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The Essentials of SEC Climate Disclosure Rule: A Guide for Businesses

SEC Climate Disclosure Rule

Introduction to SEC Climate Disclosure Rules

The winds of change are swirling around corporate climate accountability. In a recent move with far-reaching implications, the Securities and Exchange Commission (SEC) announced a pause on the implementation of its final SEC Climate Disclosure Rules. This decision throws the spotlight back on these regulations, prompting a closer look at their content and potential impact. 

For years, the issue of climate disclosure has been simmering on the backburner. Investors and environmental groups have increasingly demanded greater transparency from companies regarding their exposure to climate-related risks. The SEC, recognizing this growing need, embarked on a rule-making journey culminating in the release of its final climate disclosure regulations in March 2024. 

Here’s the catch: the final rules represent a scaled-back version compared to the initial proposals floated by the SEC. This evolution reflects the complexities of navigating stakeholder concerns and legal challenges. While some see this as a necessary compromise, others worry it weakens the teeth of the regulations. 

This blog cuts through the recent pause and unveils the nitty-gritty of the SEC’s climate disclosure rules. We’ll answer your burning questions: What kind of climate-related reporting is mandatory for companies? Who needs to comply and by when? Why shouldn’t you wait to get started, even with the temporary hold? We’ll also explore how these regulations differ from existing frameworks like the CSRD and California’s climate disclosure mandates. Dive in.  

The SEC Climate Disclosure: An Overview 

The SEC categorizes disclosures into two sections: those within and outside the financial statements. Here’s a breakdown: 

 Within Financial Statements (footnotes): 

  • Financial Impacts: Companies must highlight the financial statement impacts and material impacts on financial estimates due to severe weather events and other natural conditions. This provides investors with a clearer picture of potential climate-related financial risks. 
  • Carbon Offsets & Renewables: If a company uses carbon offsets or renewable energy credits to meet its climate targets, the roll-forward of these must be disclosed in the footnotes, ensuring transparency on these strategies. 

SEC Climate Disclosure Rules: Non-Financial Disclosures 

The SEC’s climate disclosure rules require public companies to report on a range of non-financial metrics that provide stakeholders with a clearer picture of their climate-related risks and opportunities. Here’s a breakdown of the key disclosure categories: 

Disclosure Category  Description 
Governance  This section delves into the company’s oversight structure for climate-related issues. It details how the board of directors integrates climate considerations into their decision-making processes. This might involve establishing a dedicated climate committee, assigning responsibility for climate risk management, and outlining the board’s qualifications and expertise in overseeing these matters. 
Strategy, Business Model, and Outlook  Companies must explain how climate-related risks and opportunities are likely to impact their long-term plans. This includes disclosing how potential changes in regulations, resource availability (e.g., water scarcity), and consumer preferences due to climate concerns could affect their business strategy, core operations, and future financial performance. 
Risk Management  Here, the focus is on the company’s risk identification, assessment, and mitigation strategies for climate-related issues. This section should outline the processes for identifying and prioritizing climate risks, along with the actions taken to manage those risks and build resilience. 
GHG Emissions (for large accelerated filers and accelerated filers)  This is a quantitative disclosure requiring LAFs and AFs to report their material Scope 1 and Scope 2 greenhouse gas emissions. Scope 1 emissions encompass those directly generated by the company’s activities (e.g., factory emissions, vehicle fleet emissions). Scope 2 emissions capture indirect emissions from purchased electricity, heat, or cooling. 
Climate-related Targets and Goals  Companies with established climate targets or goals (e.g., achieving carbon neutrality by a specific date) are required to disclose these alongside any transition plans. This provides transparency on the company’s aspirations for reducing its climate footprint and the strategies employed to achieve them. 
Material Expenditure and Impact  This disclosure focuses on the financial resources dedicated to climate-related activities. Companies must report on capitalized costs, expenditures, charges, and losses incurred due to severe weather events and other natural conditions. Additionally, if a company utilizes carbon offsets or renewable energy credits (RECs) to meet climate goals, the associated capitalized costs, expenditures, and losses related to these strategies must be disclosed if they are material. 

The SEC Climate Disclosure : Key Players  

The primary focus falls on large accelerated filers (LAFs) and accelerated filers (AFs). These are generally companies with a market capitalization exceeding $250 million. However, smaller public companies may also be subject to these rules if their climate-related risks are deemed “material” to their business. 

Company Category  Disclosure Requirements 
Large Accelerated Filers (LAFs)  * Narrative discussion of climate risks * Material Scope 1 and Scope 2 greenhouse gas emissions (subject to phased-in assurance requirements) * Additional disclosures on governance, risk management, climate targets, and financial impacts (if material) 
Accelerated Filers (AFs) (excluding Smaller Reporting Companies (SRCs) and Emerging Growth Companies (EGCs))  * Narrative discussion of climate risks * Material Scope 1 and Scope 2 greenhouse gas emissions (subject to phased-in assurance requirements) * Additional disclosures on governance, risk management, and climate targets (if material) 
Smaller Reporting Companies (SRCs) and Emerging Growth Companies (EGCs)  * Narrative discussion of climate risks (potentially required in the future) 
Non-Accelerated Filers (NAFs)  * No current requirement for climate-related disclosures, but the landscape may evolve 

Key Points:

  • The SEC may extend climate disclosure requirements to SRCs and EGCs in the future.
  • Even companies not explicitly mentioned may be subject to these rules if their climate-related risks are deemed “material” to their business.
  • If you’re unsure about your company’s filing category or disclosure obligations, consulting with your legal or financial team is highly recommended.

