What You Need to Know About the New SEC Climate Rule
Context
In a significant move towards greater transparency and accountability, the Securities and Exchange Commission (SEC) recently finalized a new rule aimed at standardizing climate-related disclosures for public companies. The proposed rule surprised the industry on March 21, 2022 upon release and, as a result, received 24,000 public comments. Following careful consideration of these comments, the SEC passed a revised and scaled-back version of the rule, which takes into account the importance of climate-related risk for investors and the burden that reporting will place upon businesses.
Here are key takeaways of the new rule, how it has changed from the initial proposal, and what the implications are for business.
The new rule (and what has changed)
The final rule was significantly changed from the initial proposal as a result of the thousands of public comments received, but many of the key requirements remain. At its core, the requirements in the rule focus on climate impacts and emissions that are considered financially material to a business. Here are the disclosures that made the cut:
Identification of Climate-related Risks: Investors are becoming increasingly concerned with the risks that climate change will pose to business. Due to this, the SEC is requiring companies to disclose climate-related risks that have had or are reasonably likely to have a material impact on a company’s strategy, operations, or bottom line.
Adaptation and Mitigation Strategies: After identifying climate-related risks to the business, the SEC wants investors to know whether a company has a strategy to adapt to or mitigate those risks. If so, it is required to provide a qualitative and quantitative description of the expenditures for those activities and the estimated financial effects of the adaptation and mitigation strategies. In addition to the strategies, companies are required to disclose whether or not scenario analysis, transition plans, and/or internal carbon prices are part of climate-related strategies.
Financial Impact of Severe Weather Events: As severe natural disasters continue to be caused by climate change, the SEC is requiring companies to disclose whether and how these events are affecting companies. The rule requires the disclosure of expenses incurred as a result of severe weather events and natural disasters. Some examples of this include hurricanes, tornadoes, wildfires, drought, flooding, extreme temperatures, and sea level rise.
Governance of Climate-related Risks:
The SEC requires transparency on how a company manages climate-related risks, the different executive roles involved in this management, and the oversight by the board of directors of climate-related risks. The SEC also requests information about processes for identifying, assessing, and managing material climate-related risks and if/how these processes are integrated into a company’s enterprise risk management system.
Greenhouse Gas (GHG) Emissions: Accelerated filers will be required to report on material Scope 1 and 2 emissions and, after a phase-in period, reasonable assurance of GHG emissions inventory will also be required.
Emission Reduction Targets and Strategies: If a company sets goals or targets related to climate change or GHG emissions reductions, the SEC requires disclosure of the expenditures directly related to those goals. Companies also will be required to disclose how these expenses will help make progress toward achieving the goals that are set. If carbon offsets or renewable energy credits (RECs) are used, the estimated financial impact of them is also required.
The key disclosure requirements that were removed from the final rule include:
GHG Emissions Scopes 1 and 2: The rule retains its requirements for disclosure on companies’ Scope 1 and 2 emissions, but reduces the number of companies that are required to disclose and the extent of the disclosure. Now, only large accelerated and accelerated companies are required to disclose Scopes 1 and 2 and only emissions that are material to their business.
GHG Emissions Scope 3:
Disclosure of Scope 3 emissions received the most significant backlash from the original proposal since it is the most complex category of emissions making it the most difficult to accurately measure. The final rulemaking therefore completely leaves out Scope 3 emissions for all companies.
Climate-related Risks:
Regarding climate-related risk, the final rule now requires companies to report risks and accompanying mitigation strategies only for risks that are determined to be material to their business.
What it means for companies (including private companies)
Despite rollbacks from the original proposal, the finalized SEC rule will place new requirements on public companies regarding emissions transparency and climate risk. Large companies will be subject to this beginning as early as FY 2025, which requires companies to prepare for data collection immediately. Failure to comply with these regulations could result in reputational damage, legal liabilities, and financial repercussions. However, proactive compliance presents an opportunity for businesses to enhance their transparency, attract responsible investors, and gain a competitive edge in the market.
The new rule will directly impact private companies much less than the proposed rule would have because it removes the requirement for public companies to track Scope 3 emissions. But, with new rules coming out of California and the European Union which require Scope 3 disclosures, public companies will still be asking their partners to help them track these emissions. Additionally, the California Climate Accountability Package and the EU Corporate Sustainability Reporting Directive are similar in nature to the SEC rulemaking but extend to some private companies. Therefore, although private companies will not be subject to the SEC rulemaking, they may be directly required to comply with similar requirements for disclosure of GHG emissions and climate risk.
Timeline + how to comply
The graphic below provides a quick and simple overview of the timeline for the phase-in of the rulemaking. Public companies are required to include this information in their annual Form 10K, with the exception of GHG emissions inventories which are accepted in the second quarter 10Q. This allows for marginally more time in preparing the GHG emission inventory. In order to comply, the time to start creating a process and gathering data is now.
What we can expect
The SEC rule may still face delays in full implementation as a result of lawsuits challenging the new requirements. This includes cases claiming the SEC is overstepping its boundaries while others have brought cases because the rule does not go far enough. But as Commissioner Jaime Lizzaraga mentioned the commission must not “let perfect be the enemy of the good”; the rulemaking serves as a basis for greater transparency of climate change impacts and companies’ responsibility to reduce them.
Conclusion
The SEC's adoption of climate disclosure rules underscores the growing importance of environmental transparency in the corporate world. As businesses strive to meet these new regulatory demands, partnering with a knowledgeable consulting firm is essential for navigating the complexities of climate risk management and ensuring compliance. At Uplift, we are committed to helping companies embrace sustainability, mitigate risks, and thrive in a rapidly changing regulatory landscape. Contact us today to learn more about how we can support your organization's journey toward climate disclosure compliance and environmental stewardship.
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