The following are responses to questions asked during the webinar on the SEC climate disclosure rule with Allison Herren Lee and Steve Soter and answered by the Persefoni staff using their best judgment. This is not legal advice and should not be relied on as such. Please consult your legal counsel for legal advice concerning the rule and its application to your circumstances.
In-scope Companies
What companies will be impacted?
The rule applies to companies reporting in the US public markets, including US issuers and foreign private issuers. 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.
What does the rule mean for privately held companies?
The rule directly only applies to public companies. Private companies contemplating IPO should be aware of the requirements and begin building their climate risk capabilities to set themselves up for success. This could include enhancing governance structures around climate risk, establishing sustainability programs to set a clear climate vision and policies, creating a baseline emissions footprint, and considering alignment with the growing momentum around global standards. Beyond proactive measures, proper climate risk management (and identification of opportunities) can be a competitive advantage to attract customers, employees, and capital.
If a company based in the US is a subsidiary in a group based in the EU, which is already making the relevant disclosures in Europe, can they be exempt from doing any other disclosure in the US?
If the US based company is a US public company, then it must comply with the SEC rules. The rules do not provide for substituted compliance.
Does the SEC ruling include any plan to roll out mandated reporting for privately held companies? If not, do you anticipate we'll see this soon like what the CSRD has done?
The SEC does not generally directly regulate private companies so we should not expect rulemaking on that front. In the US, however, private companies should assess whether they are subject to California climate disclosure laws SB 253 and SB 261, which do apply to public and private companies.
Compliance Timelines
When the SEC says FYB 2026 for an AF, does that mean disclosing the calendar year 2025? Am I misinterpreting that?
The rule provides that FYB refers to any fiscal year that commences in the calendar year beginning specified in the compliance date chart below. The reporting will not be due until the next required Form 10-K or 20-F (or Q2 filing for GHG emissions). The release gives these examples, “[A]n LAF with a January 1 fiscal-year start and a December 31 fiscal year end date will not be required to comply with the climate disclosure rules (other than those pertaining to GHG emissions and those related to Item 1502(d)(2), Item 1502(e)(2), and Item 1504(c)(2), if applicable) until its Form 10-K for fiscal year ended December 31, 2025, due in March 2026. If required to disclose its Scopes 1 and/or 2 emissions, such a filer will not be required to disclose those emissions until its Form 10-K for fiscal year ended December 31, 2026, due in March 2027, or in a registration statement that is required to include financial information for fiscal year 2026.”
If our fiscal year starts in October (e.g. FY25 begins in 10/24), when is our first disclosure required as a LAF?
In your 10-K for FY 2025, filed in 2026.
Final Rule Requirements
Can you go over what differences there might be from before to these now final rules?
Some of the differences are listed below.
TCFD-based disclosures remain largely the same, however, they are “less prescriptive”, subject to materiality, and the provision regarding disclosure of whether a board member has climate expertise has been removed.
Scope 1 and 2 disclosures only apply to Large Accelerated Filers (LAFs) and Accelerated Filers (AFs), and are subject to a materiality filter (Non-accelerated Filers, Smaller Reporting Companies, and Emerging Growth Companies are exempt from the GHG emissions disclosure requirements).
Scope 3 was omitted from the final rule.
The proposal provided for assurance of Scopes 1 and 2 emissions for Accelerated Filers and Large Accelerated Filers. The assurance provision remains for Accelerated Filers and Large Accelerated Filers where they disclose Scopes 1 and 2 emissions (i.e., where they have determined such emissions to be material). Both AFs and LAFs will be required to obtain limited assurance within 3 years of initially disclosing their GHG emissions. LAFs will be required to obtain reasonable assurance within 7 years of their initial disclosure of Scopes 1 and 2 GHG emissions.
The proposal provided for inclusion of a note to the financial statements addressing climate impacts on individual financial statement line items. This provision was amended in the final rule to only require a note to the financial statements related to severe weather events or the costs associated with the purchase of carbon offsets or RECs if a material part of the company’s strategy to meet its announced climate goals.
How do you define a “natural condition”?
