Beyond the fine print: the impact of the new SEC rule

On March 6, 2024, the U.S. Securities & Exchange Commission (SEC) voted to publish the final rules for climate-related disclosures initially proposed in 2022. After a rigorous comment period, the rules have been altered significantly. The two most impactful changes relate to emissions requirements:

• Smaller Reporting Companies (SRCs) and Emerging Growth Companies (EGCs) are not required to disclose emissions data. Only Large Accelerated Filers (LAFs) and Accelerated Filers (Afs) must disclose Scope 1 and Scope 2 emissions data if deemed material.
• No Scope 3 emissions disclosure is required from any filers.

The final rules have already been challenged on various grounds. As of April 4th, 2024, the SEC has voluntarily stayed the implementation of the rules, pending the completion of judicial review of consolidated challenges filed with the Court of Appeals for the 8th Circuit in St. Louis, MO. Plaintiffs include corporations, business groups, US states, and climate advocates, challenging on the basis that the rules go too far, or that they do not go far enough, to regulate climate disclosure. Additional challenges in the coming weeks are likely. The SEC claims to have made necessary adjustments to the final rules to preempt some of these challenges and intends to vigorously defend the validity of the rules, notwithstanding its voluntary stay. Either way, we will continue to monitor the status of the rules and how they may affect our clients.

Now comes the work. As these rules have overlaps with several other potentially regulated climate disclosures (California, the EU’s CSRD/ESRS, and other national disclosure regulations around the globe), we recommend seeing if and where your company may have gaps in its disclosure that would make compliance difficult.

Below we share our initial takeaways on the final rules and are happy to set up a call to talk through how they may impact your business.

Additional Requirements for Financial Statements

The final rules require several additional disclosures to be added to your company’s financial statements, providing additional context to some categories of expenditures, capitalized costs, and estimates. The timeline for compliance is staggered for filers of different sizes.

Timing:  LAFs: 2025; AFs: 2026; SRCs, EGCs, etc.: 2027

Severe weather events:

• Expenditures incurred and losses recognized in the income statement in which severe weather events were a significant contributing factor.
• Capitalized costs and charges recognized on the balance sheet in which severe weather events were a significant contributing factor.

Carbon Offsets and RECs:

• Separate disclosure of the amount expensed, the amount capitalized, and the amount of losses incurred related to any carbon offsets and Renewable Energy Credits (RECs).

Estimates and Assumptions:

• Whether and how severe weather events, climate-related targets, and climate transition plans materially affected estimates and assumptions in the financial statement.

Additional Requirements Regarding Risks for 10-K Filings

The final rules require several areas of additional disclosure in your company’s 10-K filing. These include descriptions of risk oversight, management, and impacts to your company’s business. The timeline for compliance is staggered for filers of different sizes.

Timing: LAFs: 2025; AFs: 2026; SRCs, EGCs, etc.: 2027

Governance:

• How your company’s board of directors and management oversee the assessment and management of climate-related risks, including progress toward any disclosed climate-related target goal or transition plan.

Climate Strategy:

• How climate-related risks have affected or are reasonably likely to affect your company’s strategy, results of operations, or financial condition.
• How identified climate-related risks actually or may affect your company’s strategy, business model, and outlook.
• How your company utilizes a carbon price in evaluating climate-related risk, if applicable.
• How your company utilizes scenario analysis to evaluate risks to the business in the context of certain climate-related scenarios, including a description of the scenarios, assumptions, and project financial impacts, if applicable.
• A description of your company’s climate transition plan and progress over time, if applicable.

Risk Management:

• Your company’s processes for identifying, assessing, and managing climate-related risks.
• Whether and how those processes are integrated into your company’s broader enterprise risk management system.

Targets:

• Information about your company’s climate-related targets, including:
  • The scope of the target.
  • The time horizon of the target.
  • The baseline against which progress is tracked.
  • How your company plans to achieve its target.
  • Annual updates on your company’s progress against its target and how its has achieved that progress.
  • The capitalized costs and losses and other information related to your company’s carbon offsets or Renewable Energy Credits (RECs), if applicable.

Balance Sheet Impacts

The final rules require specific disclosure of expenditures and impacts on financial estimates. The timeline for compliance is staggered for filers of different sizes, a year later than the timing of Financial Statement Footnotes and Climate Risk Disclosure elements described above.

Timing: LAFs: 2026; AFs: 2027; SRCs, ERCs, etc.: 2028

• Information regarding material expenditures and impacts on financial estimates that are a result of:
  • Mitigation of climate-related risks
  • Disclosed climate transition plans
  • Targets and actions taken in progress toward those targets.

GHG Emissions Disclosure

The final rules require LAFs and AFs to disclose their Scope 1 and Scope 2 emissions and provide assurance for them as part of the following fiscal year 10-Q. The timeline for compliance is staggered for filers of different sizes.

If deemed material, Large Accelerated Filers (LAFs) must:

• Disclose Scope 1 and Scope 2 emissions for the fiscal year beginning in 2026 in their 10-Q for the following second fiscal quarter.
  • If you are a calendar year reporter, emissions data from 2026 must be disclosed in your 2027 2^nd quarter 10-Q filing.
• Provide attestation of those emissions at limited assurance for the fiscal year beginning in 2029 in their 10-Q for the following second fiscal quarter
  • If you are a calendar year reporter, emissions data from 2029 must be disclosed with limited assurance in your 2030 2^nd quarter 10-Q filing.
• Provide attestation of those emissions at reasonable assurance for the fiscal year beginning in 2033 in their 10-Q for the following second fiscal quarter.
  • If you are a calendar year reporter, emissions data from 2033 must be disclosed with reasonable assurance in your 2034 2^nd quarter 10-Q filing.

If deemed material, Accelerated Filers (AFs) must:

• Disclose Scope 1 and Scope 2 emissions for the fiscal year beginning in 2028 in their 10-Q for the following second fiscal quarter.
  • If you are a CY reporter, emissions data from 2028 must be disclosed in your 2029 2nd quarter 10-Q filing.
• Provide attestation of those emissions at limited assurance for the fiscal year beginning in 2031 in their 10-Q for the following second fiscal quarter.
  • If you are a CY reporter, emissions data from 2031 must be disclosed in your 2032 2nd quarter 10-Q filing.

Small Reporting Companies, Emerging Growth Companies, etc.:

• No emissions disclosure requirements

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