On March 6, 2024, the Securities and Exchange Commission (SEC) published final rules around climate disclosure for public companies. Proposed rules were first released in March 2022, and since then the SEC received and reviewed roughly 24,000 public comments. The final climate disclosure rules were approved by the SEC commissioners in a 3-2 party-line vote (3 Democrats, 2 Republicans) and will go into effect 60 days after publication in the Federal Register.

Background About the Final Climate Disclosure Rules

The stated objective for these rules is to enhance and standardize climate-related disclosures by public companies and to aid investors in making relatable comparisons of companies by providing transparency into the potential financial effects of climate-related risks. The rules require that these disclosures must be included in specific SEC filings, including annual reports and registrations.

The final rules are notably less stringent than the initial proposed rules but serve as an important step in furthering transparency around disclosure of climate-related risks for large, public companies. The most noteworthy changes from the initial proposed rules include:

• The elimination of the disclosure requirement for Scope 3 emissions. Disclosure of Scope 3 emissions is controversial because they are notoriously difficult to measure, but also represent a significant, often the largest, portion of total emissions.
• The addition of the notion of “materiality” for Scope 1 and 2 emissions (see explainer below on Scope 1, 2, and 3 emissions). The original version would have required companies to report Scope 1 and 2 emissions regardless of materiality. The final version states that only climate-related risks that either have or are reasonably likely to have a material impact on the company’s business strategy, operations, or financial condition must be disclosed. The concept of materiality is somewhat nebulous and subject to interpretation. For these rules, disclosure of a climate-related risk would be deemed material if it would affect an investment or proxy voting decision.
• The exemption of small or emerging growth companies from these requirements.
• A longer time for adoption; the rule will be phased in over several years with larger companies starting in 2025.
• Not requiring that climate-related disclosures be included in a separate section entitled “Climate-Related Disclosure” and instead leaving it up to the filer, including embedding the information in existing sections.

Explainer

Scope 1: Emissions that come directly from a company’s operations. Example: energy generation from the company.

Scope 2: Emissions that are indirectly generated from the company’s operations. Example: electricity purchased for heat or lighting.

Scope 3: Emissions that are an indirect result of a company’s activities. Examples: employee travel or commuting, use of products sold, investments.

Specific disclosure requirements include many qualitative and quantitative elements that draw from the globally recognized Task Force on Climate-Related Financial Disclosures (TCFD). Among these are:

• Climate-related risk impact or potential impact on business strategy, operations, or financial condition
• Material Scope 1 and 2 GHG emission data
• Board of directors’ oversight of assessment and management of climate-related risks
• Process for managing climate-related risks
• Information on climate-related targets if deemed material for business operations or financial condition
• Material expenditures and impacts on financials of mitigating climate risks/transition plans/physical risks/achieving targets

The SEC estimates that about 2,800 U.S. companies and 540 non-U.S. companies with operations in the U.S. will be subject to these disclosures. Notably, according to a survey conducted by The Conference Board, 89% of S&P 500 companies were already disclosing emissions data in 2022. Further, many companies are subject to other regulations (California’s recent climate-related statutes and Europe’s Corporate Sustainability Reporting Directive already require disclosures for companies in the U.S.).

Bottom Line

While these rules are a scaled-back version of the initial proposed rules, they do require a significant amount of increased disclosure, some of which larger companies are already doing. There remains uncertainty around the ultimate outcome of these rules, given lawsuits have already surfaced from those that believe the rules are too costly, onerous, or overwhelming for investors. On the other side, some groups believe the weakened rules did not go far enough, particularly as they relate to the omission of Scope 3 emissions disclosure and the ability of companies to determine whether disclosures are material. Regardless of the SEC rules, the global march to improve transparency and climate-related disclosures for asset managers and institutional investors to evaluate is evident from regulations in some states in the U.S. and abroad, and this is a global trend we do not expect to abate.