SEC Experts Share 5 Essential Takeaways From the Final Climate Disclosure Rule

If you’ve been waiting for climate disclosure guidance from the Securities and Exchange Commission (SEC), the uncertainty is over. On March 6, 2024, the SEC issued its long-awaited final climate disclosure rule, “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” 

Now it’s time to get ready for reporting. The first round of companies will have to disclose in 2026 using 2025 data — which means 2024 is the year to get your systems in place. 

In this blog, our SEC experts break down the key requirements of the SEC’s final climate disclosure rule, how they differ from the initial proposal, and what you need to know to get ready for reporting.

What You Need to Know: 5 Key Insights 

1. Scope 1 and 2 emissions are in (if material), scope 3 is out, and emissions are subject to assurance. 

Under the rule, Accelerated Filers and Large Accelerated Filers must disclose their material scope 1 and 2 GHG emissions. That means those filers will have to perform assessments to determine whether their scope 1 and 2 emissions are material. Smaller Reporting Companies (SRCs) and Emerging Growth Companies are excluded — they don’t have to report their scope 1 and 2 emissions. 

In a change from the original proposal, the final rule does not require reporting on scope 3 emissions, which typically account for a large chunk of a company’s overall emissions profile. However, many businesses will still need to report their scope 3 data to Europe, California, and jurisdictions worldwide that incorporate ISSB standards into their regulations.  

👀 In order to determine whether emissions are material, companies will first need a baseline picture of their scope 1 and 2 emissions. Carbon accounting software can help you calculate these emissions. 

💡 Cool, but how do companies determine if information is material?

To determine if your scope 1 and 2 emissions are material, you’ll need to apply the US Supreme Court’s tests:  Would the information be important to the reasonable investor in making an investment or voting decision? Would omission of that information substantially alter the total mix of information available to investors? 

Each company will need to make this determination based on its own circumstances — and it won’t rely solely on emissions amounts. The SEC provides examples of factors that might make emissions disclosures material. For instance, a company could face material transition risks if it is required to report its GHG emissions metrics under foreign or state law. It could also decide whether emissions are material if investors need to know about them to understand whether the company has made progress toward its decarbonisation targets or transition plan.

Notably, emissions disclosures will be subject to assurance on a phased-in basis. Accelerated Filers will have to obtain limited assurance after they have reported their emissions for three years. Large Accelerated Filers will also have to obtain limited assurance, with more rigourous reasonable assurance phasing in after an additional four years. We provide a roundup of the timeframes for reporting and assurance in the chart below. 

💡 I’m not well-versed in securities law. How do I know if I’m a Large Accelerated Filer or an Accelerated Filer subject to the emissions disclosure requirements under the rule?

Your company's filer status depends on its public float (the market value of its outstanding shares), annual revenues, and other factors. If you're unsure about your status after reviewing the criteria, consulting with your legal or financial team can provide clarity. Here’s more information on how the SEC categorizes filers. 

2. As predicted, you’ll need to discuss the management and oversight of material climate-related risks. 

The rule requires companies to disclose their climate-related financial risks, in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). You’ll have to discuss risks that have had or are likely to have a material impact on your business strategy, operations, financial condition, or business model and outlook. The rule also requires you to share information about your efforts to mitigate or adapt to risks — efforts like transition plans, scenario analysis, and carbon pricing. You’ll also need to disclose any climate-related targets and goals, as well as details about board oversight and risk assessment processes.

3. You’ll have to report on the financial impacts of severe weather, carbon offsets, and other climate factors — and be ready for auditing of that info. 

In a note to the financial statement, reporting companies will have to disclose details about the financial impacts of various climate-related factors on their business. These factors include: 

A. Impacts of Severe Weather and Climate Events

You’ll have to disclose financial information related to severe weather events, including expenses expensed, losses, capitalized costs, and charges from severe weather events such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise. These disclosures are subject to specified thresholds: 

De minimis exception for expenses and losses - 1% and $100,000 test. Disclosure of expenses and losses is only required if the aggregate amount of those expenses and losses is at least 1% of the company’s pre-tax income or loss in that fiscal year, and the aggregate expenses and losses is $100,000 or more in the relevant fiscal year.

