On March 6, 2024, the Securities and Exchange Commission (the “SEC”) adopted, by a 3-2 vote, final rules (the “Final Rules”) to enhance and standardize climate-related disclosures by public entities and public offerings. The Final Rules, which require registrants to disclose certain climate-related information in registration statements and annual reports, come almost two years after the SEC published proposed rules on climate-related disclosures (the “Proposed Rules”). The full text of the adopting release, including the Final Rules, can be viewed here.
Background
For over a decade, the SEC has increasingly focused on climate-related disclosures. In 2010, the SEC published guidance that outlined how existing rules may require narrative climate-related disclosure, including the potential impact of climate change on a registrant’s business. More recently, in 2021, the SEC’s Division of Corporation Finance published a sample letter to public companies delineating the kinds of climate change-related disclosures, particularly as risk factors or part of the MD&A discussion that registrants should consider. This was followed by the Proposed Rules issued on March 21. 2022, which would have required registrants, regardless of industry, size or materiality, to provide similar climate-related disclosures in registration statements and periodic reports.
The Final Rules deviate significantly from the Proposed Rules (including scaled-back disclosures and phased-in compliance dates tied to a registrant’s filer status) and reflect the SEC’s efforts to balance investor demands for more consistent, reliable and comparable information on climate-related risks on a registrant’s business with concerns regarding the additional effort and expense that the new requirements will impose on registrants. To help to mitigate registrants’ compliance burdens and reduce reporting costs, the disclosure requirements in the Final Rules are similar to those recommended by the Task Force on Climate-related Financial Disclosure (the “TCFD”), an industry-led task force aimed at better-informed investment, credit, and insurance underwriting. The Final Rules similarly draw on key concepts in the Greenhouse Gas Protocol (the “GHG Protocol”), which sets forth leading reporting standards for Greenhouse Gas (“GHG”) emissions. While the TCFD and GHG Protocol are voluntary regimes, the SEC anticipates that disclosures mandated by the Final Rules will standardize information and, consequently, aid in assessing investments and voting decisions.
Key Climate-Related Disclosure Requirements
The Final Rules will establish a new subpart 1500 of Regulation S-K and Article 14 of Regulation S-X and will require registrants to disclose information relating to, among other things:
- Climate-related risks identified by the registrant that have had or are reasonably likely to have a material impact on the registrant, including its strategy, results of operations, and short-term (i.e., the next 12 months) and long-term (i.e., beyond 12 months) financial condition.
- Actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook.
- A quantitative and qualitative description of expenditures and material impacts on financial estimates and assumptions directly resulting from any strategies to mitigate or adapt to a material climate-related risks.
- If a registrant uses any transition plan, scenario analysis or internal carbon pricing to mitigate or adapt to a material climate-related risk (none of which approaches are required under the Final Rules):
- A description of the transition plan(s) and updated disclosures in subsequent years describing the actions taken during the year under the plan, including on 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 measured impacts on financial estimates and assumptions as a direct result of the disclosed actions.
- Specified disclosures regarding the registrant’s use of scenario analysis, if it determines through the analysis that a climate-related risk is reasonably likely to have a material impact on its business, operations, or financial conditions.
- Certain disclosures about a registrant’s use of an internal carbon price if it is material to how it evaluates and manages a material climate-related risk.
- With respect to risk management and oversight:
- Any processes the registrant has for identifying, assessing and managing climate-related risks, and whether and how any such processes are integrated into the registrant’s overall risk management system or processes;
- Oversight by the registrant’s board of directors regarding climate-related risks, including identification of specific board committees responsible for oversight, if any; and
- Management’s role in assessing and managing material climate-related risks, including responsible management positions and their relevant expertise.
- Any climate-related goals or targets that materially affect or are reasonably likely to affect the registrant’s business, operations, or financial condition, including expenditures and material impacts on financial estimates and assumptions as a direct result of such goals or targets, or actions taken to meet such goals or targets.
- If the registrant is a large accelerated filer (“LAF”) or an accelerated filer (“AF”) not otherwise exempted, standardized information about material Scope 1 emissions (direct GHG emissions) and/or Scope 2 emissions (indirect GHG emissions resulting from purchased energy), including the methodology, significant inputs and significant assumptions used to calculate such emissions, as well as an attestation report from an independent attestation provider, initially at the limited assurance level, but ultimately at the reasonable assurance level for LAFs only.
- Financial Statement footnote disclosure of:
- Any capitalized costs, expenditures, charges, and losses incurred (excluding recoveries) as a result of severe weather events or 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 (with any recoveries as a result of severe weather events and other natural conditions separately disclosed);
- Any capitalized costs, expenditures, and losses related to carbon offsets or renewable energy credits or certificates (“RECs”), if used as a material component of a registrant’s plans to achieve its disclosed climate-related goals or targets; and
- If the estimates and assumptions a registrant uses to produce its financial statements were materially impacted by risks and uncertainties associated with severe weather events or 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.
Modifications to the Proposed Rules
In response to comments, the SEC generally adopted a less prescriptive approach in the Final Rules. Significant changes from the Proposed Rules include:
- Qualifying the requirements to provide certain climate-related risks (such as disclosures regarding impacts of climate-related risks, use of scenario analysis and maintained internal carbon price) and GHG emission information based on materiality.
