Two years after proposing the SEC climate-related disclosure rules, with more than 24,000 comment letters, the five Securities and Exchange Commissioners voted along party lines (3-2) to approve the final rule requiring climate-related disclosures for public companies listed on US stock exchanges.
Here are the key takeaways from the 886-page document:
Materiality leads the rules
The SEC went back to basics by requiring companies to only disclose climate issues that are “financially material.” The definition of financial materiality has been debated for years and was determined by a Supreme Court ruling (TSC Industries v. Northway) as “a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote or make other investment decisions.”
However, this is one significant exception for physical climate risks: Companies must disclose financial impacts greater than 1% of profits before taxes (specifically, companies must disclose capitalized costs, expenditures, charges, and losses incurred).
Scope 3 emissions are out, but risks are still in play
Most of the coverage of the final rule has focused on exempting “Scope 3” emissions (value chain emissions) from disclosure. Although disclosure of Scope 3 emissions is not required, companies must disclose material climate risks and many of these risks occur in value chain activities (Scope 3).
The SEC excluded reporting on laborious and uncertain Scope 3 emissions while keeping the focus on assessing material climate risks in the value chain (the SEC explains this point on page 91 of the final rule).
TCFD becomes the backbone
The framework from the Task Force on Climate-related Financial Disclosures (TCFD) forms the backbone of the final rule. And, because the TCFD framework is also the common denominator in shaping other major climate standards (e.g., the EU and ISSB Standards), it is a helpful starting point for companies trying to “hit the easy button” to sort out all the new requirements.
Litigation inevitablly introduces delays
As predicted, there were mixed reactions and the Attorneys General from ten conservative states filed a lawsuit to block the SEC’s final rule. There will be other suits filed and although the rule is supposed to go into effect in 60 days, the litigation will delay implementation.
Phased-in timeline approach
Recognizing the costs and burden of disclosure, this final rule maintains a phased-in approach and exempts smaller companies from some requirements. The largest companies that are first to comply must collect information from FY2025 to be reported in FY2026.
The phase-in and exemptions were also applied to assurance requirements.
All of the disclosures must be made in the annual 10K filing with a notable exception: material scope 1 and 2 climate emissions can be disclosed in the company’s second-quarter 10Q filing – giving companies more time to collect and report this information.
In the graphic below, see the estimated phase-in timeline according to the SEC factsheet.
Alignment with other disclosure requirements
In the meantime, companies must still grapple with a litany of similar requirements. In Europe, the Corporate Sustainability Reporting Directive (CSRD), the new California climate laws, and various capital market listing rules (e.g., UK, Japan, Australia, Singapore, China, etc.).
While the SEC did not provide much guidance on equivalency with other similar requirements, they did reference both the CSRD and California’s climate bills, how many companies will be covered by both the SEC rules and these other rules (~3,700 and ~2,520, respectively).
The SEC concluded that complying with these other rules would provide affected companies with systems and processes to comply with the SEC rule (pages 601-611).
Dated: March 8, 2024
