Update: The US Securities and Exchange Commission (SEC) published its final rule for The Enhancement and Standardization of Climate-Related Disclosures for Investors to the Federal Register on March 28, 2024.
On March 6, 2024, the US Securities and Exchange Commission (SEC) announced it would adopt a final version of its climate disclosure rule requiring publicly traded companies to assess and publicly disclose information regarding their climate impacts including GHG emissions and other climate-related financial risks. The long-awaited announcement of the final SEC climate disclosure rule comes nearly two years after the Commission published its proposed climate disclosure rule in 2022.
SEC Climate Disclosure Rule Background
Over the last decade or so, major institutional investment houses and large corporations have increasingly added climate risks into their financial calculus, not only in response to investor demands for greater environment, social, and governance (ESG) performance, but also due to the growing realization that climate risks have a quantifiable and direct impact on the long-term viability and sustainability of organizations, making them a significant factor in the overall risk levels that investors rely on to evaluate investments.
To quantify and standardize these risks, numerous climate risk disclosure frameworks and standards evolved within the marketplace and financial industry. Some of the more prominent names among these include the Global Reporting Initiative (GRI), TCFD, and SASB. However, these disparate climate risk and ESG disclosure frameworks lack standardization and are entirely voluntary, leading to variation and gaps in what data each of these frameworks was able to capture and communicate to investors and other interested stakeholders.
More recently, government regulators are beginning to recognize the challenges created by these disparate disclosure frameworks and have begun to develop and implement compulsory disclosure regulations to standardize publicly traded companies’ climate risk information for investors. In the EU, this has taken the form of the European Financial Reporting Advisory Group (EFRAG) European Sustainability Reporting Standards (ESRSs) which are currently being implemented at the national level by EU member states. Concurrently, the US SEC developed its own proposed rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors. As of March 6, 2024, that rule is now final.
SEC Climate Disclosure Requirements
Regarding the Agency’s climate disclosure rule, SEC Chair Gary Gensler noted in the March 6, 2024 agency press release:
“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”
The SEC climate disclosure rule would require public companies registered with the SEC to assess and report:
- Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition;
- The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook;
- If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities;
- Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices;
- 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;
- Any processes the registrant has for identifying, assessing, and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes;
- Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition. Disclosures would include 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;
- For large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted, information about material Scope 1 emissions and/or Scope 2 emissions;
- For those required to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level; *
- The capitalized costs, expenditures expensed, charges, and losses incurred because of severe weather events and 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, disclosed in a note to the financial statements;
- 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, disclosed in a note to the financial statements; and
- 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, a qualitative description of how the development of such estimates and assumptions was impacted, disclosed in a note to the financial statements.
(*A notable difference between the SEC’s proposed requirements and the final rule was the removal of requirements for companies to disclose Scope 3 greenhouse gas (GHG) emissions in addition to Scope 1 and 2 GHGs.)
The SEC press release notes that the final rule will become effective sixty (60) days after it is published in the Federal Register, with compliance and reporting deadlines for SEC-registered entities to be phased in after that date depending on their filing status and schedule.
As of this publication, the SEC climate disclosure rule has not been formally published in the Federal Register. Follow us on LinkedIn for the latest updates as soon as they become available. For more information on SEC climate disclosure rule requirements, global reporting standards and frameworks, GHG reporting, and all things ESG, visit the VelocityEHS Resources Page.
VelocityEHS Can Help!
If you’re a public company and you haven’t done so already, you need to start preparing for the SEC climate disclosure rule now! For privately owned organizations, keep in mind that even if you’re not an SEC-registered company, you likely partner with public companies who will be subject to the new requirements, and you may receive requests for climate risk information that they’ll need to meet their own compliance and reporting obligations.
Now is also the time to reassess what systems and technology tools your organization relies on to collect, analyze, and report climate risk information to regulators, investors, and other stakeholders. Without the right tools and an easy way to access and communicate that data, the risk for non-compliance is simply too great, especially if you’re not already capturing and documenting climate risk information.
The GHG & Energy Management capabilities of the VelocityEHS ESG Solution allow you to automate and simplify the collection, validation, and reporting of your greenhouse gas and energy data, eliminating many of the administrative burdens that come with quantifying and disclosing your organization’s emissions and other climate risks. You can also easily generate the investor-grade data you need for compliance, while flexible reporting features help you manage shifting climate policies and disclosure requirements, as well as investor and supply-chain partner information requests.
Don’t wait to get your climate risk disclosure data in order. Request a Demo today and see firsthand how VelocityEHS can put your organization on a firm footing for compliance.