The SEC’s Final Disclosure Rule is Here. What’s Next?

Two years after first being introduced, the U.S. Securities and Exchange Commission (SEC) finalized a landmark climate disclosure rule with a 3-2 vote on March 6, 2024. Passed just months after California enacted its Climate Accountability Package (SB 253, SB 261) and AB 1305, the SEC’s climate disclosure rule will now require all publicly traded companies and foreign private issuers that are registered with the SEC to disclose their climate-related risks in annual SEC filings.

Climate-related disclosure within U.S. corporate reporting has primarily been voluntary and outside of annual SEC filings, following recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) or other third-party frameworks. However, without mandatory reporting or standardization, disclosures can be inconsistent or entirely omitted from one company to another. Investors are then faced with unreliable and incomparable information. They must devote additional time and resources to engage directly with companies to clarify their environmental data and climate-related risks in order to make informed investment and voting decisions.

Building on the SEC’s 2010 guidance on disclosure relating to climate change if material, the climate disclosure rule provides a clear reporting framework and recognizes that climate-related risks can be material financial risks. The standardized reporting framework will enable investors to consider information more effectively and consistently on climate-related risks and how those risks may impact a company’s financial performance and position. Regulated climate-related disclosure also provides increased liability for the information reported, which will enhance the rigor around how data and information is collected and reported. By leveling the playing field, the rule helps to prevent the disclosure of misleading climate information.

As SEC Chair Gary Gensler explained in his statement, “A lot has changed in the last 14 years since that 2010 climate guidance. Far more investors are making investment decisions that are informed by climate risk, and far more companies are making disclosures about climate risk.”

How the final rule deviates from the proposed rule

After much public debate and the submission of over 24,000 comments, the finalized SEC climate disclosure rule saw key disclosure requirements from the proposed rule either scaled down or scrapped altogether. The most notable omission in the final rule is disclosure of Scope 3 greenhouse gas (GHG) emissions, potentially removed to avoid concerns of the SEC requiring information from non-public companies in the value chain.

Disclosure of Scope 1 and Scope 2 emissions remains in the final rule, but only for large accelerated and accelerated filers if emissions are material, basing materiality off traditional usage by the SEC. Similarly, Scope 1 and Scope 2 emissions will require limited assurance and eventually reasonable assurance for large accelerated filers, while accelerated filers will only need to have limited assurance performed. Disclosure of Scope 1 and Scope 2 emissions and assurance attestation is now more flexible with a pathway to disclose in the 10-Q in the second quarter following the 10-K, giving companies more time to collect and calculate GHG emissions.

The final rule simplifies the financial reporting on the consolidated financial statement in several ways, such as removing disclosure of financial impacts from severe weather events and transition activities from any relevant line item and instead requiring the disclosure of expenditures of capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events. The one percent threshold of aggregate expenses and capital costs still applies, but now with an exemption if the aggregate amount is less than a prescribed absolute value.

Who needs to prepare and by when

All publicly traded companies and foreign private issuers that are registered with the SEC will need to include climate disclosures in their annual SEC filings. What must be disclosed and by when is determined by the registrant type.

Large Accelerated Filers (LAFs): Climate disclosure for FY 2025 starts in 2026, with the following exceptions:

• Financial impacts of mitigation activities, targets and goals, and transition plan disclosure for FY 2026 starts in 2027.
• Scope 1 and Scope 2 emissions disclosure for FY 2026 starts in 2027, with the option to report in the second quarter 10-Q filing or an amended 10-K for the prior fiscal year.
• Limited assurance of Scope 1 and Scope 2 emissions disclosure for FY 2029 starts in 2030.
• Reasonable assurance of Scope 1 and Scope 2 emissions disclosure for FY 2033 starts in 2034.

Accelerated Filers (AFs): Climate disclosure for FY 2026 starts in 2027, with the following exceptions:

• Financial impacts of mitigation activities, targets and goals, and transition plan disclosure for FY 2027 starts in 2028.
• Scope 1 and Scope 2 emissions disclosure for FY 2028 starts in 2029, with option to report in the second quarter 10-Q filing or an amended 10-K for the prior fiscal year.
• Limited assurance of Scope 1 and Scope 2 emissions disclosure for FY 2031 starts in 2032.

Smaller Reporting Companies (SRCs), Emerging Growth Companies (EGCs), and Non-Accelerated Filers (NAFs): Climate disclosure for FY 2027 starts in 2028, with the following exceptions:

• Financial impacts of mitigation activities, targets and goals, and transition plan disclosure for FY 2028 starts in 2029.

Connecting the SEC’s rule to the wider landscape of mandatory climate disclosure

In many ways, the final rule is less stringent than other key climate disclosure laws, including the European Union’s Corporate Sustainability Reporting Directive (CSRD) and California’s Climate Accountability Package. The final rule requires disclosure around Scope 1 and Scope 2 emissions, climate-related governance, targets and goals, climate risks, and the costs associated with severe weather events, which generally is in-line with disclosure requirements for the CSRD and the California climate laws. However, the CSRD and the California climate laws take it a step further. 

The CSRD mandates reporting on a much wider range of topics and necessitates a complex double materiality analysis and disclosure of Scope 3 emissions. The California climate laws also require companies to disclose Scope 3 emissions. Investors consider these more comprehensive disclosure requirements to provide more reliable information for investors to make informed investment and voting decisions. Where the final rule falls short of investor demands, expect investors to look to the CSRD and California climate laws as a basis for more comprehensive climate disclosure requests. 

While less comprehensive, the SEC’s final rule serves to bring new companies into the mandatory reporting landscape. It is now inevitable for every publicly traded company and foreign private issuer that is registered with the SEC to prepare some form of mandatory climate-related reporting — previously avoidable for registrants without business operations in Europe or California. 

Morrow Sodali’s ESG and Climate Advisory can help you get ready

It is clear from the overwhelming level of engagement from investors supporting the proposed rule that the regulatory landscape represents a lagging indicator of the data and information investors and key customers have been asking of companies for years. From our perspective, companies that view the SEC’s climate disclosure rule as a baseline to build from — rather than a threshold to meet — will be in a better position to evaluate and respond to emerging trends in investor expectations for climate risk information. The systemized processes and controls needed to manage regulatory disclosures can also support companies to build a more advanced reporting and disclosure approach.

Our team’s ESG and Climate Advisory services are tailored to help clients with this landmark SEC rule, including our SEC Climate Disclosure Readiness Assessment, GHG emissions inventory development, and climate risk assessment and scenario analysis services. Whether your company is trying to understand where to start first with climate disclosure or already has an integrated approach to address climate-related risks, Morrow Sodali is uniquely positioned to support you in both preparing for the SEC’s climate disclosure rule requirements and strengthening your overall approach to climate-related risk management.