The Wait Is Over: The SEC Climate Disclosure Rule Is Official and the Compliance Timeline Starts Now
The last reason to delay starting down a climate reporting readiness path just expired. Understanding the final SEC climate rule and making a compliance game plan need to be a top priority for every filer.
After many months of review and consideration of thousands of public comments, on March 6, 2024, the US Securities and Exchange Commission (SEC) announced its decision regarding the highly-anticipated climate disclosure rule. As expected, the rule requires many publicly-traded companies in the United States to disclose certain climate-related information consistent with globally recognized standards such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Greenhouse Gas (GHG) Protocol.
The SEC revealed the phased implementation timeline and details for these disclosures for each type of filer. Below are the highlights and answers to the key questions companies are asking now.
What types of disclosures does the rule require?
The final climate rule requires the following climate-related disclosures, depending on a company’s filing status (large accelerated filer, accelerated filer, or non-accelerated filers):
- Governance: A description of board and management-level oversight and governance of climate-related risks.
- Scope 1 and 2 emissions, if material: Metrics encompassing direct and indirect emissions from produced and purchased energy.
- Risk identification and management: A description of applicable material climate-related risks, including physical and transition risks, as well as a statement covering the company’s process for identifying, assessing, and managing these risks and how these processes are integrated into the overall risk management and strategic planning process.
- Financial impacts: The final rule mandates that registrants include the following disclosures in the footnote of their financial statements:
- The financial impacts of severe weather and other natural conditions, specifying both the total expenses and losses recognized in the income statement, and the total capitalized costs and charges on the balance sheet, each subject to specific thresholds based on pretax income or stockholders’ equity. These figures should be presented before accounting for any recoveries like insurance, which are to be disclosed separately, along with the affected financial statement line items.
- The requirement does not oblige registrants to link severe weather or natural conditions to climate change but to report the full amounts of expenditures, losses, costs, charges, or recoveries when such events significantly influence the recognition of these amounts.
- For material carbon offsets and renewable energy credits (RECs) related to achieving climate goals, details such as a roll forward of balances, amounts expensed, capitalized, or lost, the affected financial statement lines, and the accounting policy used for these instruments are required.
- Disclosures must also address how severe weather, natural conditions, and climate-related goals or plans significantly impact the financial statement estimates and assumptions.
- Situational disclosures: Description of additional climate-related considerations (if any) used in risk assessment and management processes. This includes a description of any adopted climate transition plan and scenario analysis with relevant parameters, assumptions, analytical choices, projected financial impacts and detailed disclosure of any internal carbon pricing.
- Targets: While not required by the SEC to set GHG emissions reduction targets, if companies do decide to set GHG emission reduction targets, there will be additional disclosure requirements around the scope of activities and emissions included in the target. Filers must disclose the time horizon and any interim targets, plans for reducing emissions to meet goals, relevant data to monitor progress (updated each fiscal year), and information about any carbon offsets or renewable energy certificates utilized.
- Attestation from a qualified independent service provider: Attestation covering Scope 1 and Scope 2 emissions. Attestations must meet minimum standards for acceptable attestation frameworks.
- Disclosures within financial statements will adhere to current audit standards for financial statements and the control mechanisms for financial reporting established by management.
- For large accelerated filers and accelerated filers, the audits conducted by independent, registered public accounting firms on internal controls over financial reporting (ICFR) will include evaluations of controls related to these disclosures.
- For information disclosed outside of financial statements, management’s disclosure controls and procedures (DCPs) will apply. These controls must be evaluated and confirmed periodically by the company’s chief executive and financial officers. Disclosures regarding Scope 1 and Scope 2 greenhouse gas (GHG) emissions will initially require limited assurance for large accelerated filers and accelerated filers. After a transition period, these disclosures will need to meet a standard of reasonable assurance for large accelerated filers.
Which companies are impacted and what is the timeline for compliance?
The final disclosure requirements will be phased in based on the status of each type of registrant.
