On March 6, 2024, the US Securities and Exchange Commission (SEC) released its final rules to enhance and standardize climate-related disclosures by public companies for investors and other stakeholders. These rules aim to bring climate considerations into financial reporting, leading to increased accountability, transparency, and sustainable initiatives in the corporate sphere.
Although the final SEC rules significantly scale back from the proposed rules released in 2022, there have been objections and petitions from various parties. The SEC temporarily suspended implementation on April 4, 2024, to address legal challenges, but it remains committed to defending the validity of the final rules.
Despite challenges in implementing SEC rules, investors and stakeholders still expect such disclosures. The release of these rules signals that more rigorous climate-related reporting is becoming the new norm. It is crucial for public companies to understand these rules and prepare early for future compliance.
Aligned with the TCFD framework and the GHG Protocol, the SEC rules require public companies, including US and foreign private issuers, to provide quantitative and qualitative disclosures about material climate-related risks, governance, and strategies, including:
Climate-related risks affecting business strategy and operations;
Impacts of risks on the strategy, business model, and outlook;
Mitigation or adaptation activities;
Governance and risk management processes;
Climate-related targets or goals;
Expenditures and financial impacts related to mitigation or adaptation activities, transition plans, and climate-related targets or goals.
Large companies (LAFs and AFs defined below) must also report on Scope 1 and 2 greenhouse gas (GHG) emissions with phase-in assurance.
In a note to the financial statements, companies must disclose financial impacts from severe weather events, and from carbon offsets and renewable energy credits. They must also include related estimates and assumptions.
The rules relate to the following types of companies:
Large Accelerated Filers (LAFs): companies with a public float of $700 million or more.
Accelerated Filers (AFs): companies with a public float between $75 million and $700 million.
Nonaccelerated Filers (NAFs): companies with a public float of less than $75 million.
Smaller Reporting Companies (SRCs): companies with a public float of less than $250 million; or annual revenues of less than $100 million during their most recently filed fiscal year if they have no public float.
Emerging Growth Companies (EGCs): companies with annual gross revenues of less than $1.235 billion during their most recently filed fiscal year and have been public for less than five years. This category was created under the US Jumpstart Our Business Startups (JOBS) Act.
The following table breaks down the disclosure rules and timeline by company type.
Key requirements
1. Scope 1 and 2 GHG emissions disclosure and assurance
The SEC requires LAFs and AFs (excluding SRCs and EGCs) to disclose Scope 1 and 2 GHG emissions. However, the final rule deviates from the 2022 proposed rule by no longer requiring Scope 3 emission disclosure.
Disclosure requirements
Metrics: Each scope of emissions is disclosed aggregately in CO2e, but any constituent gas that is material must be disaggregated and disclosed individually.
Exclusion: Emissions must be disclosed in gross terms, excluding the impact of any purchased or generated offsets.
Methodology: The disclosure must include a brief description of the methodology, significant inputs, and significant assumptions, including organizational boundaries, operational boundaries, and the protocol or standard used (the calculation approach, the type and source of any emission factors, and calculation tools).
Materiality: Consistent with federal securities laws, materiality should be determined by whether the information could influence the decisions of a reasonable investor.
Assurance:
Limited assurance (required for LAFs and AFs) is akin to a review, where an auditor checks to ensure that the information is prepared properly and is in line with the SEC’s criteria and standards.
Reasonable assurance (required for LAFs) involves an in-depth third-party examination of your processes, controls, and systems related to calculating and reporting of Scope 1 and 2 GHG emissions.
Disclosure deadline
LAFs: GHG emissions must be disclosed by the fiscal year beginning in 2026, with limited assurance required from FY 2029 and reasonable assurance from FY 2033.
AFs (except SRCs and EGCs): GHG emissions must be disclosed by the fiscal year beginning in 2028, with limited assurance required from FY 2031.
2. Climate-related risk disclosure
The SEC mandates companies to report material climate-related financial risks, and explore risks that have (or are likely to) lead to a material impact on business strategy, business model, operations, and financial conditions. In addition, you must include information about efforts and plans to reduce and adapt to these risks, including transition plans, scenario analysis, and internal carbon prices.
Type of risks:
Physical risks posed by climate change, such as extreme weather events and long-term shifts in climate patterns.
Transition risks, such as policy, legal, technology, and market changes as the world trends towards sustainability and reduced carbon emissions.
Deadlines for reporting risks:
LAFs: Disclosures for FY2025 will be due in the fiscal year beginning in 2026.
AFs: Disclosures for FY2026 will be due in the fiscal year beginning in 2027.
NAFs, SRCs, and EGCs: Disclosures for FY2027 will be due in the fiscal year beginning in 2028.
3. Material financial impacts of severe weather and offsets
Companies must report on any financial impacts that are related to severe weather and other natural conditions (e.g., hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise), as well as carbon offsets and RECs in a note to their financial statements. These disclosures will be subject to the financial statement audit and their internal control over financial reporting (ICFR).
De minimis disclosure thresholds for impacts from severe weather:
Aggregate expenses and losses: the greater of 1% of the absolute value of pretax income (loss), or $100,000.
Aggregate capital costs and charges: the greater of 1% of the absolute value of stockholders’ equity or deficit, or $500,000.
Carbon Offsets and RECs
Companies must disclose trading activity related to carbon offsets and renewable energy certificates (RECs). These reports must include:
Capital costs;
Expenses;
Losses for the purchase of carbon offsets and RECs (especially if they are used as part of the strategy to achieve climate-related targets or goals);
A roll-forward of the beginning and ending balances for carbon offsets and RECs.