De minimis exception for capitalized costs and charges - 1% and $500,000 test. Disclosure of capitalized costs and charges is only required if the aggregate amount of capitalized costs and charges is at least 1% of the company’s stockholders’ equity or deficit at the end of the relevant fiscal year, and the aggregate costs and charges are $500,000 or more in the relevant fiscal year. 

B. Costs and Expenses for Carbon Offsets and RECs. 

You will also need to disclose the capitalized costs, losses, and expenditures expensed for carbon offsets and renewable energy credits (RECs) if they are used as a material component of a registrant’s plans to achieve climate-related targets or goals that it has disclosed.

👀 Including these disclosures in the financial statements means they will be audited. Companies need to ensure the quality and reliability of the information they report. 

4. Okay, let’s get down to the logistics: Who, where, and when?

Who? The rule applies to companies reporting in the US public markets, including US issuers and foreign private issuers. 

Where? Disclosures in accordance with the rule will be required in companies’ annual reports on Form 10-K or Form 20-F and in registration statements. However, in order to allow additional time to gather emissions data, the GHG emissions disclosures will be required either in a company’s second quarter (Q2) Form 10-Q or an amendment to the company’s Form 10-K filed in Q2 for the prior fiscal year (or in a Form 6-K furnished at a comparable time for foreign private issuers). 

When? The following table shows the phase-in period for the required disclosures, which are based on the disclosure items and company filer status. The first disclosures will be due in 2026 for FY 2025 reporting.

5. Despite the headlines about the SEC watering down the final rule, it does facilitate global harmonization — but there is much more to be done. 

The rule, as adopted, deviates from the proposal in ways that are significant with respect to its alignment with global frameworks and requirements. While there are differing views on the wisdom of those changes, what is largely undisputed is the positive reaction and, frankly, relief that the rule draws heavily on the TCFD and GHG Protocol. 

One of the guiding principles driving the rule’s proposal was that investors and companies both were asking for clear disclosure requirements to address the reporting fragmentation that existed. Investors wanted consistent, comparable, decision-useful information on which to base their investment decisions. Issuers wanted clarity as to what they should report and what disclosure frameworks to follow. We now have clarity and that is much to the good.

Global convergence around TCFD and the GHG Protocol has arrived.

The SEC is far from alone in looking to the TCFD and GHG Protocol to guide its disclosure requirements. The European Sustainability Reporting Standards, which implement Europe’s Corporate Sustainability Reporting Directive, look to the TCFD and GHG Protocol for its investor-focused climate disclosure requirements. Similarly, the International Sustainability Standards Board — which is shaping regulations around the world — has issued climate disclosure standards that draw on the TCFD framework and the GHG Protocol. Even California drew on these same frameworks in its landmark laws, SB 253 and SB 261. It is safe to say that global convergence on the TCFD and GHG Protocol has been achieved. This is good for investors and good for companies. 

But there is more work to be done. While we have achieved global convergence on the frameworks that underpin companies’ climate-related disclosures, there are significant gaps between disclosures that the SEC climate rule requires and disclosures that companies will need to make to meet regulatory demands elsewhere. And market demand for more complete information will continue.  

Businesses will still face difficult decisions — the ISSB standards can help. 

Companies will be assessing climate risk and gathering data pursuant to common frameworks, but will still face difficult decisions about what information to report, and  where. Commissioners on both sides of the vote on the rule noted the challenges that multiple regulations present, and called for further consideration of ways “to avoid a patchwork of reporting obligations and potentially conflicting demands.”  The IFRS Sustainability Disclosure Standards (“ISSB Standards”) can bridge these gaps.

Companies that want to participate efficiently and effectively in the global markets can prepare by looking to those standards to identify additional information that investors, and many regulators, will be seeking. Issuers and investors who want to address these challenges should also weigh in on the Commissioners’ calls for an order recognizing other regimes.  

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Time to roll up our sleeves and prepare for reporting. Get ready for SEC disclosure. Calculate your emissions for free with Persefoni Pro.