The rule gives the following examples of severe weather events and natural conditions: hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise. The release provides that this is not an exhaustive list and the Commission gives companies some discretion in making this determination. It provides in the release, “The list of examples of severe weather events and other natural conditions included in Rule 14-02 is not intended to be exclusive or exhaustive, nor are the examples intended to create a presumption about whether disclosure is required for those events in every circumstance. 2092 Rather, under the final rules, registrants will have the flexibility to determine what constitutes a severe weather event or other natural condition based on the particular risks faced by the registrant, taking into consideration the registrant’s geographic location, historical experience,2093 and the financial impact of the event on the registrant, among other factors.” (p. 485-486).
How do I determine thresholds when assessing information to put into the note to the financial statements?
When determining what information to include in the notes to the financial statements regarding expenses, losses, capitalized costs, and charges, consider the following de minimis thresholds:
For Expenses and Losses: Disclosure is necessary if the total amount of these expenses and losses reaches at least 1% of the company's pre-tax income or loss for that fiscal year, and if the cumulative amount of these expenses and losses equals or exceeds $100,000 in that fiscal year.
For Capitalized Costs and Charges: Disclosure is required when the total of capitalized costs and charges constitutes at least 1% of the company's stockholders’ equity or deficit at the fiscal year's end, and if the total capitalized costs and charges amount to $500,000 or more in that fiscal year.
What does the final rule say about disclosure requirements regarding climate targets and transition plans?
The rule requires companies to disclose climate targets or goals if they have materially affected or are reasonably likely to materially affect the company’s business, results of operations or financial condition. The rule would also require, among other things, a qualitative description of how the company intends to meet its targets or goals. The company is also required to disclose any progress made toward those disclosed targets or goals and how such progress has been achieved. You can find further information in new Item 1504 of Regulation S-K.
A company would also need to disclose in a note to its financial statements the financial impact of the use of offsets and RECs to meet its climate goals if offsets and RECs are a material part of the company’s publicly announced goals or targets.
What is the implication for boards and executives?
Registrants must disclose the board’s oversight of climate-related risks, which involves describing whether the board or a board committee is responsible for the oversight of climate-related risks, and how the board administers this oversight. Companies must also disclose the management’s role in assessing and managing material climate-related risks. This includes identifying any positions or committees in the organization responsible for that assessment and management, and describing the processes by which those responsible for assessing and managing such risks are informed about and monitor risks.
Please would you explain what a 10-K and 10-Q are to sustainability practitioners?
The Form 10-K is an annual report that publicly traded companies are required to file with the SEC. It provides a comprehensive overview of the company's business and financial condition and includes audited financial statements. The 20-F is similar to the 10-K but is intended for a category foreign companies called foreign private issuers that also report to the SEC. The Form 10-Q is a quarterly report and is less comprehensive than the annual 10-K. It includes unaudited financial statements and provides an update on the company's financial condition and other important information.
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 may be provided 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).
How can companies determine if physical climate risk will materially impact their business or not?
To prepare for the physical risks of climate change, many organizations conduct climate risk assessments. These typically involve projection modeling of a range of possible scenarios to assess how future weather events, sea level rise, droughts etc. will affect the operations of an organization.
How does the financial purchase of a market-based mechanism (RECs and offsets) or investment into a project that generates them by an organization affect the fiduciary duty of the organization?
Corporate officers and directors have fiduciary duties of care and loyalty that are defined under state law. The purchase of offsets or RECs would not impact their fiduciary duties but these officers and directors would have to exercise their duties of care and loyalty in deciding whether it is prudent for the company to purchase such instruments, based on all the facts and circumstances.
GHG Emissions
Will market based scope 2 need to be carved out? And, how will within value chain mitigation/decarbonization be treated, i.e., if a company is investing in scope 3 emissions reductions through insets in a land-based or food/agriculture setting?
Under the SEC rule, registrants will have to explain whether scope 2 emissions were measured using location-based or market-based calculations (or both). Scope 3 value chain specifics are not addressed in the final rule.