4. Climate-related targets and goals
The SEC has included specific requirements for disclosure of climate-related targets and goals. If these materially affect your results of operations or financial condition, you must provide the following information:
A detailed description of each target and goal, and the timeframe.
The board of directors’ and management’s role in the targets and goals.
The performance indicators and metrics you intend to use, including interim targets.
Any relationship your goals and targets may have about transition plans to manage climate-change risks, and the impacts it may have on your business model and strategy.
Quantitative and qualitative information about material expenditures incurred and potential material impacts on financial estimates and assumptions as a direct result of the target or goal, or actions taken to progress toward the target or goal.
Any challenges or uncertain elements that may occur, along with an action plan to manage them.
Information about how the targets or goals will be achieved, with a focus on carbon credits or RECs (if you plan to use them).
You must also provide a yearly update on how each target and goal is progressing.
Proposed Rules vs Final Rules: Key changes on GHG emissions disclosures
The final rules take a more relaxed approach, making it more lenient than its predecessor.
Proposed Rule
Final Rule
Scope 1 and 2 disclosure
Required for NAFs, SRCs, and EGCs.
Not required for NAFs, EGCs, and SRCs.
Organization boundary
Imposed by the SEC with more rigidity.
Companies have more flexibility to define their boundaries if appropriate disclosure is provided when the boundaries differ from consolidated financial statement disclosures.
Timeline
LAFs were required to disclose by FY 2023, while AFs and NAFs had until FY 2024.
LAFs now have until 2025 for the disclosure, and AFs have until 2026. Additional phase-in period for assurance.
Scope 3 disclosure
Required for all companies other than SRCs.
All companies are exempt.
What happened to Scope 3 disclosures?
The most dramatic change from the proposed rule is the elimination of requirements for Scope 3 GHG emissions disclosures,due to “potential costs and difficulties related to Scope 3 emissions reporting”.
However, this does not mean you should ignore this data altogether. In fact, private and public companies based in California with over $1 billion in annual revenue must still provide this information, as per the Climate Corporate Data Accountability Act (California SB 253). The Corporate Sustainability Reporting Directive (CSRD) also mandates Scope 3 GHG reporting for EU-based and non-EU companies with significant activity in the EU. Other proposed regulations and reporting standards, such as ISSB, are being adopted by countries across the globe.
Submit in registration statements and Exchange Act annual reports under Regulation S-K., for both domestic companies and foreign private issuers.
These should either be separated into their own distinct sections, or integrated into other sections, such as “Risk Factors”, “Business Description”, or “Management Discussion and Analysis” (MD&A).
Scope 1 and 2 GHG emissions disclosures and assurance:
Domestic companies
File in the annual report on Form 10-K
File in a quarterly report on Form 10-Q for the second quarter of the fiscal year after the year that the GHG emissions data pertains to. It should then be incorporated by reference into your annual Form 10-K report. This allows the data to be included in the report without needing to be repeated in full.
Foreign private issuers
File in the annual report on Form 20-F.
Or file an amendment to your annual report on Form 20-F. If you choose this option, it must be provided no later than 225 days after the end of the fiscal year when you are required to provide GHG emissions disclosures.
Securities Act or Exchange Act registration statement:
Submit it as of the most recently completed fiscal year which is at least 225 days before the registration statement’s date of effectiveness.
Preparing for the Final Rule
Companies should start considering the SEC’s final rules alongside other climate disclosures, despite the implementation challenges. The sooner you begin preparation, the easier it will be to meet the proposed deadlines. You can start by taking the following steps:
Understand requirements across climate regulations and standards.
Many SEC registrants will be subject to the EU CSRD-ESRS and/or California SB 253 and SB 261. Companies should develop a clear understanding of these mandates as well as the ISSB standards, which are becoming a global benchmark for climate disclosures. A holistic view of the rules will facilitate efficient preparation for global compliance.
Review and identify gaps in GHG inventory and risk assessment.
The GHG Protocol and TCFD underpin SEC rules, as well as CSRD, California climate rules, and ISSB standards. Companies can begin reviewing their GHG inventories and risk assessments against these frameworks to identify gaps in areas such as GHG coverage, transition risk, data management, and internal controls, to ensure data accuracy and reliability.
Create an integrated action plan.
To comply across various climate regulations and meet stakeholder expectations, companies should define a clear governance structure with assigned roles and accountability for climate disclosure, allocate necessary resources, set science-based targets, and establish a timeline with milestones for all sustainability initiatives. This structured approach ensures effective implementation and ongoing compliance monitoring.
About Aligned Incentives
Aligned Incentives offers an AI-powered enterprise sustainability planning platform trusted by the world’s largest organizations. We enable companies to effectively measure, report, and mitigate environmental impacts and climate-related risks while ensuring regulatory compliance.
Scope 1, 2, and 3 GHG reporting: Leveraging a comprehensive LCA methodology aligned with the GHG Protocol, we help companies efficiently develop accurate carbon footprints across the full value chain. Our results are streamlined to meet diverse reporting needs.
TCFD risk assessment: Our TCFD module enables you to seamlessly integrate your footprint with a variety of Intergovernmental Panel on Climate Change (IPCC) and International Energy Agency (IEA) scenarios to assess your transition/financial and physical risks.
Transparency and assurance: The robustness of our software and accounting system ensures auditability, traceability, and security. It offers detailed documentation down to the line-item level, simplifying the auditing and assurance processes.
