SEC Adopts Rules to Enhance and Standardize Climate-Related Disclosure

On March 6, 2024, the SEC adopted climate-related disclosure rules by a 3-2 vote after a nearly two-year waiting period and consideration of a record-breaking 24,000 comment letters. The final rules create new Subpart 1500 of Regulation S-K and Article 14 of Regulation S-X.

The new climate-related disclosure requirements reflect the SEC’s recent efforts to provide more useful information to investors on the various climate-related risks and impacts on companies’ business and financial condition. The final rules also require that these disclosures be included in companies’ SEC filings on annual reports and registration statements, rather than on the companies’ websites, allowing for more reliability and uniformity.

Overall, there are three main components to the new rules. First, the final rules require companies to disclose material climate-related risks, governance processes in place to manage such risks, climate-related targets or goals, if any, and plans for achieving such targets and goals. Second, the rules require large accelerated filers and accelerated filers to disclose material Scope 1 and Scope 2 GHG emissions and provide a related attestation report. Third, final rules require disclosure in the footnotes of audited financial statements on expenditures resulting from severe weather events and other natural conditions. Below, we summarize the compliance timeline, which will be phased-in based on a company’s filing status.

The final rules include several modifications from the rules originally proposed in March 2022. Deviations from the proposed rules include, among others, (1) eliminating the requirement to report Scope 3 GHG emissions; (2) limiting Scope 1 and Scope 2 GHG emission reporting to only large accelerated filers and accelerated filers; (3) qualifying many disclosure requirements by materiality and (4) narrowing climate-related disclosures required to be included in the audited financial statements.

Climate-Related Risks and Impacts Disclosure

The final rules update Regulation S-K to require disclosure of material climate-related risks and governance processes used to mitigate such risks in a company’s annual report and registration statements.

Specifically, companies must disclose the actual or potential negative impact of climate-related conditions and events on a company’s business, results of operations, or financial condition that have had or are reasonably likely to have a material impact on the company’s business strategy, results of operations, or financial condition. Companies must also disclose existing and potential material impacts of identified climate-related risks on a company’s strategy, business model, and outlook. The risks must be identified as physical or transition risks. For each risk, the company must provide information necessary to an understanding of the nature of the risk presented and the extent of the company’s exposure to it.

If a company undertakes activities to mitigate or adapt to climate-related risks, including using transition plans, scenario analysis, or internal carbon prices, it must disclose such activities. Companies should also provide 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.

Additionally, the final rules require companies to disclose any oversight by the board of directors on climate-related risks, including identifying any board committees responsible for such oversight, and the role management plays in assessing and managing material climate-related risks. The new disclosure requirements also include the company’s processes for identifying, assessing, and managing material climate-related risks and whether such processes are integrated into the company’s overall risk management system.

A company must disclose information on any climate-related targets or goals that materially affect or are reasonably likely to materially affect the company’s business, results of operations or financial condition. For each target or goal, disclosure is required for the scope of activities included, the unit of measure, the timeline to achieve the target, any baseline measurement date, a description of how the company intends to achieve the goal, and a description of progress to date. This disclosure also includes material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal, or actions taken to progress towards such target or goal. Climate-related goals disclosure is required even if the company has set climate-related targets or goals privately and not publicly.

GHG Emissions Disclosure

Large accelerated filers and accelerated filers are required to disclose, to the extent material, direct GHG emissions (Scope 1) and GHG emissions associated with energy purchases (Scope 2). Materiality for this disclosure is not determined by the amount of GHG emissions, but rather whether a reasonable investor would consider the information important when making an investment or voting decision, or would view omission of the disclosure as having significantly altered the total mix of information made available.

The GHG emissions metrics must be expressed on a carbon dioxide-equivalent basis and, if any constituent gas is individually material, such gas must be disclosed on a disaggregated basis. The methodology for measuring Scope 1 and Scope 2 GHG emissions is not defined by the new rules. Instead, companies also must disclose the methodology, significant inputs, and significant assumptions used to calculate the company’s GHG emissions.

Companies must include an attestation report covering Scope 1 and Scope 2 GHG emissions disclosure initially at the limited assurance level. Following an additional transition period, large accelerated filers must provide attestation reports at the reasonable assurance level. Smaller reporting companies and emerging growth companies are exempt from the emissions disclosure requirements.

Financial Statement Disclosure

New Article 14 of Regulation S-X requires certain disaggregated financial information be included in notes to a company’s audited financial statements. This information includes capitalized costs, expenditures, expenses, charges and losses resulting from severe weather events and other natural conditions, in each case subject to applicable 1 percent de minimis disclosure thresholds. Relevant weather events and natural conditions include hurricanes, tornadoes, wildfires, drought, flooding, extreme temperatures and rising sea levels.

Companies must also disclose capitalized costs, expenditures, and losses associated with carbon offsets and renewable energy credits or certificates if they play a material role in the company’s plans to achieve its climate-related targets or goals. If estimates and assumptions the company uses to produce the financial statements were materially influenced by risks and uncertainties stemming from severe weather events or other natural conditions, or any disclosed climate-related targets or transition plans, the company must provide a qualitative description of the impact on the development of such estimates and assumptions.

Presentation of Disclosure

Companies must include climate-related disclosures in their registration statements and annual reports filed with the SEC. The disclosures mandated by Regulation S-K should be presented either in a dedicated section with an appropriate heading in the filing, or integrated in another appropriate section of the filing, such as Risk Factors, Description of Business, Management’s Discussion and Analysis of Financial Condition and Results of Operations, or alternatively, by incorporating such disclosure by reference from another SEC filing, as long as the disclosure meets the electronic tagging requirements of the final rules. Pursuant to the final rules, climate-related disclosures must be electronically tagged using Inline XBRL.

Compliance Timeline

The final rules will become effective 60 days following the publication of the adopting release in the Federal Register. The SEC established staggered compliance dates that vary depending on a company’s filing status. The first compliance dates apply to large accelerated filers, which must begin complying in 2026 with respect to fiscal year 2025. Accordingly, large accelerated filers should ensure that adequate climate-related procedures and internal controls are in place by January 1, 2025.

The following table summarizes the key compliance dates for the various types of filers with a December 31 fiscal-year end. These dates apply to both annual reports and registration statements, with registration statement compliance beginning with any registration statement that includes financial information for the full fiscal year noted in the table.

Legal Challenges

Since the announcement of the final rules, a number of legal challenges have been made. Several state attorneys general filed suit challenging the rule. Additional challenges, both in court and in Congress, are expected. It is possible these legal challenges may impact the ultimate compliance requirements.

Ballard Spahr’s Securities and Capital Markets Group helps clients comply with public reporting, proxy, and disclosure obligations, and advises private and public companies through all stages of development and capital-raising activities.

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