On Wednesday, March 6, 2024, the U.S. Securities and Exchange Commission (“SEC”) voted 3-2 to adopt a substantial set of new rules that require a wide range of public climate-related disclosures. The rules apply to both U.S. domestic public companies and foreign private issuers.

The SEC’s action comes on the heels of California legislation establishing climate and carbon market disclosure requirements that apply to certain entities doing business in or making carbon emission reduction claims in California.

The SEC proposed its climate-related disclosure rules in its March 21, 2022 Proposing Release. The SEC received over 24,000 comments in response and delayed issuing the final rules multiple times. The final rules differ from the proposed rules in several ways. Most notably, the SEC dropped the requirement to disclose “Scope 3” emissions (i.e., indirect upstream and downstream emissions from a registrant’s value chain). The final rules also dropped the requirement to use the Greenhouse Gas Protocol as the specified emissions accounting standard, which was convened in 1998 by the World Business Council for Sustainable Development and the World Resources Institute and is the most widely used emissions accounting standard today.

A summary of the final rules and next steps are discussed below. In addition to the almost 900 pages of the final rules, the SEC issued a Press Release and a Fact Sheet. The final rules will be effective 60 days from publication in the Federal Register. A table of compliance dates is below.

Summary of the Final Climate-Related Disclosure Rules

The final rules mandate new climate-related disclosures by a registrant in its registration statements and annual reports filed with the SEC. The risk-related disclosures and emissions reporting must be separately captioned, while the climate-related financial statement metrics and disclosures must be included in a note to the registrant’s audited financial statements. The climate-related disclosures framework is modeled primarily on the recommendations of the Task Force on Climate-Related Financial Disclosures (“TCFD”).

Here is a summary of the key new disclosure obligations adopted by the SEC.

