures—excluding historical facts—pertaining to a registrant’s transition plan, scenario analysis, the use of an internal carbon price, and targets and goals.

What’s Next

The rule becomes effective 60 days after publication in the Federal Register. Compliance dates will be phased in as follows.

Assurance

Tax

Advisory

International

Technology

Risk & IT Compliance

Strategy & Operations

Transactions

Specialty

Individual

Institutional