On March 6, 2024, the US Securities and Exchange Commission adopted by a 3-2 vote new rules requiring domestic and foreign public companies to disclose certain climate-related information in their registration statements and periodic reports.¹ The adoption of the final rules comes nearly two years after the Commission first proposed them.²

New disclosure requirements

The final rules contain new requirements aimed at improving the consistency, comparability and reliability of climate-related disclosure for investors, such as adding a new subpart 1500 to Regulation S-K, requiring disclosure of information and risks that are likely to impact a company’s business and financial statements. The rules also add a new article 14 to Regulation S-X, requiring climate-related financial statement metrics to be included in a note to audited financial statements.

Companies will be required, under Items 1501 to 1506 of Regulation S-K, to provide climate-related disclosure in their registration statements and annual reports about the following items:

• climate-related risks that have had or are reasonably likely to have a material impact on business strategy, results of operations, or financial condition;
• the actual and potential material impacts of any identified climate-related risks on strategy, business model, and outlook;
• if, as part of its strategy, a company 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 company’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 company’s board of directors or an identified board committee, if any, of climate-related risks and any role by its management in assessing and managing the company’s material climate-related risks;
• a company’s processes for identifying, assessing, and managing material climate-related risks and, if the company is managing those risks, whether and how any 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 reasonably likely to materially affect the company’s business, results of operations, or financial condition, which 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 large accelerated filers (“LAFs”) and accelerated filers (“AFs”)³ that are not otherwise exempted, on a phased in basis, information about Scope 1 emissions and/or Scope 2 emissions when those emissions are material; and
• for those required to disclose Scope 1 emissions and/or Scope 2 emissions, an attestation report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level. Reasonable assurance is equivalent to the level of assurance provided in an audit of a company’s consolidated financial statements included in an Annual Report on Form 10-K.

The new required climate-related disclosure must be disclosed in a separate, appropriately captioned section of the company’s filing or in another appropriate section of the filing, such as Risk Factors, Description of Business or Management’s Discussion and Analysis. Alternatively, the disclosure can be incorporated by reference from another SEC filing as long as the incorporated disclosure meets the electronic tagging requirements of the final rules. 

In addition, companies will be required, under Items 14-01 and 14-02 of Regulation S-X, to disclose the following in a note to the financial statements:

• 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;
• the capitalized costs, expenditures expensed, 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; and
• if the estimates and assumptions a company 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.

Companies that are required to disclose Scope 1 emissions and/or Scope 2 emissions and are LAFs or AFs must also file attestation reports in respect of those emissions.⁴ Companies that are not otherwise required to disclose their indirect greenhouse gas (“GHG”) emissions or include a GHG emissions attestation report are required to disclose certain information if the company voluntarily discloses its GHG emissions in an SEC filing and voluntarily subjects those disclosures to third-party assurance.

While the final rules represent a significant increase in companies’ climate-related disclosure obligations, they also notably reduce some of the originally proposed reporting requirements on a number of key points, including, among others:

• eliminating the proposed requirement to provide disclosure of GHG emissions from upstream and downstream activities in a company’s value chain (“Scope 3 emissions”) for all companies;
• exempting smaller reporting companies (“SRCs”)⁵ and emerging growth companies (“EGCs”)⁶ from the requirement to disclose direct GHG emissions (“Scope 1 emissions”) and indirect GHG emissions from purchased electricity and other forms of energy (“Scope 2 emissions”) disclosure requirements;

• adopting a less prescriptive approach to certain final rules, including, for example, the climate-related risk disclosure, board oversight disclosure, and risk management disclosure requirements; and
• narrowing or eliminating certain proposed financial statement disclosures.

These changes are indicative of the Commission’s efforts to balance its self-identified need for consistent, comparable, and reliable climate-related information with concerns about mitigating the associated costs and burdens of the final rules. Despite this effort, the final rules have already spurred intense criticism and legal challenges from both opponents of climate-related disclosures that argue the final rules exceed the Commission’s mandate and advocates of climate-related disclosures that contend that the final rules do not go far enough.

Phase in periods

The final rules will become effective 60 days after publication in the Federal Register and will be phased in for all companies with various compliance dates dependent upon the status of the company as an LAF, an AF, a non-accelerated filer (“NAF”),⁷ an SRC, or an EGC. The table below summarizes the phase-in periods and compliance dates.

Challenges to the Rules and Observations

The final rules, which follow two years of debate over the Commission’s original proposal, are facing immediate criticism and legal challenges. Commissioners Peirce and Uyeda, representing the two Commission votes against the final rules, each have levied criticisms of the final rules. Commissioner Peirce has emphasized the role of materiality in US securities law and questioned the materiality of non-economic considerations.⁸ Commissioner Uyeda has accused the Commission of exceeding its mandate in adopting the final rules, claiming the Commission “ventured outside of its lane and set a precedent for using its disclosure regime as a means for driving social change.”⁹ 

Commissioner Uyeda’s contention that the Commission is acting outside of its authority is shared by many critics of the final rules, and it will likely serve as the basis of the legal challenges that the rules are expected to face. For example, in the hours following the adoption of the rules, a coalition of ten Republican-led states filed in the US Court of Appeals for the Eleventh Circuit a petition seeking federal court review the Commission’s adoption of the rule.  The attorneys general asked the court to declare the rule unlawful and to vacate the Commission’s final action.

This response to the final rules does not come as a surprise. Last year, California passed two bills, S.B. 253 and S.B. 261,¹⁰ mandating climate-related disclosure requirements for companies operating in the state. Lawsuits have been filed against the California bills by business groups including the US Chamber of Commerce.

In spite of these legal challenges, most companies are nonetheless preparing to disclose the required information. The reasons for implementation can range from having previously issued ESG reports (in some cases on a voluntary basis), to being in a supply chain and being asked for information, or to other reasons like brand, reputation and corporate strategy.

Notwithstanding many challenges, climate-related risk reporting rules and regulations continue to proliferate in the United States and globally. As mentioned above, California has adopted two new laws concerning climate-related disclosures, including not only disclosure of Scope 1 emissions and Scope 2 emissions, like the SEC rules, but also Scope 3 emissions.¹¹ California’s rules also conceivably have a broader reach in that they would apply to both publicly and privately held companies meeting certain doing business requirements in California, not just those public companies regulated by the SEC. 

The European Union (“EU”) recently adopted the Corporate Sustainability Reporting Directive (“CSRD”), which requires certain large and listed EU companies to disclose information regarding the sustainability of their operations. Also, certain non-EU companies, some of which are subject to the SEC’s rules, which meet certain thresholds of net annual turnovers, asset value and number of employees are required to disclose information regarding the sustainability of their operations. The reporting under the CSRD is more extensive than under the SEC rules and covers a wide range of sustainability issues that span environmental, social and governance topics. The CSRD also requires that companies report “double materiality” or their impact on people and the environment as well as the sustainability matters that financially impact the company.

In addition, the International Sustainability Standards Board, established by the IFRS Foundation, has issued General Requirements for Disclosure of Sustainability-related Financial Information (or IFRS S1) and Climate-related Disclosures (or IFRS S2) which set out requirements for companies to disclose information about their climate-related risks and opportunities.¹²

As this trend continues, a growing number of companies are likely to fall within the scope of one or more climate-related rules, regulations or standards. This emerging regulatory structure will align with the SEC’s goals, manifested in its new rules, of improving accuracy, efficiency and consistency in climate-related reporting, ultimately benefiting investors and financial markets.

1. Securities Act Rel. No. 11,275 (Mar. 6, 2024).↩
2. Securities Act Rel. No. 11,042 (Mar. 21, 2022). ↩
3. See Rule 12b-2 under the Securities Exchange Act of 1934 for the definitions of large accelerated filer and accelerated filer.↩
4. The final rules set forth specific requirements for attestation providers. An attestation provider must be (1) an expert in GHG emissions by virtue of having significant experience in measuring, analyzing, reporting or attesting to GHG emissions and (2) independent with respect to the registrant, and any of its affiliates, for whom it is providing the attestation report, during the attestation and professional engagement period. ↩
5. An SRC is an issuer that is not an investment company, an asset-backed issuer (as defined in 17 CFR 229.1101), or a majority-owned subsidiary of a parent that is not an SRC and that: (1) had a public float of less than $250 million; or (2) had annual revenues of less than $100 million and either: (i) no public float; or (ii) a public float of less than $700 million.↩
6. An EGC is a registrant that had total annual gross revenues of less than $1.235 billion during its most recently completed fiscal year and has not met the specified conditions for no longer being considered an EGC.↩
7. An issuer does not meet the definition of AF or LAF, it is considered a NAF. ↩
8. https://www.sec.gov/news/statement/peirce-statement-mandatory-climate-risk-disclosures-030624?utm_medium=email&utm_source=govdelivery ↩
9. https://www.sec.gov/news/statement/uyeda-statement-mandatory-climate-risk-disclosures-030624?utm_medium=email&utm_source=govdelivery ↩
10. https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB253; https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB261. ↩  
11. See https://www.dentons.com/en/insights/alerts/2023/october/19/new-climate-reporting-requirements-to-take-effect-in-california ↩
12. See https://www.ifrs.org/content/dam/ifrs/project/general-sustainability-related-disclosures/project-summary.pdf ↩