• Greenhouse Gas (“GHG”) Emissions Reporting: The final rules require accelerated filers (excluding emerging growth companies and small reporting companies) and large accelerated filers to disclose, if material, the registrant’s direct GHG emissions (“Scope 1” emissions) and indirect GHG emissions from the purchase of electricity and other forms of energy for operations (“Scope 2” emissions). If a registrant is required to disclose its Scope 1 and Scope 2 emissions, such emissions must be disclosed separately on an aggregate basis expressed in terms of CO_2e. If any constituent gas is individually material, it must be disclosed disaggregated from the other GHGs. In each case, the reported emissions must exclude the impact of offsets. The final rules require disclosure of the method that the registrant uses to determine the organizational boundaries for GHG reporting. Notably, the operations that a registrant considers as owned or controlled for the purpose of calculating GHG emissions need not conform to the organizational boundaries used in the registrant’s consolidated financial statements. But if the organizational boundaries materially differ from the scope of entities and operations included in the registrant’s consolidated financial statements, the registrant must provide a brief explanation of this difference.
• Smaller Companies Excluded: Under the final rules, smaller reporting companies (“SRCs”) and emerging growth companies (“EGCs”) are excluded from the GHG emissions reporting requirement. The exclusion applies only so long as the registrant remains an SRC or EGC.
• Traditional Notions of Materiality Apply to GHG Emissions Reporting: The SEC noted that a registrant should apply the traditional notions of materiality developed under the federal securities laws when evaluating whether the registrant’s Scope 1 and/or Scope 2 emissions are material. The final rules state that “the guiding principle for this determination is whether a reasonable investor would consider the disclosure of an item of information, in this case the registrant’s Scope 1 emissions and/or its Scope 2 emissions, important when making an investment or voting decision or [whether] such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available.” The final rules provide examples of circumstances related to GHG emissions that “could factor into investors’ decision making” or otherwise may inform the materiality assessment for GHG emissions. These include whether the registrant is subject to methane fees imposed by the U.S. Environmental Protection Agency (“EPA”) or other requirements to report GHG emissions under a “foreign or state law.” As examples of such foreign or state laws, the final rules reference California’s recently adopted Climate Corporate Data Accountability Act (SB 253) and the European Union’s Corporate Sustainability Reporting Directive.
• Accounting Standards for GHG Emissions Reporting: The final rules permit registrants to calculate GHG emissions “according to the methodology that best matches their particular facts and circumstances.” The final rules require disclosures on methodology, significant inputs, significant assumptions, and the reporting standard used with respect to Scope 1 and Scope 2 emissions. The final rules permit the disclosure of “reasonable estimates” for Scope 1 and Scope 2 emissions “provided that such estimates are accompanied by disclosure of underlying assumptions and [the] reasons for using estimates.” The SEC’s decision to allow methodologies other than the Greenhouse Gas Protocol—the most widely used accounting standard—is likely to introduce greater inconsistency across disclosures.
• Attestation Standards for GHG Emissions Reporting:  If a registrant is required to make Scope 1 and Scope 2 disclosures, the final rules require, following a transition period, third-party attestation for such disclosures. The final rules permit the use of any attestation standards that “are publicly available at no cost or that are widely used for GHG emissions assurance and that are established by a body or group that has followed due process procedures including the broad distribution of the framework for public comment.” The attestation must be provided by a GHG emissions attestation provider who meets certain independence, expertise, and other identified requirements. The attestation requirement is phased in following a transition period to achieve “limited assurance.” Large accelerated filers will then be required to obtain an attestation report at a “reasonable assurance” level beginning the seventh fiscal year after the compliance date. Compliance dates are included in the SEC’s table below.
• Climate-Related Targets and Goals:The final rules mandate disclosure by registrants of any climate-related targets and goals, if material to the registrant’s business, results of operations, or financial condition. The rules require registrants to provide any additional information or explanation necessary to understand the material impact, or the reasonably likely material impact, of the target or goal. This includes a description of the scope of such goals, how the registrant intends to meet those goals, metrics used to measure progress, and the registrant’s timeline to meet those goals, including information about the baseline time period if the registrant has established a baseline for the target or goal.
• Planning, Mitigation, and Adaptation Activities: The final rules require specific disclosures regarding a registrant’s activities, if any, to plan for, mitigate, or adapt to a material climate-related risk. This includes the use, if any, of transition plans, scenario analyses, or internal carbon prices.
• Expenditures Related to Transition Activities: The final rules require registrants to disclose material expenditures related to (1) activities that, in management’s assessment, are related to mitigation of or adaptation to climate-related risk, (2) disclosed transition plans, and (3) disclosed targets and goals, among other specified requirements.
• Climate-Related Risk, Impacts, and Governance Disclosure Framework:The rules require disclosures regarding matters such as:
  • Any climate-related risks that have materially impacted the registrant, or are reasonably likely to have a material impact on the registrant, including on its business strategy, results of operations, or financial condition and outlook;
  • Whether such climate-related risks are physical or transition risks and are reasonably likely to manifest in the short-term (i.e., the next 12 months) and, separately, in the long-term (i.e., beyond the next 12 months);
  • Oversight of such climate-related risks by the company’s board of directors;
  • Management’s role in assessing and managing such climate-related risks, including management positions and committees involved, their expertise, and processes by which they assess and manage such risks, including how those processes are integrated into the registrant’s overall risk management systems; and
  • Certain other prescribed disclosures related to climate-related risks.

    While the final rules implement a climate-related disclosure framework modeled on the recommendations of the TCFD, there are differences between the SEC’s final rules and the TCFD’s recommendations. For example, the SEC’s final rules do not require disclosing information about “climate-related opportunities” and instead treat such information “the same as other voluntary disclosure.”

