SEC’s Climate Disclosure Rules

On March 6, 2024, the Securities and Exchange Commission (the “SEC”) adopted final climate disclosure rules (the “Final Rules”)¹ to take effect as early as the beginning of the 2025 fiscal year. On April 4, 2024, the SEC stayed the Final Rules due to litigation initiated immediately following adoption of the Final Rules.

Background

The SEC began addressing climate disclosure as early as 2010. After years of proposals, petitions, and public comments regarding climate change disclosure, on March 21, 2022, the SEC first issued the proposed climate disclosure rules (the “Proposed Rules”).² Over 24,000 comment letters, including over 4,500 unique letters, were submitted in response to the Proposed Rules.

Although the Final Rules are currently stayed, public companies should consider reviewing the numerous changes brought by the Final Rules. Provided below is a brief overview of the SEC’s climate-related additions and amendments to its rules under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”).

Final Rules

Definitions. The Final Rules add new Item 1500 of Regulation S-K composed of the climate disclosure rules and related definitions. Key terms defined in Item 1500 include “physical risks,” and “transition risks,” as further discussed below.

“Physical risks” to a company’s business operations include both (i) acute risks arising from short-term climate-related disasters, such as floods, wildfires, and hurricanes, and (ii) chronic risks arising from longer-term weather patterns, such as drought and sea level rise.

“Transition risks” are actual or potential negative impacts on a company’s business, results of operation, or financial condition that may arise from:

• changes in law or policy;
• reduced demand for carbon-intensive products;
• the devaluation or abandonment of assets;
• litigation;
• competitive pressures associated with the adoption of new technologies; or
• reputational impacts.

Strategy, Business Model, and Outlook. New Item 1502 of Regulation S-K requires companies to disclose any climate-related risks that have had, or are reasonably likely to have, a material impact on the company, including on its business strategy, results of operations or financial condition and whether such risks are physical risks or transition risks. Specifically, the Final Rules will:

• require a company to describe whether any disclosed climate-related risks are reasonably likely to manifest in the short-term or in the long-term;

• require a company to describe the actual and potential material impacts of the identified climate-related risks, including impacts on the company’s (i) business operations; (ii) products or services; (iii) suppliers, purchasers, or counterparties to material contracts; (iv) activities to mitigate or adapt to climate-related risks; and (v) expenditures for research and development;

• require a company to discuss whether and how it considers any identified material impacts as part of its strategy, financial planning, and capital allocation;

• require a company to describe material expenditures incurred and material impacts on financial estimates resulting from activities to mitigate or adapt to climate-related risks, including adoption of new technologies or processes;

• require a company to describe any transition plan that was adopted to manage a material transition risk; and

• require any company that uses internal carbon pricing to disclose certain information about its internal carbon price.

Governance. Under new Item 1501 of Regulation S-K, a company will be required to describe the board of directors’ oversight of climate-related risks, including identification of any board committee responsible for such oversight. Separately, a company must also describe management’s role in assessing and managing climate-related risks, including whether internal processes for monitoring climate-related risks are in place and the frequency of reporting to the board on climate-related risks.

Notably, due to pushback in response to the Proposed Rules, the Final Rules do not require disclosure of board members’ climate expertise.

Risk Management. Companies will be required under new Item 1503 of Regulation S-K to disclose any processes for identifying, assessing, and managing material climate-related risks, and if applicable, whether and how such processes are integrated into the company’s overall risk management system.

Targets and Goals. New Item 1504 of Regulation S-K will require companies to disclose any climate-related target or goal that has materially affected or is reasonably likely to materially affect the company’s business, results of operations, or financial condition. If a company makes such a disclosure, it is required to provide any additional information or explanation necessary for a reasonable investor’s understanding of the material impact (or reasonably likely material impact) of the target or goal, including but not limited to: (i) scope of activities included in the target or goal; (ii) the unit of measurement; (iii) the defined time horizon for achieveing the target or goal; (iv) if the company has established a baseline for the target or goal, then the baseline time period and means by which progress will be tracked; and (v) a qualitative description of how the company intends to meet its climate-related targets or goals.

