What you need to know about the upcoming SEC climate disclosure rule

by | November 27, 2023

In March 2022, the U.S. Securities and Exchange Commission (SEC) proposed a sweeping climate disclosure rule that would require public companies to include certain climate-related information in their registration statements, annual reports, and financial statements. If published, the rule would impose significant new disclosure requirements on all public reporting companies in the U.S., including foreign private issuers.

Since the rule was proposed more than a year ago, it has received significant attention and comments from a range of stakeholders, including public companies, institutional investors, nonprofit organizations, trade associations, and law firms. The substantial pushback to the proposed rule has caused the SEC to significantly delay the publication of the final rule as it grapples with how best to address these concerns. It is currently unclear when the final rule will be published, but it is expected to be finalized in 2024.

While there is some uncertainty as to the content of the final rule, there is little doubt that it will eventually be published. Public companies (as well as private companies intending to IPO) should begin preparing now to ensure compliance with the reporting requirements. This article will outline the key requirements of the proposed climate-related disclosure rule and potential next steps for companies to consider.

Key required disclosures

Narrative disclosures

The proposed rule requires registrants to identify certain climate-related risks that are likely to have material impacts on their business or consolidated financial statements. These risks and related disclosures must be included in a separate section of registrants’ registration statements and annual reports (Form 10-K or 20-F). Alternatively, registrants may incorporate these disclosures by referencing another section of the filing (such as the MD&A).

The rule broadly mandates the following narrative disclosures, each of which includes specific reporting requirements:

  • Climate-related risks that are likely to have a material impact on the registrant’s business or consolidated financial statements
  • How identified risks have had or are likely to have a material impact on the registrant’s business or consolidated financial statements (the impact may be short, medium, or long term)
  • Oversight and governance of climate-related risks by the registrant’s board and management
  • How identified risks have affected or are likely to affect strategy, business model, and outlook
  • Processes for identifying, assessing, and managing identified risks
  • Whether such processes are integrated into the registrant’s overall risk management system
  • Climate-related opportunities (if relevant)
  • Climate-related targets, goals, and transition plans (if any)

GHG emissions disclosures

In conjunction with the narrative disclosures, registrants must also disclose greenhouse gas (GHG) emissions data in the new section of their registration statements or annual reports. This disclosure requirement broadly follows the GHG Protocol, but registrants have some flexibility to choose the calculation method as long as the methodology, primary inputs, and assumptions are disclosed.

If actual reported data is unavailable for the fourth fiscal quarter, registrants may use a reasonable estimate of GHG emissions for that quarter together with actual, determined GHG emissions for the previous three fiscal quarters, as long as they promptly disclose in a subsequent filing any material difference between the estimate and the actual, determined GHG emissions data for the fourth fiscal quarter.

For Scope 1 and 2 emissions, the reporting requirements include:

  • Aggregated GHG emissions, in carbon dioxide equivalent terms and gross terms
  • Disaggregated GHG emissions by each constituent greenhouse gas (carbon dioxide, methane, nitrous oxide, nitrogen trifluoride, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride), in carbon dioxide equivalent terms and gross terms
  • For accelerated filers and large accelerated filers, an independent attestation report conducted by an attestation service provider that is an expert in GHG emissions. The report must include certain related disclosures about the attestation service provider (licensure/accreditation, record-keeping obligations, and whether the attestation engagement is subject to an oversight inspection program). Filers have one fiscal year to transition to providing limited assurance and two more fiscal years to transition to providing reasonable assurance

The current proposed rule requires a registrant to disclose Scope 3 emissions if:

  1. These emissions are material, and/or
  2. If the registrant set a GHG emissions reduction target that includes Scope 3 emissions.

Smaller reporting companies (SRCs) will be exempt from the Scope 3 reporting requirement. Given the substantial pushback on the proposed rule’s Scope 3 reporting requirement, it is likely that the final rule will make major modifications to it or remove it altogether.

Financial disclosures

The final reporting requirement involves disclosure of certain disaggregated climate-related financial statement metrics. These metrics would need to be disclosed in a note to the registrant’s audited financial statements and are subject to third-party audit.

The rule broadly mandates the following quantitative disclosures:

  • The disaggregated financial impact of climate-related events (including natural conditions and other physical risks) and transition activities (to reduce GHG emissions or to mitigate transition risks) on line items of the registrant’s consolidated financial statements and related expenditures
  • Financial estimates and assumptions impacted by identified transition risks
  • Expenditures for mitigation activities to address physical and transition risks

Disclosure would only be necessary if identified climate-related events and transition activities would financially impact at least 1% of a line item on the consolidated financial statement for the relevant fiscal year. The 1% threshold has been a matter of significant commentary and will likely be modified in the final rule.

Reporting requirements for all disclosures

All of the above disclosures must be electronically tagged in Inline XBRL. These disclosures must also be deemed as filed (rather than furnished), which subjects them to a higher standard of liability if the information is later found to be materially false or misleading.

There will be a phase-in period for all registrants, with the required compliance date dependent on the registrant’s filer status as a large accelerated filer (earliest compliance date), accelerated or non-accelerated filer, or SRC (latest compliance date).

What should registrants be doing now?

There are some things companies can do now to get a head start on complying with the SEC climate rule:

  • Review existing disclosure frameworks and conduct a gap analysis.
  • Ensure alignment between external messaging and internal controls, as well as existing voluntary disclosures (e.g., CDP).
  • Become familiar with the TCFD framework, which the SEC climate rule is substantially based on.
  • Begin gathering data on Scope 1 and 2 GHG emissions for fiscal year 2024 (in anticipation of mandatory filings due as early as 2025).
  • Identify climate-related risks.
  • Set up an executive-level ESG oversight committee, incorporating representatives from finance, sustainability/ESG, risk, and internal audit departments.
  • Develop formalized internal control policies.
  • Identify attestation service providers and auditors that can review GHG emissions reports and financial statements.
  • Engage an enterprise sustainability management platform to automate and streamline the collection and reporting of GHG emissions and climate-related financial risks.

Use Pulsora to streamline and automate climate disclosures

Pulsora is an integrated, comprehensive, and flexible cloud-based platform to help companies define, capture, and improve relevant sustainability metrics to exceed stakeholder expectations. Pulsora is specifically designed to facilitate compliance with the proposed SEC climate disclosure rule and other climate-related reporting requirements, such as the European Union’s Corporate Sustainability Reporting Directive (CSRD), California’s SB-253 and SB-261, the ESG Data Convergence Initiative (EDCI), and many more.

Learn how you can prepare your business for the SEC rule, request a call with one of our climate regulation experts.