The SEC Climate Disclosure: Timeline  

Registrant Type  Disclosure & Financial Statement Effects Audit  GHG Emissions/Assurance  Electronic Tagging 
Large Accelerated Filers (LAFs)  FYB 2025  FYB 2026 (limited), FYB 2029 (reasonable)  FYB 2026 
Accelerated Filers (AFs) other than SRCs and EGCs  FYB 2026  FYB 2027 (limited), FYB 2031 (not applicable)  FYB 2026 
Smaller Reporting Companies (SRCs), Emerging Growth Companies (EGCs), and Non-Accelerated Filers (NAFs)  FYB 2027  Not required  FYB 2027 

Key 

  • FYB – Fiscal Year Beginning
  • GHG – Greenhouse Gas
  • Limited Assurance – An assurance engagement that involves a moderate level of assurance procedures.
  • Reasonable Assurance – An assurance engagement that involves performing a combination of procedures to reduce to a suitably low level the risk of material misstatement in the financial statements.

Notes:

  • The table reflects the disclosure requirements as per the final SEC rule before the recent pause on implementation.
  • The timeline provided is for public companies following a calendar year-end.

Comparing the SEC’s Climate Disclosure Rules: A Global Landscape  

While the SEC’s climate disclosure rules mark a significant step, it’s important to understand how they compare to existing frameworks. Here’s a breakdown of key differences:  

Scope of Disclosure:  

  • SEC: Focuses primarily on climate-related disclosures, excluding broader ESG (environmental, social, and governance) considerations. Scope 3 emissions, which capture a company’s indirect emissions throughout its value chain, are not currently required.  
  • CSRD (EU): Adopts a broader approach, encompassing sustainability reporting across environmental, social, and governance factors. CSRD mandates disclosure of Scope 3 emissions for certain companies.  
  • California Climate Disclosure: Similar to the SEC rules, California focuses on climate-related disclosures but requires reporting of Scope 3 emissions for some companies.  

Assurance Requirements:  

  • SEC: Implements a phased-in approach for assurance on Scope 1 and Scope 2 emissions, starting with limited assurance for LAFs and potentially progressing to reasonable assurance in the future.  
  • CSRD (EU): Requires full assurance on sustainability reporting, including climate disclosures, for companies in scope.  
  • California Climate Disclosure: Does not currently mandate external assurance, but this may change in the future.  

Disclosure Detail:  

  • SEC: Focuses on quantitative disclosures like greenhouse gas emissions, with some qualitative elements on governance, risk management, and climate targets.  
  • CSRD (EU): Requires comprehensive reporting, including both quantitative and qualitative data across sustainability factors. The CSRD mandates the use of specific reporting standards that provide more detailed guidance.  
  • California Climate Disclosure: Similar to the SEC, California requires some quantitative data (e.g., emissions) but allows for more flexible qualitative disclosures.  

Overall Tone:  

  • SEC: Offers a more streamlined approach, focusing specifically on climate risks and opportunities.  
  • CSRD (EU): Represents a more ambitious and holistic approach to sustainability reporting.   
  • California Climate Disclosure: Shares some similarities with both the SEC and CSRD, but offers more flexibility in qualitative disclosures.  

Additional Considerations: 

The SEC’s rules are currently on hold, while the CSRD and California disclosure mandates remain active.

Companies operating internationally may need to comply with multiple disclosure frameworks, depending on their location and market exposure.

Don’t Wait to Act 

While the SEC’s climate disclosure rules are currently on hold, there are compelling reasons for companies to get started now, rather than waiting for a later implementation date. Here’s why: 

Building a Strong Foundation: 

  • Internal Alignment: Early engagement fosters open communication and collaboration across departments like supply chain, operations, and finance. This helps identify potential roadblocks and establish a cohesive approach to data collection and reporting. 
  • Technological Integration: Implementing climate disclosure requires exploring and integrating appropriate technology solutions. Starting early allows for a smoother transition – identifying the right tools, integrating them within existing systems, and training staff in their use all require careful planning. 

Securing Expertise and Building Relationships: 

  • Auditor Selection: Finding qualified auditors with expertise in greenhouse gas emissions reporting may require additional effort. Beginning the search early increases the chances of securing the right partner and allows time for auditors to understand your company’s specific needs. 
  • Supplier Engagement: Obtaining reliable data from suppliers often hinges on clear communication and established relationships. A proactive approach strengthens these ties, encourages supplier participation, and fosters collaborative efforts towards shared sustainability goals. 

Competitive Advantage and Risk Mitigation: 

  • Early Leadership: By proactively navigating climate disclosure requirements, companies can position themselves as leaders in sustainability. This builds trust with investors and stakeholders increasingly focused on ESG factors. 
  • Market Opportunities: Early movers unlock new market opportunities in a world prioritizing climate action. Companies that demonstrate environmental responsibility can attract eco-conscious consumers and investors. 

Also, the decision to proactively engage with climate disclosure extends beyond simply avoiding penalties. It’s a strategic move that positions your company as a leader in sustainability. 

 The world is catching up to the reality of climate change accountability, and companies that embrace this shift will be best positioned to thrive in the evolving landscape. Don’t wait for the regulations to take effect – form strategic alliances, leverage available resources, and start building a robust climate disclosure strategy today.  

Proactive action is the key to transforming climate disclosure from a compliance burden into a springboard for a more sustainable and successful future. Book a demo today!

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