Registrants need to include non-GHG emission-related disclosures in their annual reports upon filing. Domestic registrants have the option to disclose emissions data in their Q2 Form 10-Q for the subsequent year, while foreign private issuers can amend their annual Form 20-F report, due 225 days post-fiscal year, to include these disclosures. Other required information, such as GHG emissions, must be detailed by domestic registrants in a dedicated section of Form 10-K (Item 6), positioned right before the MD&A, or in a relevant section of the filing. Foreign private issuers should include it in Form 20-F (Item 3.E).
Large Accelerated Filers:
| When: Compliance Deadline | What: Disclosure Type | Where: Document/Form |
| 2025 | S-K and S-X disclosures | Form S-1 registration, Form 10-K, or alternate |
| 2026 | Non-GHG climate disclosure | Form 10-K |
| 2026 | Scope 1 and Scope 2 emissions reporting, XBRL tagging | Q2 Form 10-Q
|
| 2029 | Limited assurance | Q2 Form 10-Q
|
| 2033 | Reasonable assurance (replaces limited assurance) | Q2 Form 10-Q |
Accelerated Filers
| When: Compliance Deadline | What: Disclosure Type | Where: Document/Form |
| 2026 | S-K and S-X disclosures, XBRL tagging | Form S-1 registration, Form 10-K, or alternate |
| 2027 | Non-GHG climate disclosure | Form 10-K |
| 2028 | Scope 1 and Scope 2 emissions reporting, | Q2 Form 10-Q
|
| 2032 | Limited assurance | Q2 Form 10-Q
|
Small Reporting Companies, Emerging Growth Companies, and Non-Accelerated Filers
| When: Compliance Deadline | What: Disclosure Type | Where: Document/Form |
| 2027 | S-K and S-X disclosures, XBRL tagging | Form S-1 registration, Form 10-K, or alternate |
| 2028 | Non-GHG climate disclosure | Form 10-K |
What is the verdict on Scope 3 emissions?
The SEC received more than 20,000 comments during the public comment period, many of which focused on the Scope 3 emissions, which are emissions generated throughout the value chain of the organization. The SEC revised the final rule to remove the Scope 3 disclosure requirement, which reflects the feedback received, significantly reducing the compliance effort for many filers.
What are the most important next steps?
The climate rule’s first requirement is qualitative climate risk disclosure for large accelerated filers by FY2025 and for other accelerated filers by FY2026. Any accelerated filer not already collecting climate-related information—including climate risks and Scope 1 and Scope 2 emissions data—needs to get started this year.
Smaller reporting companies and private companies looking to go public should also begin to develop the rights tools and partners to meet the requirements as they will soon be facing deadlines of their own.
Taking the following steps should be high priority in the coming months:
- Establish a climate risk management framework, including board and management-level oversight and a system for identifying and assessing climate-related impacts to the business.
- Define what materiality for climate looks like for the company by completing a climate risk assessment.
- In the final rule, the SEC clarifies that registrants should align their definition of materiality with the one provided by the U.S. Supreme Court. According to this definition, an issue is deemed material if it’s highly likely that a prudent investor would find it crucial in making decisions related to purchasing or selling securities, or in deciding how to vote. Such an investor would also consider the lack of this information as significantly impacting the overall pool of information available. Furthermore, the final rule highlights that the determination of materiality is contingent upon the specific facts and circumstances of each case, considering both qualitative and quantitative aspects.
- Begin collecting and calculating Scope 1 and Scope 2 emissions data.
- Over the next two years, define the internal controls and processes to prepare for financial reporting-level assurance.
Riveron can help
For any company waiting on the SEC to make climate-related reporting official, that wait is now over with the SEC’s landmark decision finalized. For many companies, the need to accelerate the climate-reporting journey is significant.
Wherever a company is along the path, our team can provide the right expertise and support to move through each phase of the ESG disclosure and reporting process, from data collection and calculation, establishing internal controls around GHG data, and integrating climate-related risk management into a company’s broader enterprise risk management process. Reach out today to learn how a trusted partner can make the difference in successfully meeting climate-related disclosure requirements for new and upcoming regulations.
