On March 6, after two years of revisions and considering 24,000 comments from experts, companies, and public, the SEC passed a rule that would require public companies to disclose information related to their material climate-related risks to meet investor needs for consistent and reliable climate-related information.
Although the final rule was significantly weakened compared to earlier proposals, it nonetheless signals a strong shift for U.S. companies regarding mandatory environmental, social and governance (ESG) disclosures.
The new reporting regulations come against the backdrop of other jurisdictions adopting mandatory ESG disclosure rules (e.g., Corporate Sustainability Reporting Directive in the EU, International Financial Reporting Standard (IFRS) in Nigeria, Brazil, and Japan, and California’s Climate Corporate Data Accountability Act (SB 253).
What reporting is required?
Companies that identify climate-related risks as material will be required to report on those risks and impacts, any risk management processes, and board and management risk oversight. Additional required disclosures include:
- Mitigation activities undertaken and related costs and financial impacts,
- Information related to a target and goal that has or is likely to affect the business, and
- Any financial impacts from severe weather events and other natural conditions if minimum thresholds are met, among others.
Disclosures are not required for companies that have not identified any material climate-related risks.
Large accelerated filers (LAFs) and accelerated filers (AFs), except for emerging growth companies (EGCs) and smaller reporting companies (SRCs), will also be required to report on Scopes 1 and 2 greenhouse gas (GHG) emissions, only if material. A Scope 3 disclosure requirement has been omitted from the approved rule. Third-party assurance of the GHG emissions is set to be phased in starting in 2029.
Where will this information be reported?
U.S. registered companies, including IPOs, will be required to disclose information regarding material climate-related risks and GHG emissions in registration statements and their annual reports (10-K) under a separate section of its filing or in another appropriate section, such as Risk Factors, Description of Business, or MD&A.
If Scope 1 and 2 emissions disclosures are required, domestic filers must include the disclosures in its 10-K, 10-Q for the second fiscal quarter of the fiscal year immediately following the year to which the GHG emissions metrics relate, or in a 10-K amendment by the due date of their Q2 Form 10-Q. The SEC included separate provisions for foreign private issuers and companies filing registration statements. In addition, if Scopes 1 and 2 emissions were previously disclosed, historical fiscal year metrics should be included in filings.
Companies must also provide financial statement disclosures required under Regulation S-X for the most recently completed fiscal year, and if previously disclosed, for historical fiscal years, in a note to the company’s audited financial statements.
Safe harbor rules apply for all information required by specific sections, except for historical facts.
What is the timeline?
The effective year when companies need to meet each of the phased in disclosure requirements is for the fiscal year that begins in the listed calendar year. The below table illustrates the earliest calendar year filings for companies that follow a calendar-year fiscal cycle:
Please be aware that the aforementioned compliance dates are subject to change pending the outcome of the ongoing and anticipated legal challenges to the SEC’s climate disclosure rule.
What steps should companies take right now?
Step 1. Conduct materiality assessments: Determine the materiality of climate and other ESG-related issues to your business. If climate risks are material, then:
Step 2. Refine climate governance structure: Establish oversight and accountability for climate-related matters.
Step 3. Assess compliance readiness: Identify reporting gaps and develop action plans to ensure SEC compliance.
Step 4. Conduct climate-risk assessments: Identify, assess, prioritize, and create a plan to mitigate and adapt to climate-related business impacts.
Step 5. Build internal capacities: Train teams (including accounting, finance, legal, compliance, audit, etc.) to effectively manage and report climate-related risks.
Step 6. Implement data collection and verification systems: Ensure accurate and reliable climate-related data reporting.
Step 7. Measure Scope 1 and 2 emissions (if material): Calculate direct and indirect emissions to establish a baseline and set goals, if applicable.
ICR’s Strategic ESG Advisory Team can help your organization assess the next steps to comply with SEC’s new climate rules. Get in touch.