In simplest terms, it seems clear that the SEC wants disclosure of scope 1 and scope 2 emissions and offsets or RECs separately. Market-based scope 2 goes into your scope 2 emissions reporting and the emission factors will simply be market-based vs location-based. If you use RECs to offset your scope 2, they would have to be separately disclosed in a note to your financial statements if they form a material part of your decarbonization plan.
How should we think as reporting companies in terms of disclosing GHG intensity metrics? Picking a scaling metric for our business is challenging and the final rule does not mandate the disclosure of a particular metric?
The final rule does not require disclosure of GHG emissions intensity. As such, companies have discretion as to whether to disclose intensity and, if so, based on what metrics.
Do you think there will be some leeway in the first 5 years or so on how companies calculate all of this as there could be different approaches in how to calculate some of this and difference in assurance companies? And given that some different sources of CO2 give off different amounts of CO2 such as heavy oils vs light oils.
It isn’t entirely clear but we expect emission factors to evolve over time and Persefoni tracks and keeps the emission factors up to date in its platform. That said, the rule does provide accommodations for companies to make it easier to calculate and disclose their GHG emissions. For example, it provides a phase-in period for emissions disclosures and permits companies to report that information in Q2 vs in their Form 10-K or 20-F.
For SRCs, the GHG emission disclosures and related attestation is exempted but what do they have to disclose? Just disclosures related to governance and oversight of climate-related risks and the material impact of these risks on the company's strategy and outlook? This assumes the company does not utilize carbon offsets or renewable energy credits and there are no severe weather attempts. Is this accurate?
SRCs would have to disclose TCFD-based climate-related risks and financial statements related to severe weather events and use of offsets/RECs to meet targets, if used and if material. Additionally, SRCs would have to report material expenditures and financial impacts taken under a transition plan, scenario analysis, and/or carbon pricing, if used. Lastly, they would disclose efforts to mitigate or adapt to climate-related risks, and the impacts of meeting climate-related targets or goals.
Materiality
Is there a threshold for 'materiality' for scope 1 and 2 and climate risk information? How is that defined?t
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 two 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 determine its emissions are material if investors would find this information important to an understanding of whether the company has made progress toward its decarbonization targets or transition plan.
For companies who already disclosed scope 1, 2, and 3, and now are considering pulling back relative to “materiality”, what, if any, is the risk from an SEC scrutiny standpoint? Does this create a greater risk of a comment letter or if that likelihood of a comment letter is minimized if the company footnotes that any go-forward disclosures are in the context of the new rule?
It’s hard to know whether the SEC’s staff might comment under these circumstances. It likely depends on how significant the company’s previously disclosed emissions were. If it does draw a comment letter, the company should be prepared to provide backup information to explain its determination that its scope 1 and 2 emissions are not material and therefore don’t need to be disclosed.
Can you unpack the materiality a little more? If management is responsible for determining materiality, the incentive will be to not disclose. Further and related, the second qualifier for reporting is existing commitments or claims. How do you expect this to impact the public facing net zero claims? Do you anticipate a rollback on commitments, especially given more active litigation on greenwashing?
The test of materiality is based on the US Supreme Court's determination of whether the information would be important to the reasonable investor in making an investment or voting decision and whether its omission would substantially alter the total mix of information available to investors (TSC v. Northway). There will be judgment calls to be sure. However, companies that don't disclose or even pull back on existing commitments to decarbonize face real reputational risks.
Assurance
What are the SEC requirements for reporting verified data?
The rule requires companies to obtain assurance over their scope 1 and 2 emissions if they determine they need to report those emissions. Remember, this disclosure will be required for Accelerated Filers and Large Accelerated Filers where scope 1 and 2 are material. These assurance requirements will phase in, starting with limited assurance and, for Large Accelerated Filers, moving on to reasonable assurance.
What level of assurance is acceptable to the SEC?
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 rigorous reasonable assurance phasing in after an additional four years.
Does the final rule specify what types of firms can provide the assurance for scopes 1 and 2?
Assurance can be provided by GHG assurance providers as long as they are “expert” and “independent” (not limited to audit firms). The providers will have to apply standards that are “publicly available at no cost”or “widely accepted” and have been “subject to public comment.”
