The Enhancement and Standardization of Climate-Related Disclosures for Investors

On March 6, 2024, the Securities and Exchange Commission adopted new regulations that mandate corporations disclose specific climate change information in their annual reports and registration statements. These regulations were first proposed on March 21, 2022. The public comment file is available online.

The final rules require a registrant to disclose information, such as material climate-related risks and activities to mitigate such risks, the registrant’s board of directors’ oversight of climate-related risks, and management’s role in managing these risks. The final rule also requires disclosing information about any climate-related targets or goals that are material to the registrant’s business, results of operations, or financial condition.

To assist investors in assessing certain climate-related risks, the final regulations require larger registrants to disclose their Scope 1 and/or Scope 2 greenhouse gas (GHG) emissions on a phased-in basis when those emissions are material. In addition, these registrants must file an attestation report covering the required disclosure of their Scope 1 and/or Scope 2 emissions, also on a phased-in basis. They must also disclose the financial statement effects of severe weather events and other natural conditions, including costs and losses.

The final rules include staggered compliance dates for registrants based on their filer status and the disclosure’s content.

Background

Investors, companies, and the markets have recognized that climate-related risks can affect a company’s financial performance. The Commission has amended its disclosure requirements several times in the last 90 years to include information important for investment and voting decisions. For the past 50 years, the Commission has required disclosure of various environmental issues. The final rules continue the Commission’s efforts to respond to investors’ need for consistent, reliable, and comparable information about the financial effects of climate-related risks on a registrant’s business.

Content of the Disclosures

The final rules will require a registrant to disclose:

• Actual or potential material impact on the Company’s strategy, business model, and outlook that is likely to significantly impact the company’s business strategy, financial condition, or operational results.
• A description of material expenditures and impacts on financial estimates resulting from any mitigation or adaptation activities undertaken as part of a company’s strategy.
• Disclosures regarding a company’s activities to mitigate or adapt to a material climate-related risk, including using transition plans, scenario analysis, or internal carbon prices.
• Information about the board’s oversight of climate-related risks and management’s role in assessing and managing the company’s material climate-related risks.
• The company’s processes for identifying, assessing, and managing material climate-related risks and whether and how such processes are integrated into the company’s overall risk management system or processes.
• Information about a company’s climate-related targets or goals, if any, that have materially affected or are likely to affect its business, results of operations, or financial condition.
• Information about material Scope 1 and/or Scope 2 emissions is required for large-accelerated filers (LAFs) and accelerated filers (AFs).
• An assurance report at the limited assurance level for disclosure of Scope 1 and/or Scope 2 emissions, which for an LAF will be at the reasonable assurance level following an additional transition period.
• Disclosing capitalized costs, expenditures, and losses due to severe weather events and other natural conditions, subject to applicable one percent and de minimis disclosure thresholds, in a note to the financial statements.
• Disclosing capitalized costs, expenditures, and losses related to carbon offsets and renewable energy credits or certificates if used as a material component of a company’s plans to achieve its disclosed climate-related targets or goals in a note to the financial statements.
• A description of how the development of estimates and assumptions was impacted if the estimates and assumptions a company uses to produce financial statements were materially affected by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, disclosed in a note to the financial statements.

Even with these changes, the final rule will require registrants to provide significant incremental disclosure under Regulations S-K and S-X.

The final rules will be effective 60 days after publication in the Federal Register, and compliance will be phased in as follows: