On March 6, 2024, the SEC (or Commission) adopted final rules by a 3-2 vote that would require domestic and foreign registrants to provide climate-related disclosures in their registration statements and annual reports (the Final Rules). The disclosures are much more limited in scope than originally proposed nearly two years ago. Significantly, the Final Rules do not require disclosure of Scope 3 greenhouse gas (GHG) emissions. However, the Final Rules still require a variety of disclosures, including:

• how any climate-related risks have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations or financial condition;
• the actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model and outlook;
• if a registrant has adopted a transition plan as part of its strategy, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from transition activities;
• any material scenario analyses or internal carbon prices;
• any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
• any processes the registrant has for identifying, assessing and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes;
• information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations or financial condition. 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), material Scope 1 and Scope 2 GHG emissions:
  • registrants will disclose information about GHG emissions in their reporting for the second quarter of the fiscal year immediately following the year to which the disclosure relates;
  • following a transition period, LAFs and AFs must disclose GHG emissions with a “limited assurance” attestation report. Following an additional transition period, LAFs (but not AFs) must disclose GHG emissions with a “reasonable assurance” attestation report;
• the capitalized costs, expenditures and losses incurred because 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, in a note to financial statements;
• the capitalized costs, expenditures and losses related to carbon offsets and renewable energy credits or certificates (RECs) if material to a registrant’s climate-related targets or goals in a note to financial statements.

The Final Rules will become effective 60 days after publication in the Federal Register. Compliance with the Final Rules will be phased in, based on the type of registrant and filing. LAFs must begin making some disclosures in fiscal year 2025, while AFs and other registrants have until fiscal year 2026 or 2027. The Final Rules will be completely phased in by fiscal year 2033.

SEC Chair Gary Gensler stated the Commission received over 24,000 comments in response to the Proposed Rules (which we previously described in our publication, US SEC proposes new rules on climate-related disclosures and on GRIP Controversial climate rules given green light by SEC). Gensler described the Final Rules as balancing investors’ demand for consistent, comparable and reliable climate disclosures with the costs imposed on registrants.

Commissioner Hester Pierce, who dissented, expressed concerns about the SEC mandating that climate-related disclosures get special treatment. At the same time, Commissioner Caroline Crenshaw qualified her approval by stating she believed the Final Rules were too narrow and excluded important provisions from the Proposed Rules. Ten Republican-led states immediately petitioned the United States Court of Appeals for the Eleventh Circuit to block the rules from taking effect.

Implications and key takeaways

Refine practices to reduce litigation and enforcement risks

Companies should refine practices to reduce their litigation and enforcement risks. They should:

• Review and hone procedures for assessing climate-related risks. The Final Rules expand on the Commission’s 2010 guidance on how existing rules may require disclosure of climate-related risks. Companies should ensure that their processes to identify, assess and report on climate-related risks are robust and encompass actual or potential material impacts on the company’s business strategy, operations and financial condition. Companies should also consider integrating such processes with their overall risk management system.
• Review and hone reporting processes to the board of directors. Companies should ensure that their board of directors is giving climate-related matters appropriate focus. Companies should record the board’s oversight of climate-related risks and management’s role in assessing and managing material climate-related risks. Specifically assigning material climate-related risk as a risk to be monitored by a board committee is likely to become a best practice.
• Scrutinize internal controls for climate-related disclosures. Companies should review internal controls to ensure that climate-related statements are supported by facts and data. Companies should designate who is authorized to speak on climate-related matters and develop processes to ensure climate-related statements are consistent with the company’s reporting to regulators and stakeholders. Companies should ensure internal carbon prices are supported and consistent.
• Monitor climate-related targets, goals and transition plans. Companies should monitor how climate-related targets, goals or transition plans affect or are reasonably likely to affect the company’s business strategy, operations or financial condition, including financial estimates and assumptions.
• Specifically tailor disclaimers to climate-related risks. Companies should prepare individualized and detailed cautionary statements tailored to the specific climate-related risks applicable to the company’s particular circumstances. Companies should review and update cautionary language regularly, warn of specific risks and discuss actual developments relevant to those risks.

Disclosure of scenario analysis or internal carbon prices

Although the Final Rules do not require companies to use scenario analysis, if a company does use scenario analysis to assess the impact of climate-related risks, and if, based on the results of scenario analysis, the company determines that a climate-related risk is reasonably likely to have a material impact on its business, operations or financial condition, then the company must disclose each scenario, including a brief description of the parameters, assumptions and analytical choices used, as well as the expected material impacts, including financial impacts, under each such scenario.

The Final Rules require companies that use internal carbon pricing to disclose certain information about the internal carbon price if its use of the price is material to how it evaluates and manages a climate-related risk. Companies that use more than one internal carbon price to evaluate and manage a material climate-related risk must disclose each internal carbon price and the reasons for using different prices.

Disclosure of newly-material risks

The SEC’s 2010 Guidance identified climate-related risks that could be material and subject to disclosure, even before the Commission approved these Final Rules. Similarly, although the SEC has not previously required disclosure of GHG emissions, some companies may have reported similar information to the Environmental Protection Agency or other agencies.