Do you know how closely the SEC is working with assurance companies out there or audit firms like Deloitte or EY and working to make sure there is a mutual understanding of the calculations and information being gathered and made?
The rule does not prescribe the detailed methodologies that audit firms and assurance providers must use for conducting calculation reviews and verification processes. Instead, these activities are expected to align with recognized professional standards and practices that are deemed suitable for GHG emissions attestation. This approach allows assurance providers flexibility in applying their professional judgment and expertise, guided by established standards such as those from the American Institute of Certified Public Accountants (AICPA), International Auditing and Assurance Standards Board (IAASB), or other relevant bodies.
Scope 3
Notwithstanding the SEC's statements that scope 3 disclosures are not required as a climate metric, are there situations where scope 3 disclosure will be required under other parts of the rule? For example, if a company has a Scope 3 emissions target or goal wouldn't it have to disclose scope 3 emissions to show progress toward that goal?
A company is required to disclose any climate-related target or goal if such target or goal has materially affected or is reasonably likely to materially affect the company’s business, results of operations or financial condition. This disclosure must include any additional information or explanation necessary to an understanding of the impact of the goal. This might include, for example, a description of the scope of activities included in the target, the unit of measurement, and - among other things - progress made toward meeting the target or goal. The company is required to update this disclosure each fiscal year, describing any actions it’s taken during the year to achieve the goal. Within this context, if a company’s disclosed target or goal includes a scope 3 emissions reduction target, the company would need to consider the disclosures that would be necessary pursuant to that goal.
If disclosing targets and goals, transition plans, internal carbon pricing programs, scenario analysis, etc. that are for scope 3 emissions…does it still need to be included? Or is the SEC only concerned with scope 1 and 2 emissions? Same question for offsets. If offsets are used for the scope 3 categories, do they still need to be disclosed?
Similar to the question above, a company is required to disclose any scenario analysis, transition plan, internal carbon price, or offset or REC used if any of these has materially affected or is reasonably likely to materially affect the company’s business, results of operations or financial condition. This disclosure must include any additional information or explanation necessary to an understanding of the impact of the usage of scenario analysis, transition plan, internal carbon price, offset or RECs. Within this context, if a company’s disclosed target or goal, transition plan, carbon price, or offsetting scheme includes scope 3 or a scope 3 emissions reduction target, the company would need to consider the disclosures that would be necessary.
I am from a non US-based company and am a part of the scope 3 of some of our partners in the USA. Are we obliged to disclose our emissions to our US partners?
The SEC rule doesn't require disclosure of scope 3 emissions so, for purposes of the SEC rule, the simple answer is no. However, companies need to think about whether they are in the value chain of companies that have scope 3 reporting obligations elsewhere, including California or the CSRD, or if they are in the value chains of companies that voluntarily report their scope 3 emissions.
Given scope 3 is mandatory for CSRD and other similar international regulations, how likely is it that the SEC would amend it to include scope 3 in future?
It's certainly possible but not likely in the short term. What we can expect is that companies will report the full scope of their emissions, as you say, pursuant to the CSRD and other jurisdictions. This reporting will be out there. It will be interesting to see whether the SEC provides a voluntary alternative reporting mechanism to help companies to use their ISSB disclosures to satisfy their SEC reporting obligations so they can report consistently. This could enable companies to report more consistently if they choose to do so. Of course, a safe harbor from liability would likely need to be a part of that discussion.
Given that scope 3 is not in the SEC disclosure rule, but it is nonetheless still material - will investors find this information anyway from third party sources?
Yes, it is certainly possible that investors will still want to gather scope 3 data directly from companies, from third party sources, or different sources of reporting (CDP, ISSB, etc.)
What could penalties or repercussions look like from the SEC to companies?
The SEC enforces its rules and penalizes for non-compliance or inaccurate disclosures primarily through investigations and enforcement actions. If a company is found to have violated SEC regulations, including those related to disclosure requirements, the SEC can impose penalties and order other relief depending on the circumstances and the context in which the company is found to have violated the securities laws and rules.