• Climate-Related Items in Financial Statements: The final rules require registrants to disclose certain climate-related elements in a note to the financial statements, including:
  • Costs of Severe Weather Events and “Natural Conditions”: The note to the financial statement must include capitalized costs and charges, expenditures expensed, and losses incurred as a result of severe weather events and other “natural conditions.” In making these disclosures, registrants must use a prescribed attribution principle, subject to applicable 1% and de minimis thresholds, described below. The final rules require a registrant to attribute such a disclosed cost, expenditure, charge, loss, or recovery to a severe weather event or other natural condition and disclose the entire amount when the event or condition is a significant contributing factor in incurring the cost, expenditure, charge, loss, or recovery. Disclosure of expenditures expensed as incurred and losses is required if the aggregate amount of such expenditures expensed as incurred and losses equals or exceeds 1% of the absolute value of income or loss before income tax expense or benefit for the relevant fiscal year. However, if such aggregate amount is less than $100,000 for the relevant fiscal year, disclosure is not required. Disclosure of such capitalized costs and charges recognized is required if the aggregate amount of the absolute value of capitalized costs and charges recognized equals or exceeds 1% of the absolute value of stockholders’ equity or deficit at the end of the relevant fiscal year. However, if such aggregate amount is less than $500,000 for the relevant fiscal year, disclosure is not required. Importantly, a registrant is not required to determine that a severe weather event or other natural condition was caused by climate change to trigger disclosure. The disclosure must include material impacts on financial estimates and assumptions.
  • Carbon Offsets and Renewable Energy Credits: If a registrant uses carbon offsets or renewable energy credits or certificates (“RECs”) as a material component of its plans to meet its climate-related targets or goals, the rules require disclosure in a note to the financial statements of the capitalized costs, expenditures expensed, and losses related to those offsets and RECs.
  • Estimates and Assumptions: The note to the financial statements must also disclose whether the estimates and assumptions used to prepare the consolidated financial statements were materially impacted by risks and uncertainties related to severe weather events and other natural conditions or any climate-related targets or transition plans disclosed by the registrant. In addition, the note must provide contextual information, including a description of significant inputs and assumptions used, significant judgments made, other information that is important to understand the financial statement’s effect, and, if applicable, policy decisions that the registrant made to calculate the specified disclosures.
  • Integration with Existing Requirements: These new financial statement reporting requirements are subject to existing auditing and internal controls requirements.
• Safe Harbor: The final rules extend the Private Securities Litigation Reform Act (“PSLRA”) safe harbor provisions to climate-related disclosures (other than historical facts) that pertain to transition plans, targets, goals, scenario analyses, and the use of internal carbon pricing. The extension includes such climate-related disclosures made by certain types of entities and in certain transactions that are currently excluded from the PSLRA safe harbor for forward-looking statements, such as partnerships, limited liability companies, and initial public offerings. Scope 1 and Scope 2 emissions disclosures do not fall within the scope of any safe harbor. The SEC noted that it “may determine at a future date, after assessing how disclosure practices have evolved, whether it makes sense to amend or remove the safe harbor.”
• Timing:The final rules will become effective 60 days after publication in the Federal Register and will be phased-in based on the filer status of the registrant as a large accelerated filer, an accelerated filer, a non-accelerated filed, an SRC, or an EGC, and on the content of the disclosure. The first disclosures will be required for large accelerated filers that are calendar year companies for fiscal year 2025 in the Form 10-K due in March 2026. The SEC provided the table below of compliance dates in its Fact Sheet about the new rules. Items 1502(d)(2), (e)(2) and 1504(c)(2) of Regulation S-K, referred to in this table, require quantitative and qualitative disclosure of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from activities to mitigate climate-related risks, from the registrant’s transition plan, or from actions taken to meet targets or goals. The SEC provided an additional phase-in period for these disclosures, as shown below, recognizing that registrants may need to develop systems and update disclosure controls to accommodate the tracking and reporting of these expenditures and impacts.

Compliance is phased in as follows:

Compliance Dates under the Final Rules1
Registrant Type	Disclosure and Financial Statement Effects Audit		GHG Emissions/Assurance			Electronic Tagging
	All Reg. S-K and S-X disclosures, other than as noted in this table	Item 1502(d)(2), Item 1502(e)(2), and Item 1504(c)(2)	Item 1505 (Scopes 1 and 2 GHG emissions)	Item 1506 - Limited Assurance	Item 1506 - Reasonable Assurance	Item 1508 - Inline XBRL tagging for subpart 15002
LAFs	FYB 2025	FYB 2026	FYB 2026	FYB 2029	FYB 2033	FYB 2026
AFs (other than SRCs and EGCs)	FYB 2026	FYB 2027	FYB 2028	FYB 2031	N/A	FYB 2026
SRCs, EGCs, and NAFs	FYB 2027	FYB 2028	N/A	N/A	N/A	FYB 2027
	1 As used in this chart, “FYB” refers to any fiscal year beginning in the calendar year listed. “AFs” mean accelerated filers, “LAFs” means large accelerated filers, “NAFs” mean non-accelerated filers, “SRCs” mean small reporting companies, and “EGCs” mean emerging growth companies. “XBRL” means extensible business reporting language. 2 Financial statement disclosures under Article 14 will be required to be tagged in accordance with existing rules pertaining to the tagging of financial statements. See Rule 405(b)(1)(i) of Regulation S-T.

