Guide to the New SEC Climate Disclosure Rules

On March 6, 2024, the Securities and Exchange Commission (SEC) released a set of disclosure rules that require some public companies to include climate-related information in their annual financial reports. The ultimate aim of the new SEC rules is to reinforce and bolster transparent communication between companies and their investors, particularly in regard to climate-related risks and opportunities.  

The SEC rules join the growing list of recently released climate-related reporting standards, including the ISSB Reporting Standards, California’s Climate-Related Financial Risk Act, and the EU’s Corporate Sustainability Reporting Direction. The final SEC rules will apply to an estimated 2,800 companies in the U.S., but compliance will look different for each company based on factors like annual revenue and materiality that will determine what information companies will have to disclose.  

As businesses try to navigate this emerging climate disclosure landscape, it can be challenging to figure out how these new rules will apply to your company. Below, we break down the requirements of the new SEC rules and offer insight into how to build compliance readiness.  

Rule Breakdown   

The new SEC rules have five main areas of disclosure that we’ll look at more closely here: greenhouse gas emissions, climate-related risk management, governance, targets, and financial statements.  

It is first important to note that many of the rules state that companies only have to disclose “material” information. The SEC defines a matter as material if there is a “substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote.” Keeping this in mind, there is no one-size-fits-all solution for compliance with the new rules.  

 Greenhouse Gas Emissions 

The rules require large accelerated filers (LAFs) and accelerated filers (AFs) to disclose material Scope 1 (direct) and Scope 2 (i.e., electricity, steam, heating, or cooling) greenhouse gas emissions. LAFs are companies with an initial public float determination greater than or equal to $700 million, while the initial public float determination of AFs is in the range of $75-700 million. Smaller reporting companies and emerging growth companies (EGCs) – defined as a company with a total annual gross revenue of less than $1.235 billion – are currently exempt from the greenhouse gas emission reporting requirement.  

  Climate-Related Risks 

All public companies will be required to report climate-related physical and transition risks that may have a material impact on business operations, strategy, or financial performance. Physical risks include weather events and longer-term climate conditions, like sea level rise, that could directly impact business operations. The SEC defines transition risks as those resulting from regulatory, technological, or market changes; for example, costs resulting from climate-related regulations would need to be disclosed. In addition, businesses must also disclose the actual and potential material impacts of these risks on their business models.  

The rules also contain provisions for disclosing the process by which companies identify, assess, and manage material climate-related risks. This information will allow investors to evaluate a company’s approach to risk mitigation strategies, and ultimately its resilience.  

 Governance  

Under the new rules, companies will have to disclose a description of the existing and/or developing role of the board of directors in overseeing climate-risk management strategies, as well as details about any board committees that are responsible for the oversight of these risks. Companies must clearly articulate how the board of directors is involved in monitoring and achieving compliance with company-specific targets and transition plans designed to mitigate climate risks.  

 Targets & Goals  

Disclosure of material climate-related targets and goals that may reasonably affect business, operations, or financial performance will be required. The new rules contain a provision that companies must also include internal goals that would be useful for providing an accurate picture of companies’ climate strategies to their investors. In addition, reports must outline proposed timelines and approaches for achieving these targets.  

 Financial Statement  

Finally, the new rules will require companies to include a qualitative piece to their financial statements. The main financial requirements will include disclosing capitalized costs, expenditures, and losses associated with both physical and transitional climate-related risks. The written addition to the financial report will help contextualize for investors how the financial performance of companies is affected by climate-related considerations. 

Implementation Timeline  

After their finalization early last month, the rules were set to follow a phased-in implementation approach, wherein the timeline would differ based on the type of company. The earliest proposed date of disclosure is in 2025 when LAFs would have to include climate-related risks in annual reports. AFs would need to meet this requirement by 2026, and smaller reporting companies and EGCs by 2027. Greenhouse gas emissions disclosure requirements begin in 2026 for LAFs and 2028 for AFs.   

However, immediately following the finalization of the rules, several lawsuits were filed to challenge them. Oil companies Liberty Energy and Nomad Proppant Services filed a suit claiming that the scope of the rules was outside the purview of the SEC and violated the First Amendment. On the opposite side, environmental groups including the Sierra Club and the Natural Resources Defense Council have also filed suits arguing that the rules do not effectively protect investors. As a result of these multiple suits, the Eighth Circuit was selected through a lottery process to hear the consolidated cases.  

During this litigation, the rollout of the SEC rules may be pushed back, but investors are still increasingly seeking climate-related disclosure. Preparing to comply with these new disclosure requirements will necessitate careful and strategic planning. Capaccio is committed to helping our clients meet current disclosure requirements and proactively prepare for how the disclosure process will evolve moving forward.  

Preparing for Disclosure  

The new SEC rules offer companies an opportunity to evaluate their current approaches to climate-related risk mitigation and identify areas to improve efficiency. While these new rules are under review, companies have additional time to establish clear governance strategies for overseeing risk management.  

To move toward disclosure preparedness, Capaccio can conduct a materiality assessment that will identify key areas and considerations that are important to both your company and its stakeholders. This process leads into establishing targets specific to your company’s needs and growth. Once the materiality assessment is complete, Capaccio’s EHS-Dashboard™ is a comprehensive software solution that centralizes both quantitative and qualitative data for ease of reporting. To comply with the SEC rules, the EHS-Dashboard™ can calculate Scope 1 and 2 greenhouse gas emissions, identify potential climate-related risks, and monitor progress toward established targets and goals. To learn more about the capabilities of the EHS-Dashboard™, schedule a demo. 

Rather than take a wait-and-see approach to the new SEC rules, Capaccio can help your company take steps to build readiness for all current and upcoming rules and regulations. In doing so, your company can bolster transparency with stakeholders and implement a solution to position your company for long-term success.