Best Practices for Reporting Teams
What would be your recommendations to work with the internal statutory reporting team who typically does the SEC filing that are not familiar with sustainability reporting?
It is certainly a good idea to work with such teams and facilitate effective collaboration and common understanding of the new requirements and how the rules apply to your company.
We have seen companies preparing for the rules by establishing clear processes and controls over their collection of data. We have also seen successful collaboration among teams such as sustainability, operations, real estate, accounting, finance, legal and others. Implementing sustainability reporting tools and software can also help to streamline data collection, management, calculation and reporting.
Regarding people, talent and upskilling: What are the biggest knowledge gaps that need to be filled? Is the upskilling needed primarily within the Finance function or do you see it as a broader education and mindset shift campaign around the entire business?
From a legal standpoint, could private plaintiffs bring a securities fraud lawsuit claiming that there are material omissions regarding scope 1 + 2. (if companies decide not to report)?
The short answer is yes. Private plaintiffs who have standing (typically investors) have a private right of action to bring a securities fraud lawsuit if the company has been engaged in any manipulative, fraudulent or deceptive tactics in the purchase or sale of securities. So if omission were found to be a manipulative, fraudulent or deceptive tactic, it could give rise to a private right of action under SEC Rule 10b-5. There is a split of authority in the courts presently as to whether the omission of required information alone (i.e., without fraud) would support a claim under Rule 10b-5. That question is pending before the U.S. Supreme Court in Macquarie Infrastructure Corp. v. Moab Partners.
Is there a standard or typical time span in which rules such as these are brought up for review or revision - or it is completely at the discretion of the commission(ers)?
There is no mandatory review of Commission rules. Various factors can influence whether and when rules might be reviewed such as market developments, policy priorities, legislative changes, investor input, and the usefulness of the disclosures companies make pursuant to the rules.
I understand the safe harbor provision does not cover historical information -it's forward looking. In this case, is there ever a possibility that the SEC would look at past CDP reports (and, by virtue of reporting to CDP, a TCFD framework) and question a company on what they have reported against TCFD and climate risk vs what they are stating going forward?
This is possible. In September 2021, the SEC’s Division of Corporation Finance issued a sample comment letter designed to indicate the types of comments that companies might receive related to climate change. The staff subsequently did issue comments to companies related to their climate disclosures in line with this sample letter. One of the comments in the sample letter points to disclosures in a company’s CSR report and asks what consideration was given to including similar disclosure in the company’s SEC filing. The SEC staff could certainly look at a company’s prior disclosures to CDP and ask questions about any differences between the CDP disclosures and the company’s disclosures in its SEC filing. Whether the staff will do so remains to be seen.
Is the SEC also considering similar climate disclosure rules for investment advisers?
Thoughts on how investors and ESG raters will view a pullback/repositioning?
There would seem to be some potential risk of reputational harm or questions about the seriousness of the company’s initial plans or goals if it pulls back. That said, it will of course depend on the company’s specific circumstances.
The former Bank of England Governor, Mark Carney, communicated that companies/industries not moving towards zero-carbon emissions would be penalized by investors and go bankrupt. What is impeding leadership from taking and communicating these positions? What is the role of the scientific community / the top international experts in shaping policies, regulations, and rules?
These issues all point to the fact that climate risk is financial risk that investors deserve to be informed of. The SEC climate disclosure rule is focused on ensuring that companies disclose to their investors information about a company’s climate risks to help investors to make well-informed investment and voting decisions.
Legal Challenges to the Rule
What are the thoughts around counter momentum from states' AG's? Do you expect them to delay or kill the SEC rule before it gets implemented?
We have seen some such efforts already in the form of a lawsuit filed by ten states challenging the rule. This was anticipated. It is difficult to know what the effect of the litigation might be but companies are well advised to continue to prepare to comply with the rule in the interim.
What are risks that the SEC rule will be read to implicitly preempt the California legislation?
This seems unlikely because the purpose of the SEC rule is to protect investors where the purpose of the California laws is to protect the public generally.
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