On March 6, 2024, in a 3-2 vote, the US Securities and Exchange Commission (SEC) adopted final rules requiring registrants to disclose certain climate-related information in registration statements and annual reports. Nearly two years after the proposed rules were first released, the final rules scale back many of the items that would have been required by the proposed rules, while still requiring extensive climate-related disclosures from many companies.
The final rules (available here) represent a historic expansion of US securities disclosure regulation, and will likely significantly increase the complexity of public company reporting for many US registrants in the future. The final rules will become effective 60 days after they are published in the Federal Register.
This high-level summary from the Latham & Watkins ESG Practice will be followed by a more detailed Client Alert and a webcast addressing the practical implications of the final rules for companies, the markets, and global reporting practices. (Register for the webcast here.)
The final rules create a new subpart 1500 of Regulation S-K and Article 14 of Regulation S-X. Like the proposed rules, certain aspects of the final rules build on concepts contained in the Task Force on Climate-related Financial Disclosures (TCFD) reporting framework and the GHG Protocol. In summary, the final rules will require disclosure regarding:
- Board and management oversight. Registrants will need to disclose 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.
- Material climate-related risks and impacts. Registrants will need to disclose any climate-related risks identified by the registrant that have had or are reasonably likely to have a material impact on the registrant, including on its strategy, results of operations, or financial condition in the short and long term. Registrants will also need to disclose the actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook, including, as applicable, any material impacts on a non-exclusive list of items enumerated in the rules. In addition, registrants will need to discuss any processes they have for identifying, assessing, and managing material climate-related risks as well as whether and how any such processes are integrated into the registrant’s overall risk management system or processes.
- GHG emissions. If a registrant is a large accelerated filer or an accelerated filer that is not otherwise exempted, and its Scope 1 emissions and/or its Scope 2 emissions metrics are material, that registrant will be required to disclose those GHG emissions and produce an attestation report in respect of those emissions subject to phased-in compliance dates. With respect to registrants who are not otherwise required to disclose their GHG emissions or produce a GHG emissions attestation report, those registrants will be required to disclose certain information under the rules if they voluntarily disclose their GHG emissions in an SEC filing and voluntarily subject those disclosures to third-party assurance.
- Risk mitigation and transition plan considerations, including both quantitative and qualitative data. If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, the registrant will need to disclose a quantitative and 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. In addition, if a registrant has adopted a transition plan to manage a material transition risk, that registrant will need to disclose a description of the transition plan, and updated disclosures in the subsequent years describing the actions taken during the year under the plan, including how the actions have impacted the registrant’s business, results of operations, or financial condition, and quantitative and qualitative disclosure of material expenditures incurred and material impacts on financial estimates and assumptions as a direct result of the disclosed actions.
- Details regarding climate-related targets and goals. If a registrant has set a climate-related target or goal that has materially affected or is reasonably likely to materially affect the registrant’s business, results of operations, or financial condition, the registrant will have to make certain disclosures about such target or goal, including disclosures regarding 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.
- Details regarding the use of scenario analysis and internal carbon prices. If a registrant uses scenario analysis and, in doing so, determines that a climate-related risk is reasonably likely to have a material impact on its business, results of operations, or financial condition, the rules require certain disclosures regarding such use of scenario analysis. In addition, if a registrant’s use of an internal carbon price is material to how it evaluates and manages a material climate-related risk, that registrant will be required to make certain disclosures about the internal carbon price.
- Certain financial statement disclosures. Registrants will be required to disclose 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% and de minimis disclosure thresholds, and will also be required to disclose 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. In addition, 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, the registrant will need to include a qualitative description of how the development of such estimates and assumptions was impacted. Importantly, “severe weather events and other natural conditions” are not limited to climate-related events or conditions.
Key Differences From the Proposed Rules
The final rules contain a number of noteworthy differences from the proposed rules, including (i) the exclusion of a Scope 3 GHG emissions reporting requirement and the general limitation of material Scope 1 and Scope 2 GHG emissions reporting to large accelerated filers and accelerated filers; (ii) the elimination of the proposed requirement to describe board members’ climate expertise; (iii) the elimination of the proposed requirement to disclose the impact of certain severe weather, natural conditions, and transition activities on each line item in the consolidated financial statements; (iv) the movement of certain disclosures regarding expenditures into Regulation S-K rather than Regulation S-X; (v) the reduction of certain direct impacts on private companies; (vi) the formal elimination of the proposed requirement to provide quarterly updates on material changes; and (vii) the inclusion of additional phase-in flexibility in certain respects.
In addition, while the release for the proposed rules discussed the possibility of allowing foreign private issuers or other companies to provide information based on non-US standards in place of SEC requirements, the final rules provide no such accommodation. The final rules also provide that information relating to transition plans, scenario analysis, the use of an internal carbon price, and targets and goals, except for historical facts, is considered a forward-looking statement for the purposes of the Private Securities Litigation Reform Act and the federal securities laws.
However, while the final rules are arguably less prescriptive in certain respects than the proposed rules would have been, and qualify many disclosure requirements with materiality, they still introduce significant regulatory complexity. Moreover, the threshold analysis of whether certain matters are or are not material will likely be extensive and expensive for many companies. Given the extensiveness and complexity of these new requirements, companies are likely to be assessing their need for additional internal support and external expertise over the near term.
Location and Timing
The final rules generally require that registrants (both domestic and foreign private issuers) file the climate-related disclosures in their registration statements and Exchange Act annual reports. Scope 1 and Scope 2 GHG emissions information, to the extent required, may be provided in the quarterly report on Form 10-Q for the second fiscal quarter in the fiscal year immediately following the year to which the information relates, with similar timing applying for foreign private issuers and registrants filing registration statements. Both narrative and quantitative climate-related disclosures are required to be electronically tagged in Inline XBRL. It is worth noting that the final rules will affect both domestic registrants and foreign private issuers, but will not apply to Canadian registrants that use the MJDS and file their Exchange Act registration statements and annual reports on Form 40-F.
Additional details regarding compliance dates under the final rules are set forth below.
