United States: What Public Companies Should Know About The SEC's Climate Reporting Regulations

On March 6, 2024, the Securities and Exchange Commission (SEC) adopted highly controversial final regulations requiring public companies to make new climate-related disclosures in their registration statements and annual reports. The regulations, entitled The Enhancement and Standardization of Climate-Related Disclosures for Investors, mandate disclosure of information about a registrant's climate-related risks that have materially impacted, or are reasonably likely to have a material impact on, its business strategy, results of operations, or financial condition.

In support of the new disclosure requirements, the SEC has emphasized that climate risks can pose significant financial risks to companies and that investors need reliable information about climate risks to make informed investment decisions. The SEC also maintains that while many companies are starting to provide some climate-related disclosures in response to investor demand and recognized climate-related risks to their businesses, disclosure practices are currently fragmented and inconsistent.

Unlike the initial proposed regulations, the final regulations; (a) establish an exemption from the greenhouse gas (GHG) emissions disclosure requirement for smaller reporting companies (SRCs) and emerging growth companies (EGCs); (b) eliminate the requirement to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3 emissions); and enable issuers to provide Scope 1 emissions disclosures (direct GHG emissions) and Scope 2 emissions (indirect emissions from purchased electricity or other forms of energy) in their second quarterly report to be filed after their fiscal year-end rather than in their annual reports.

Although the final regulations ease compliance burdens in several areas, the disclosure requirements are still significant, particularly for large accelerated filers (LAFS) and accelerated filers (AFs). Below is a brief overview of what issuers must disclose:

Climate-Related Risk Disclosures

• 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.

Corporate Governance Disclosures

• 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.

Climate-Related Goal Disclosures

• 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

Financial Statement Disclosures

• 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 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.
• 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.

GHG Disclosures

• For LAFs and AFs that are not otherwise exempted, information about material Scope 1 emissions (direct GHG emissions) and/or Scope 2 emissions (indirect emissions from purchased electricity or other forms of energy).
• 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.

All domestic and foreign registrants, except for asset-backed issuers, must provide the disclosures. As discussed above, SRCs, EGCs, and nonaccelerated filers are exempt from the Scope 1 and Scope 2 GHG emission disclosure requirements, but they must submit all other disclosures.

The final rule becomes effective 60 days after it is published in the Federal Register. However, compliance deadlines for the rules will be phased in for all registrants, with the compliance date dependent on the registrant's filer status. Below is an overview provided by the SEC:

1 As used in this chart, "FYB" refers to any fiscal year beginning in the calendar year listed.
2 Financial statement disclosures under Article 14 will be required to be tagged in accordance with existing rules pertaining to the tagging of financial statements. See Rule 405(b)(1)(i) of Regulation S-T.

Not surprisingly, the SEC's climate disclosure regulations are controversial. The agency received 24,000 comments, including more than 4,500 unique letters, in response to its initial rule proposal. The Fifth Circuit instituted an administrative stay on March 15, 2024, temporarily blocking the SEC from implementing the rules, and nine lawsuits were initiated challenging the final regulations.

Those challenging the final regulations, including state attorneys general, energy industry suppliers, and the U.S. Chamber of Commerce, contend that the requirements are overly burdensome and exceed the SEC's rulemaking authority. According to the suit filed by ten states, "The final rule exceeds the agency's statutory authority and otherwise is arbitrary, capricious, an abuse of discretion, and not in accordance with law."

The Sierra Club and the Natural Resources Defense Council have also filed suit, arguing that the SEC's climate rules don't go far enough. "With this rule, the SEC recognized what many investors have known for years: climate change introduces significant financial risk to our markets," Hana Vizcarra of Earthjustice, representing the Sierra Club, said in a statement. "In fact, the SEC should have gone further to protect investors from companies that would rather not own up to those climate-related risks."

To address the flood of lawsuits challenging the rules, the U.S. Judicial Panel on Multidistrict Litigation has consolidated them before the Eight Circuit Court of Appeals. Following the consolidation order, the Fifth Circuit ordered the dissolution of the administrative stay it issued, but among its other tasks, the Eighth Circuit must decide whether to grant a new administrative stay in response to a request by Liberty Energy Incorporated and Nomad Proppant Services LLC.

Even with legal challenges ongoing, the time to act is now. Should the regulations survive, companies need to be prepared to meet their disclosure obligations.

Whether or not your company currently makes any climate disclosures, the first step should be to educate key organizational members (board of directors, management, and employees) about the final rule and begin to develop a clear and comprehensive plan of action. The plan should assign board and management responsibilities; assess current data collection, reporting, and disclosure; identify gaps with regard to data, controls, and reporting; and develop compliance strategies for disclosure and attestation. Companies that are subject to additional reporting requirements, including those established by the State of California and the European Union, must also consider the relationship between the three regimes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.