In addition, a company must disclose any progress toward meeting the target or goal, updating such disclosure each fiscal year. Finally, if a company has used carbon offsets or renewable energy credits (“RECs”) as a material component of its plan to achieve a target or goal, it must separately disclose: (i) the amount of carbon reduction represented; (ii) the amount of generated renewable energy represented by the RECs; (iii) the nature and source of the carbon offsets or RECs; (iv) description and location of underlying REC projects; (v) any registries (or other authentication) of the carbon offsets and RECs; and (vi) the cost of the carbon offsets or RECs.

GHG Emissions Metrics. Under new Item 1505 of Regulation S-K, large accelerated filers (“LAFs”) and accelerated filers (“AFs”) will be required to disclose on a phased-in basis (i) direct greenhouse gas (“GHG”) emissions (Scope 1) and/or (ii) indirect emissions from purchased electricity or other forms of energy (Scope 2), to the extent such emissions are material. For any GHG emission required to be disclosed, the company’s Scope 1 emissions and/or Scope 2 emissions must be disclosed separately, each in the aggregate and disaggregated by each constituent GHG³.

Companies must also describe in sufficient detail for a reasonable investor to understand the methodology, significant inputs, and significant assumptions used in calculation of GHG emissions metrics, including the protocol or standard used to report such emissions.

Attestation of GHG Emission Disclosures. New Item 1506 of Regulation S-K will require companies that are required to provide Scope 1 and/or Scope 2 emissions disclosure to include an attestation report to such disclosure in the relevant SEC filing.

Similar to Item 1505, this rule applies only to LAFs and AFs (other than smaller reporting companies (“SRCs”) and emerging growth companies (“EGCs”)). AFs will be required to obtain an attestation report only at a limited assurance level, while LAFs will be required to meet a reasonable assurance level (but not at this heightened level until the fiscal year beginning in 2033). Companies must file the consent from the attestation provider as an exhibit to the relevant SEC filing that acknowledges its awareness of the use in such filing of its attestation report. However, no consent is required for a report at the limited assurance level.

Finally, GHG emissions attestation reports must be prepared by a GHG emissions attestation provider, who or which must be (i) an expert in GHG emissions through sufficient experience in measuring, analyzing, reporting, or attesting to GHG emissions, and (ii) independent with respect to the company.

Safe Harbor for Certain Climate Disclosures. New Item 1507 expressly provides that disclosures (other than historical facts) made pursuant to the following provisions are considered forward-looking statements for purposes of the Private Securities Litigation Reform Act safe harbor: Item 1502(e) (transition plans), Item 1502(f) (scenario analysis), Item 1502(g) (internal carbon pricing), and Item 1504 (targets and goals).

Inline XBRL. New Item 1508 of Regulation S-K will require all companies to tag climate disclosures in Inline XBRL.

Financial Statement Effects (Amendments to Regulation S-X). Pursuant to amendments to Article 14 of Regulation S-X, the Final Rules introduce new financial statement footnote disclosures. Such disclosures will be required in filings that require audited financial statements and corresponding Regulation S-K climate disclosures.

Required financial statement footnote disclosure will include the following:

• Aggregate amount⁴ of expenditures expensed as incurred and losses resulting from severe weather events and other climate conditions;
• Aggregate amount⁵ of capitalized costs and charges resulting from severe weather events and other climate conditions; and
• Aggregate amounts of capitalized costs, expenditures, and losses resulting from the purchase and use of carbon offsets and RECs.

Separately, while the Final Rules eliminated the proposed requirement to disclose expenditures related to transition activities in the financial statements, companies will be required to disclose material expenditures related to (i) activities to mitigate or adapt to climate-related risk, (ii) disclosed transition plans, and (iii) disclosed targets and goals.

As the metrics described above will become part of the financial statements, such information will be (i) included in the scope of the audit of the financial statements, (ii) subject to audit by an independent registered public accounting firm, and (iii) within the scope of the company’s internal control over financial reporting.