When disclosing existing risks for the first time, companies should be prepared to justify why the risk was not previously disclosed. Companies should be prepared to explain their reasons for determining that an existing risk has crossed the materiality threshold, such as the Final Rules themselves or developments in climate science.

Limited safe harbor for forward-looking climate-related disclosures

The Final Rules include a safe harbor from private liability for forward-looking climate-related disclosures and estimates such as transition plans, scenario analysis, the use of an internal carbon price and targets and goals. The safe harbor does not shield the disclosure of historical facts or financial statement disclosures.

Phased-in disclosure of “material” GHG emissions for large companies

The Final Rules require LAFs and AFs to disclose Scope 1 and Scope 2 emissions that are material to investors. The Proposed Rules, on the other hand, required all issuers to disclose Scope 1 and Scope 2 emissions, irrespective of materiality; and certain issuers to disclose Scope 3 emissions, if material.

Whether GHG emissions are material to investors depends on whether there is a substantial likelihood that a reasonable investor would view the information as having significantly altered the “total mix” of information available.

Companies should consider their GHG emissions alongside other indicators of materiality, such as public perception, the relative volume of emissions compared to the industry, the type and source of emissions and how emissions support the company or its business. There is no safe harbor for GHG emission disclosures.

The Final Rules phase-in the GHG emissions disclosure requirement. LAFs must first disclose GHG emissions for fiscal year 2026, with AFs disclosures going into effect in fiscal year 2027. The Final Rules also phase in the limited and reasonable assurance attestation requirements.

Smaller reporting companies and emerging growth companies are exempt from the Final Rules’ GHG emission disclosure requirements. Although not required, smaller companies may still choose to disclose GHG emissions. If they do, they should ensure the disclosures are accurate.

Line item notes to financial statements

Companies must report the capitalized costs, expenditures and losses incurred because of severe weather events and other natural conditions. The Final Rules do not require companies to determine whether climate change caused the event or condition to warrant disclosure, which is intended to avoid companies having to speculate or incur the cost to determine causation.

Compliance with other laws and regulations

Even companies that are not subject to the Final Rules’ disclosure requirements may be subject to disclosure requirements under other laws, including state and foreign laws. For instance, in October 2023, California enacted two new laws requiring entities doing business in the state and meeting annual worldwide revenue thresholds to publicly disclose Scope 1, 2 and 3 emissions and a climate-related risk analysis starting in 2026.

Similarly, the European Union’s Corporate Sustainability Reporting Directive requires some Scope 3 disclosures. Companies – especially those operating in multiple jurisdictions – should carefully consider their reporting obligations under all applicable laws and regulations to ensure compliance.

Consider performance of competitors

Companies can, and should, compare their climate-related risks with those of competitors. Transparency into an industry’s overall climate-related risk aids managing those risks. By monitoring competitors’ performance, companies can adopt best practices, mitigate their own risks, reduce costs and achieve long-term goals.

Notable changes from the Proposed Rules

The Final Rules scaled back certain disclosures in the Proposed Rules, including:

• Eliminating disclosure of Scope 3 GHG emissions. The Final Rules eliminate Scope 3 GHG emissions from required disclosures. The proposed Scope 3 disclosures drew strong criticism from registrants as unduly burdensome and costly.
• Narrowing the reach of Scope 1 and Scope 2 GHG emissions disclosure requirements. The Final Rules only require that LAFs and AFs disclose Scope 1 and 2 GHG emissions if they are material and only after a phase-in period. The Proposed Rules would have required that all reporting companies disclose Scope 1 and 2 emissions irrespective of their materiality.
• Eliminating a requirement that companies disclose the board’s climate-related experience. The Commission did not adopt proposed provisions which would have required companies to disclose their board of directors’ expertise in climate-related issues.
• Eliminating the Financial Impact Metrics line-item disclosure on financial statements. The Final Rules did not include provisions which would have required line-item disclosure of detailed financial impacts of climate-related risks and events, as well as transition activities, in consolidated financial statements. Instead, the Final Rules require only disaggregated financial information related to these risks, events and transition activities.

Temporary halt of the Final Rules

On March 15, 2024, the United States Court of Appeals for the Fifth Circuit granted (in an unpublished order) a temporary stay of the Final Rules while the court considers an administrative challenge, which argues, in part, that the Final Rules require speculative disclosures. The Final Rules face similar challenges in the Sixth, Eighth and Eleventh Circuits.

Meanwhile, environmental groups have challenged the Final Rules in the Second and DC Circuits, alleging the Final Rules do not go far enough. One of these courts will eventually rule on the validity of the Final Rules. (See also on GRIP Climate disclosure rule halted by federal court in setback for SEC)

On March 21, 2024, after the SEC requested consolidation before a single court based on a random draw, the US Judicial Panel on Multidistrict Litigation consolidated the challenges before the US Court of Appeals for the Eighth Circuit.