After nearly two years of public comments and deliberation, the U.S. Securities and Exchange Commission (SEC) has adopted a Final Rule on Mandatory Climate Disclosures. Though less extensive than initially proposed, the Final Rule establishes detailed and comprehensive climate-related requirements for publicly traded companies in an 886-page document. Notably, it mandates that companies report specific greenhouse gas (GHG) emissions and material climate impact information in their registration statements and annual reports. However, it does not require reporting of Scope 3 emissions from upstream and downstream activities in a company’s value chain.
March 25, 2024 UPDATE
Multiple federal lawsuits have been filed across the United States challenging the Final Rule. Some public companies and state attorneys general argue that the rule exceeds the SEC’s authority, while the Sierra Club and the Natural Resources Defense Council (NRDC) claim it does not go far enough. On March 19, 2024, the SEC requested consolidation from the U.S. Judicial Panel on Multidistrict Litigation. On March 21, 2024, the Panel consolidated the nine lawsuits and assigned the case by lottery to the U.S. Court of Appeals for the Eighth Circuit. The Final Rule is temporarily stayed, and no timeline or briefing schedule has been announced.
April 5, 2024 UPDATE
Following consolidation in the Eighth Circuit, several parties sought an emergency order to prevent the Final Rule from taking effect during litigation. To expedite the process, the SEC announced on April 4, 2024, that it is voluntarily delaying the implementation of the Final Rule. While the SEC maintains that the Final Rule is a lawful exercise of its regulatory authority, the voluntary stay allows the consolidated cases to focus on the merits of the appeal and avoid regulatory uncertainty in the meantime.
The Final Rule aims to enhance and standardize climate-related disclosures for investors increasingly concerned about climate-related risks impacting a company’s business and long-term financial health. It builds on the Task Force on Climate-Related Financial Disclosures (TCFD) framework and the GHG Protocol, representing the SEC’s efforts to create a consistent climate-reporting framework for all publicly traded companies. Many new disclosures align with the TCFD’s recommendations on governance, risk management, strategy, and metrics.
On March 15, 2024, the U.S. Court of Appeals for the Fifth Circuit issued a temporary stay on the Final Rule’s implementation. This administrative stay temporarily halts implementation but is not the final decision on the rule’s legality. Additional litigation is pending in other circuit courts, with some arguing the Final Rule did not go far enough. These various challenges are expected to be consolidated. We will monitor developments and provide updates in the coming weeks.
This Update addresses key takeaways, disclosure requirements, phase-in periods for compliance, and implications for companies affected by the Final Rule moving forward.
Here are some key points from the new rules:
No Scope 3 emissions Disclosures: The final rules do not mandate companies to disclose and report their Scope 3 greenhouse gas (GHG) emissions. However, this rule is subject to change shortly as stated by Chair Gensler.
Exemptions from GHG Emissions Disclosures: Smaller reporting companies (SRCs), emerging growth companies (EGCs) and non-accelerated filers (NAFs) can breathe a sigh of relief as they do not have to report on their Scope 1 and Scope 2 greenhouse gas (GHG) emissions or related attestation disclosures. However, these companies must follow other climate-related disclosure rules but with a longer phase-in period than large, accelerated files (LAFs and Afs).
General GHG Materiality Threshold: Barring SRCs and EGCs, large and accelerated files (LAFs) are required to disclose their Scope 1 (direct) and Scope 2 (indirect) GHG emissions if they are material. That said, some companies may realize they do not need to disclose these emissions.
Extended GHG Phase-In Periods: The time frame has been extended for reporting on Scope 1 and Scope 2 GHG emissions. Large accelerated filers (LAFs) must disclose these emissions at the beginning of a financial year starting in 2026 and accelerated filers (Afs) in 2028. The attestation reports are granted a duration of three years after initial disclosures, especially the ones at a ‘limited assurance’ level. On the other hand, LAFs that require ‘reasonable’ assurance reports are awarded an additional four years by the financial year beginning in 2033.
Deferred Reporting: Organizations can report on their Scope 1 and Scope 2 emissions in their quarterly reports for the second financial quarter after the end of the reporting year or in an updated annual report within the same time frame, providing them with extra time to prepare. Foreign private issuers must follow the same timeline as the local companies.
General Phase-In Periods: Other climate-related disclosures will phase in more quickly. LAFs must comply with most of these disclosures for fiscal years beginning in 2026, accelerated filers have an additional year, and SRCs, EGCs, and NAFs have two additional years. Some disclosures about material expenditures and financial impacts due to climate risks or goals may be delayed for one more year.
Given the new rules, companies should assess how climate issues integrate with their existing compliance programs and reporting structures. This might require developing or restructuring multiple departments’ climate-related systems, processes, and controls. Companies may also need to implement additional data collection, disclosure control procedures, and internal controls to meet the new requirements.
Additionally, companies should evaluate materiality considerations for their disclosures, particularly concerning Scope 1 and 2 GHG emissions. The nature and manner of these disclosures will likely impact how investors, key stakeholders, and consumers perceive the company’s commitment to sustainability in the future.