Compliance Dates and Phase-In Periods

As previously stated, the Final Rules include disclosure compliance dates⁶ and phase-in periods that are dependent on the company’s filer status:

• All Regulation S-K and S-X disclosures (unless stated otherwise)
  • LAFs: Fiscal year beginning 2025
  • AFs: Fiscal year beginning 2026
  • SRCs, EGCs, non-accelerated filers (“NAFs”): Fiscal year beginning 2027
• Items 1502(d)(2)⁷, 1502(e)(2)⁸, 1504(c)(2)⁹ (Financial Statement Disclosures of Material Expenditures):
  • LAFs: Fiscal year beginning 2026
  • AFs: Fiscal year beginning 2027
  • SRCs, EGCs, NAFs: Fiscal year beginning 2028
• Item 1505 (Scopes 1 and 2 GHG emissions)
  • LAFs: Fiscal year beginning 2026
  • AFs: Fiscal year beginning 2028
  • SRCs, EGCs, NAFs: N/A
• Item 1506 (Limited Assurance)
  • LAFs: Fiscal year beginning 2029
  • AFs: Fiscal year beginning 2031
  • SRCs, EGCs, NAFs: N/A
• Item 1506 (Reasonable Assurance)
  • LAFs: Fiscal year beginning 2033
  • AFs: N/A
  • SRCs, EGCs, NAFs: N/A
• Item 1508 (Inline XBRL tagging)
  • LAFs: Fiscal year beginning 2026
  • AFs: Fiscal year beginning 2026
  • SRCs, EGCs, NAFs: Fiscal year beginning 2027

Update re Legal Challenges

Following the SEC’s adoption of the Final Rules, nine federal lawsuits were filed, which were consolidated into a single case that is now before the U.S. Circuit Court of Appeals for the Eighth Circuit sitting in New Orleans, Louisiana. In response to the legal challenges, the SEC announced that it would stay the Final Rules. The SEC noted that it remains committed to the implementation of the Final Rules, explaining that its decision to pause implementation will facilitate the orderly judicial resolution of the challenges faced in court.

Concurrently, lawmakers have been urging the Eighth Circuit Court to vacate the Final Rules. On June 25, 2024, a group of House and Senate lawmakers filed an amicus brief with the Eighth Circuit Court, supporting the challenge against the SEC and arguing that the SEC’s overreach into climate regulation violates the separation of powers and the major questions doctrine (as further discussed below).

Under the major questions doctrine, courts presume that Congress would not grant authority to agencies that lack “comparative expertise in making certain policy judgments” to decide issues of “vast economic and political significance.”¹⁰ Challengers of the Final Rules argue that the SEC lacks the authority to mandate climate disclosures, indicating that the Environmental Protection Agency should handle matters related to climate policy. Courts, relying on the major questions doctrine and previous Supreme Court cases determining agency mandates exceeded authority granted by Congress, may decide that the Final Rules extend into an area outside of the SEC’s expertise and are thus unenforceable.

Future Considerations

Regardless of the ongoing legal challenges to the Final Rules, investor pressure may continue to drive public companies to comply with increased climate disclosures. In addition, because the outcomes of the legal challenges are uncertain, companies should continue to consider and prepare for compliance to the Final Rules until definitive rulings are made.

Footnotes

1. U.S. Securities and Exchange Commission, Release No. 33-11275, The Enhancement and Standardization of Climate-Related Disclosures for Investors (March 6, 2024).
2. U.S. Securities and Exchange Commission, Release No. 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors (March 21, 2022).
3. The Final Rules define GHG as carbon dioxide, methane, nitrous oxide, nitrogen trifluoride, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride.
4. If such aggregate amount equals or exceeds one percent of the absolute value of income or loss before income taxes for the relevant fiscal year.
5. If such aggregate amount equals or exceeds one percent of the absolute value of stockholders’ equity (deficit), at the end of the relevant fiscal year.
6. The Final Rules are currently stayed and thus compliance dates could potentially be pushed back.
7. Item 1502(d)(2) requires disclosure of material expenditures incurred and material impacts on financial estimates and assumptions directly resulting from activities to mitigate or adapt to climate-related risks.
8. Item 1502(e)(2) requires disclosure of material expenditures incurred and material impacts on financial estimates and assumptions directly resulting from a disclosed transition plan.
9. Item 1504(c)(2) requires disclosure of material expenditures incurred and material impacts on financial estimates and assumptions directly resulting from disclosed targets or goals or the actions taken to meet such targets or goals.
10. West Virginia v. Environmental Protection Agency, 142 S. Ct. 2587 (2022).