Key Takeaways

The final rules will entail significant costs in terms of both money and human resources for registrants. Requiring registrants to integrate additional internal controls, financial reporting, emissions tracking, disclosures, and, in some cases, third-party attestation, substantially raises the compliance demand on registrants. Registrants also face increased risk from public climate-related disclosures because the complex nature of climate-related disclosures raises the threat of SEC enforcement and the potential use of such disclosures against the registrant, including as the basis for “greenwashing” or securities litigation.

The SEC’s climate-related disclosure rules increase the difficulty of ensuring that reporting remains consistent across jurisdictions in light of California’s recently adopted legislation requiring the disclosure of GHG emissions and climate-related risks by certain large companies and in light of the global proliferation of climate-related disclosure rules, including in the European Union, the United Kingdom, India, and Singapore. Further, other jurisdictions, including China, Canada, and Australia, have proposed climate-related disclosure rules, which are likely to add to the growing complexity of the regulatory mandates facing companies worldwide.

Commissioner Statements

The SEC’s Commissioners provided statements during the public meeting in which the SEC’s vote to adopt the final rules took place. Chair Gary Gensler discussed how the SEC has “no role as a regulator of climate risk,” but does have a role in regulating the disclosure of such risks by public companies. Chair Gensler noted that the SEC began requiring certain environmental disclosures in the 1970s and issued guidance on climate risk disclosures in the 2010s. Commissioners Hester Peirce and Mark Uyeda indicated that they were against the proposed rules and voted “no” on the adoption. Commissioner Peirce suggested that the final rules will “spam” investors with “information that is irrelevant to the company’s financial picture,” and set a dangerous precedent because special interests will now “line up” to get their preferred disclosures included in SEC reports. Commissioner Peirce stated that the rules “embrace materiality in name only,” while Commissioner Uyeda reflected that courts may soon determine the rules to be invalid under the “major questions” doctrine.

Potential Issues and What’s Next

Overall compliance costs will remain front and center. While the SEC’s final rules are designed to integrate with existing disclosure practices due to their heavy reliance on the terminology and prior work undertaken globally in this arena, particularly by GHG accounting methodologies and the TCFD, the demands required of registrants are high. The decision to allow companies to use greenhouse gas methodologies other than the Greenhouse Gas Protocol will introduce additional risk that disclosures will be inconsistent across registrants.

The Rules are Being Challenged in Court

On the same day that the SEC adopted the final rules, a group of ten U.S. states filed a petition for review in the U.S. Court of Appeals for the Eleventh Circuit. The petition asks the Court to "declare unlawful and vacate" the rules under the Securities Act and the Administrative Procedure Act. The states’ petition alleges that the rules exceed “the agency's statutory authority and otherwise [are] arbitrary, capricious, an abuse of discretion, and not in accordance with law." The petitioning states are Alabama, Alaska, Georgia, Indiana, New Hampshire, Oklahoma, South Carolina, Virginia, West Virginia, and Wyoming.

What Registrants Should Do Now

Registrants should take concrete steps in the immediate term:

• Ensure that the broader requirements for climate-related risk reporting are well understood across the internal cross-functional teams that most registrants will call on to formulate and execute climate-related disclosures;
• Identify the status of current internal information, including existing climate-related risk identification and management practices, and any gaps in emissions data;
• Assess what further steps may be required to prepare for attestation of GHG emissions reporting, as applicable;
• Align disclosure processes across the different jurisdictions where a registrant may disclose climate-related information, whether voluntarily or as the result of mandates, because taking early steps to integrate processes can facilitate consistency and reduce the risk that disclosures will unintentionally conflict;
• Understand and, as needed, augment existing climate-related expertise at the management-level and understand how that expertise can be leveraged most efficiently to identify and manage climate-related risks;
• Cultivate a depth of working knowledge among the board of directors to facilitate efficient and thorough oversight of climate-related risks; and
• Stay apprised of emerging developments that may inform materiality assessments and multi-jurisdictional reporting considerations, including developments in non-U.S. jurisdictions such as the European Union.

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