SEC Adopts Landmark Climate-Related Disclosure Rules

Capital Markets

Written in partnership with Christopher Agoranos, J.D. candidate at The University of North Carolina School of Law.

On March 6, 2024, the U.S. Securities and Exchange Commission (the “SEC”) adopted final rules to enhance and standardize climate-related disclosures by reporting companies (the “Final Rules”). The Final Rules, arriving almost two years after the SEC proposed climate-related disclosure rules, are yet another indication of the SEC’s increased focus on climate-related risks. The SEC aims to improve the consistency, comparability, and reliability of climate-related disclosures for investors in an age where climate-related risks have become more prevalent.

The Final Rules are sweeping in scope and are already subject to legal challenges. Below, we focus on some of the key takeaways to help companies prepare for compliance.

The content and form of the newly-enacted disclosures.

The Final Rules will create a new subpart 1500 of Regulation S-K and Article 14 of Regulation S-X. In particular, the rules will require reporting companies to disclose the following:

  • Climate-related risks that have had or are reasonably likely to have a material impact on the company, including on its strategy, results of operations, or financial condition in the short- or long-term.
  • The actual and potential material impacts of any identified climate-related risks on the company’s strategy, business model, and outlook.
  • Specified disclosures regarding a company’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices.
  • Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the company’s material climate-related risks.
  • Any processes the company has for identifying, assessing, and managing material climate-related risks and, if the company is managing those risks, whether and how any such processes are integrated into the company’s overall risk management system or processes.
  • If a company has set a climate-related target or goal that has materially affected or is reasonably likely to materially affect the company’s business, results of operations, or financial condition, certain disclosures about such target or goal, including material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or actions taken to make progress toward meeting such target or goal.
  • If a company is a large accelerated filer (“LAF”), or an accelerated filer (“AF”) that is not otherwise exempted, its Scope 1 emissions and/or its Scope 2 emissions, if material.1 An attestation report verifying the Scope 1 and/or Scope 2 emissions disclosure will be required following a phase-in period (with an increased assurance level for AFs).
  • The capitalized costs, expenditures, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to a de minimis disclosure thresholds.
  • The capitalized costs, expenditures, and losses related to carbon offsets and renewable energy credits or certificates if used as a material component of a company’s plans to achieve its disclosed climate-related targets or goals.
  • If the estimates and assumptions a company uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions, or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted.

Companies will have some flexibility in the presentation of climate disclosures.

Companies will be required to include climate-related disclosures in registration statements and annual reports filed with the SEC, either in a separate, appropriately captioned section, or layered in other relevant sections, such as Risk Factors, Description of Business, and Management’s Discussion and Analysis. Additionally, companies will be able to incorporate by reference the disclosure from another SEC filing, as long as the disclosure meets the iXBRL tagging requirements. 

The Final Rules will have a phase-in period.

The Final Rules will become effective 60 days after publication in the Federal Register and compliance will be phased in over the next several years. Compliance dates will depend on (1) the company’s filer status and (2) the content of the disclosure. This chart breaks down the phase in periods:

Compliance Dates Under the Final Rules2
Filer StatusDisclosure and Financial Statement Effects AuditGHG Emissions/AssuranceElectronic Tagging
 All Reg. S-K and S-X disclosures, other than as noted in this tableItems 1502(d)(2), (e)(2), and 1504(c)(2) (Material Impacts and Expenditures)Item 1505 (Scopes 1 and 2 GHG Emissions)Item 1506 – Scope 1 and Scope 2 Attestation – Limited AssuranceItem 1506 – Scope 1 and Scope 2 Attestation -Reasonable AssuranceItem 1508 – iXBRL tagging for subpart 15003
LAFsFYB 2025FYB 2026FYB 2026FYB 2029FYB 2033FYB 2026
AFs (other than SRCs and EGCs)FYB 2026FYB 2027FYB 2028FYB 2031N/AFYB 2026
SRCs, EGCs, and NAFs4FYB 2027FYB 2028N/AN/AN/AFYB 2027

Concrete steps companies can take to prepare for compliance.

Legal challenges notwithstanding, the SEC has shown no signs of shifting its attention away from climate-related risks. Therefore, companies should develop plans for evaluating and managing their exposure to climate-related risks. To get started, companies might consider doing the following:

  • Develop a climate oversight structure at the board and management level.
  • Ensure the appropriate internal workstreams, as well as with external service providers, are aligned with respect to the data and disclosures that will be required.
  • Consider conducting a risk assessment to help your company identify and establish a framework for determining material climate-related risks.
  • Create a plan to comply with the new disclosure requirements in the first reporting year, perhaps by identifying gaps between what the company presently discloses and what the new rules require.
  • Confirm or develop the company’s approach and calculations with respect to applying the SEC’s materiality threshold as it relates to climate-related risks (e.g., climate-related risks that have had or are reasonably likely to have a material impact on the company, including on its strategy, results of operations, or financial condition in the short- or long-term).

Although affirmative steps in this regard may mean increased disclosures, the SEC’s focus on climate-related risks suggest that companies who do not take such affirmative steps will not be off the hook. Instead, companies may simply find themselves less prepared to meet the new expectations of the SEC. Of course, best practices will depend on numerous factors, including the company’s industry, its line(s) of business, as well as its size. We are available to help your company think strategically about ways to comply with the Final Rules efficiently and effectively.

1Scope 1 emissions are direct greenhouse gas (GHG) emissions that occur from sources that are controlled or owned by an organization (e.g., emissions associated with fuel combustion in boilers, furnaces, vehicles). Scope 2 emissions are indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling.

2As used in this chart, “FYB” refers to fiscal year beginning in the calendar year listed.

3Financial 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.

4As used in this chart, “NAF” refers to a non-accelerated filer, “SRC” refers to a small reporting company, and “EGC” refers to an emerging growth company.

Lorna A. Knick and Christopher Agoranos are members of the Capital Markets practice group of Wyrick Robbins, which represents public company clients across a broad range of industries in connection with their SEC reporting and corporate matters, and significant financing transactions. The Capital Markets group publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.