Worldwide: US Securities And Exchange Commission Releases Long-Anticipated Climate-Related Disclosure Rules

On March 6, 2024, the Securities and Exchange Commission (SEC) released its widely anticipated climate-related disclosure rules (the Final Rules). The Final Rules require registrants to disclose certain climate-related information in registration statements and annual reports. These requirements are a part of the SEC's effort to standardize climate-related disclosures by public companies. Notably, the SEC has relaxed some of the disclosure requirements found in the initially proposed rules, in response to public comments.

Canadian public issuers should familiarize themselves with the requirements set out in the Final Rules, as Canada's own climate-related public disclosures, which the Canadian Securities Administrators (CSA) are developing, may mirror some requirements for public issuers now in place in the United States.

Background

In the past few years, investors across the globe have made clear their interest in, and expectation for, more consistent and reliable information about the financial effects of climate-related risks on a company's operations, as well as information about how the company manages those risks. The Final Rules seek to address investors' needs and concerns, and publicly traded companies will now be required to disclose climate-related information in a method that is consistent and better facilitates comparison across companies.

Timeline

The Final Rules are effective 60 days after publication in the Federal Register and will follow a phased-in approach starting in 2025, with the compliance date for registrants, dependent on whether they are a large-accelerated filer (LAF), an accelerated filer (AF), a non-accelerated filer (NAF), smaller reporting company (SRC) or emerging growth company (EGC).

The phased-in approach recognizes that certain registrants, like SRCs or EGCs, will require additional time and resources to put in place controls, procedures and systems required to comply with the Final Rules, as compared to LAFs who are already required to collect and disclose certain climate-related information.

The compliance dates are summarized by the below table, published by the SEC:¹

Key Changes from Proposed Rules

The Final Rules move away from some of the requirements that were initially included in the prior proposed rules published on March 21, 2022. Such changes are in large part a result of public comments received and include more significant accommodations granted for various reporting requirements than initially proposed. Key changes seen in the Final Rules include:

• Eliminating the requirement for companies to disclose information on their Scope 3 emissions, which are indirect emissions that occur along a company's supply chain;
• Qualifying certain climate-related disclosure requirements by a materiality threshold, including disclosures regarding impacts of climate-related risks, use of scenario analysis and maintained internal carbon price;
• Extending the phase-in periods for providing disclosures regarding Scope 1 and Scope 2 GHG emissions. LAFs must provide Scope 1 and Scope 2 disclosures for fiscal years beginning in 2026, and AFs must provide these disclosures for fiscal years beginning in 2028;
• Exempting SRCs and EGCs from the GHG emission disclosure requirements, including Scope 1 and Scope 2 emissions;
• Extending the reasonable assurance phase in period for LAFs for Scope 1 and Scope 2 GHG emissions and requiring only limited assurance for AFs. Under the Final Rules, LAFs must obtain attestation reports at the "limited assurance" level by 2029 and attestation reports at the "reasonable assurance" level by 2033. AFs require attestation reports at the "limited assurance level" only, to be obtained by 2031; and
• Extending "Safe Harbor" protections from private liability for certain climate-related disclosures pertaining to transition plans, scenario analysis, the use of internal carbon price, and targets and goals, such that such disclosures, except for historical facts, are considered "forward-looking statements".

Required Disclosures under the Final Rules:

The Final Rules will require registrants to disclose the following:

• 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 LAFs and 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 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; 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.²

Registrants (including foreign private issuers) will need to file their climate-related disclosure in their registration statements and Exchange Act annual reports filed with the SEC. The Final Rules will provide an accommodation that permits Scope 1 and/or Scope 2 GHG emissions disclosure, if required, to be filed on a delayed basis if: (1) a domestic registrant, in its Form 10-Q for the second fiscal quarter in the fiscal year immediately following the year to which the GHG emissions disclosure relates; (2) a foreign private issuer, in an amendment to its annual report on Form 20 F, which shall be due no later than when such disclosure would be due for a domestic registrant; and (3) filing a Securities Act or Exchange Act registration statement, as of the most recently completed fiscal year that is at least 225 days prior to the date of effectiveness of the registration statement.

Takeaways for Canadian Public Issuers

Canada's own proposed climate-disclosure regulation, National Instrument 51-107 Disclosure of Climate-related Matters (NI 51-107), has been paused since 2022. That said, following the release of the ISSB standards in January 2023, an overview of which can be found in our previous blog International Sustainability Standards Board Releases Sustainability Disclosure Standards, the CSA has stated that they intend to adopt disclosure standards based on the ISSB Standards, modified to the Canadian context. Canadian public issuers should familiarize themselves with the disclosure requirements in the Final Rules given that the CSA will likely consider the requirements of the SEC when developing and putting in place requirements for Canadian public companies. Canadian public issuers should also take steps now to ensure they have proper internal controls and procedures in place when additional climate-related disclosure obligations are adopted.

Canadian public issuers that have elected to voluntarily provide climate-related disclosures, in particular based on the Task Force on Climate-Related Financial Disclosure framework, ISSB and/or the GHG Protocol, may benefit from reduced burdens and costs associated with compliance with the Final Rules as well as compliance with any climate-related disclosure requirements which may be adopted by the CSA in the future.

Bennett Jones has extensive knowledge and experience in climate-related reporting and public issuer disclosures and can help your business address any questions regarding the SEC Final Rules. If you want to learn more, please contact the authors or a member of our ESG group.

Footnotes

1. US Securities and Exchange Commission "The Enhancement and Standardization of Climate-Related Disclosures: Final Rules" 6 March 2024: https://www.sec.gov/files/33-11275-fact-sheet.pdf.

2. Securities Exchange Commission "The Enhancement and Standardization of Climate-Related Disclosures for Investors", March 6, 2024: https://www.sec.gov/files/rules/final/2024/33-11275.pdf, pp. 29-30.

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.