On March 6, the US Securities and Exchange Commission (SEC) approved new rules requiring public companies to disclose extensive climate-related information in their registration statements and periodic reports.
The SEC has published a fact sheet about the rule.
While the final rules eliminate the requirement included in the proposed rules released by the SEC in March 2022 to disclose Scope 3 emissions from indirect sources (like consumers or supply chain providers), they will still impact how public companies report climate-related risks and greenhouse gas (GHG) emissions and what public companies need to include on their registration statements and periodic reports, such as Form 10-Ks.
The rules, which are already being challenged by a coalition of 10 states, are designed to provide investors, including retail investors, with more consistent and comparable information on climate-related risks to better position them to make informed investment decisions. However, the compliance burden associated with these rules will be significant, particularly with regard to the collection and verification of GHG emissions data.
Implications for Public Companies
Climate-Related Risks Disclosure
The final rules require a company to disclose any climate-related risks that have had or are reasonably likely to have a material impact on its business and financial statements, whether over the short, medium, or long term, and how those risks have affected or are likely to affect its strategy, business model, and outlook. The rules require companies to assess the potential impacts of various climate-related factors, including physical risks such as extreme weather events and transition risks associated with the shift to a lower-carbon economy. Such disclosure will offer investors a more comprehensive understanding of how a company is positioned to manage climate-related risks and opportunities.
Climate-Related Governance and Risk Management
The rules require companies to disclose information concerning their board of directors’ oversight of climate-related risks, and management’s role in assessing and managing those risks. Additionally, the rules require companies to describe any processes used for identifying, assessing, and managing climate-related risks. These processes include how the company determines the relative significance of climate-related risks compared to other risks, how it considers existing or likely regulatory requirements or policies, such as GHG emissions limits, when identifying climate-related risks, and how it determines the materiality of climate-related risks. Companies also need to describe their strategies for managing climate-related risks, such as how they decide whether to mitigate, accept, or adapt to a particular risk, and how they prioritize addressing climate-related risks.
GHG Emissions Data
The rules require all companies to separately disclose their total Scope 1 GHG emissions (direct emissions from owned or controlled operations) and total Scope 2 GHG emissions (indirect emissions from the generation of purchased or acquired electricity, steam, heat, or cooling consumed by owned or controlled operations).
The goal of requiring this detailed reporting on GHG emissions is to provide investors with a better understanding of a company's carbon footprint.
Climate-Related Financial Statement Metrics
Companies will be required to provide new mandated climate-related financial statement metrics and related disclosure in a note to their audited financial statements. The metrics are required to show, on a disaggregated basis, the impact on any relevant line item in the company’s consolidated financial statements of physical risks identified by the company, any other severe weather events and natural conditions, such as floods, drought, wildfires, extreme temperatures, and sea level rise, and any transition risks. This level of detail may serve to provide investors with a clearer picture of the financial impact of climate-related risks on a company's financial performance.
Implications for Foreign Private Issuers
The proposed rules apply similarly to foreign private issuers (other than Canadian issuers using Form 40-F), with some modifications to address differences in accounting standards used. If a foreign private issuer files consolidated financial statements under International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board, then the company is required to apply IFRS as the basis for calculating and disclosing the proposed climate-related financial statement metrics and setting its organizational boundaries for the purpose of providing the proposed GHG emissions disclosure. By contrast, foreign private issuers that file consolidated financial statements under home country Generally Accepted Accounting Principles (GAAP) and reconcile to US GAAP will be required to use US GAAP as the basis for calculating and disclosing the proposed climate-related financial statement metrics and setting its organizational boundaries for the purpose of providing the proposed GHG emissions disclosure.
Compliance Deadlines
The final rules will become effective 60 days after publication in the Federal Register and will be phased in over time, with compliance deadlines depending on the status of the registrant. Large accelerated filers will need to begin reporting GHG emissions starting in fiscal year 2026, and accelerated filers will need to report GHG emission for fiscal year 2028. While non-accelerated filers, smaller reporting companies, and emerging growth companies are not required to make the same Scope 1 and 2 emission disclosures, they will be subject to other financial disclosure requirements beginning fiscal year 2027.
Takeaways
The final rules will significantly impact the disclosure obligations of companies, providing investors with more consistent and comparable information to make informed investment decisions. However, the rules also increase the compliance burden for companies, particularly regarding the collection and verification of GHG emissions data.
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