- Removing the requirement to disclose Scope 3 GHG emissions, which are indirect GHG emissions from upstream and downstream activities in a company’s value chain.
- Exempting smaller reporting companies (“SRCs”), emerging growth companies (“EGCs”) and non-accelerated filers (“NAFs”) from the Scope 1 and Scope 2 emissions disclosure requirements and related attestation reports.
- Providing flexibility on placement of climate-related disclosures, other than the new financial statement disclosures, mostly up to the registrant by eliminating the requirement to include certain disclosures under a separately captioned “Climate-Related Disclosure” section and allowing incorporation by reference of some of the disclosures from certain previous filings.
- Modifying climate-related risk disclosure requirements to eliminate mandated discussion of the negative impact on a registrant’s value chain.
- Scaling back the governance and risk management disclosures by eliminating the proposed requirements to describe board members’ climate expertise, the specific board members responsible for climate-related risk, the frequency of reporting climate-related risks to the board and how the board sets climate-related targets or goals.
- Removing the requirement to disclose the impact of severe weather events and other natural conditions and transition activities on each line item of a registrant’s consolidated financial statements.
- Limiting disclosure of material expenditures directly related to climate-related activities as part of a registrant’s strategy, transition plan and/or targets and goals to disclosure requirements set forth in subpart 1500 of Regulation S-K (rather than under Article 14 of Regulation S-X).
- Rejecting the proposal to require a private company that is a party to a business combination transaction to provide subpart 1500 and Article 14 disclosures.
- Eliminating the requirement to disclose material changes to climate-related disclosures provided in a registration statement or annual report in a Form 10-Q.
- Extending certain phase-in periods and allowing deferred reporting of Scope 1 and Scope 2 GHG emissions in the second quarter Form 10-Q for the following year.
Climate-Related Disclosures Safe Harbor
The Final Rules carve out safe harbors for climate-related disclosures relating to transition plans, scenario analysis, the use of an internal carbon price, and targets and goals, provided under Regulation S-K. The safe harbor clarifies that all information disclosed under the specific sections, except for historical facts, constitute a “forward-looking statement” under the Private Securities Litigation Reform Act and safe harbors for forward-looking statements under section 27A of the Securities Act and Section 21E of the Exchanged Act.
Presentation of Disclosures
For domestic issuers, all or part of the new climate disclosures are required in Form 10-K filings under Part II, Item 6: Climate-Related Disclosure, Form 10-Q filings under Part II, Item 1B, Climate-Related Disclosure, and in certain registration statements. For Form 10-K filings, if the relevant disclosure is included in other parts of the report, such as risk factors or MD&A, the registrant may cross-reference such disclosures in Item 6. Financial statement disclosures for historical fiscal year(s) included in a registrant’s consolidated financial statements are required on a prospective basis only. Under the Final Rules, disclosure must be provided for the registrant’s most recently completed fiscal year, and to the extent previously disclosed or required to be disclosed, for the historical fiscal year(s) for which audited consolidated financial statements are included in the filing. The new disclosures are required to be tagged in inline XBRL.
Effective Date and Compliance Phase-In Periods
The Final Rules will become effective 60 days after publication in the Federal Register. The compliance dates for new climate-related disclosures are phased in, based upon the status of the registrant as a LAF, AF, NAF, SRC or EGC. The compliance date for most of the requirements, other than GHG emissions disclosures, begins with fiscal years beginning in 2025 for LAFs, fiscal years beginning in 2026 for AFs, other than SRCs and EGCs, and for other filers (including SRCs and EGCs) with fiscal years beginning in 2027. The compliance date for a few disclosures, including quantitative and qualitative disclosures regarding material expenditures and material impacts on financial estimates and assumptions that result from efforts to mitigate or adapt to climate-related risks or to achieve climate-related targets or goals, are delayed one year from the initial compliance date. The compliance date for GHG emissions disclosures begins with fiscal years beginning in 2026 for LAFs and in 2028 for AFs with requirements for an attestation report further delayed.
What to Expect Next
The Proposed Rules were highly controversial and, even with the significant modifications to the Final Rules aimed at reducing compliance costs (both time and money), the Final Rules have already drawn strong objections, both from business groups and state officials who deem them too onerous and environmental advocates who deem them too weak. The Attorney Generals of Louisiana, Texas and Mississippi have asked the Fifth Circuit to overturn the Final Rules and a coalition of ten other Republican-led states (Alabama, Alaska, Georgia, Indiana, New Hampshire, Oklahoma, South Carolina, West Virginia, Wyoming and Virginia) have filed a petition asking the Eleventh Circuit to review the SEC’s action in adopting the Final Rules. Energy industry suppliers Liberty Energy Inc. and Nomad Proppant Services LLC have also filed a lawsuit in the Fifth Circuit and both the U.S. Chamber of Commerce and the Sierra Club have hinted at possible litigation. Multiple lawsuits in multiple jurisdictions is likely to create some confusion and uncertainty as to the future of the Final Rules.
However, public companies wishing to take a “wait and see” approach should note that, even if the courts rule against some or all of the mandates in the Final Rules, the SEC is still able to file enforcement actions against companies violating existing disclosure standards.
