The U.S. Securities and Exchange Commission (SEC) today adopted final rules for the “Enhancement and Standardization of Climate-Related Disclosures for Investors” (the Rules). The Rules require registrants to disclose climate-related risks that have had, or are reasonably likely to have, a material impact on business strategy, results of operations, or financial condition, together with their associated actual or potential material impacts. The Rules do not require reporting on Scope 3 emissions or greenhouse gas (GHG) emissions originating in a registrant’s value chains or outside of its direct operations (as was proposed in earlier versions – see our earlier bulletin here). The Rules notably require more disclosure from registrants on capitalized costs, expenditures expensed, and losses related to material use of carbon credits. Disclosure requirements will be phased-in between 2025-2033, with compliance dates dependent on the type of registrant. The SEC also published a fact sheet alongside today’s release.
This bulletin briefly summarizes key details of the Rules.
Content of the disclosures. The Rules will require a registrant to disclose, among other things:
- Strategy. The Rules require disclosure of the following strategy-related climate risks and impacts:
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- actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook;
- if, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk or has adopted a transition plan to manage material risks, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities; and
- specified disclosures regarding a registrant’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.
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- Risk management. The Rules require disclosure of a registrant’s climate-related risk management, including:
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- any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks; and
- any processes the registrant has for identifying, assessing, and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes.
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- Targets and goals. Registrants are required to disclose climate-related targets and goals, including information about targets or goals that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition. The SEC notes that disclosures should include 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.
- GHG emissions. Large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted are required to disclose GHG emissions metrics, including:
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- information about material Scope 1 emissions and/or Scope 2 emissions in gross terms that exclude the impacts of any purchased or generated offset;
- description of the protocol or standard used to report GHG emissions; and
- attestation and assurance reports at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level.
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- Climate-related costs, expenditures, and losses. The Rules require the disclosure of climate-related costs, expenditures, and losses to be provided in a note to the relevant financial statements, including:
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- the capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, subject to applicable one percent and de minimis disclosure thresholds;
- the capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals; and
- if the estimates and assumptions a registrant 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.
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Effective date and phase-in periods. The Rules will become effective 60 days after their publication in the Federal Register. The Rules provide for a phase-in approach for disclosures for all registrants with compliance dates determined based on the status of the registrants as an LAF, AF, non-accelerated filer (NAF), smaller reporting company (SRC), or emerging growth company (EGC). There is also additional phase-in periods for LAFs for disclosures pertaining to material expenditures, GHG emissions, the assurance requirement, and the electronic tagging requirement.
Compliance Dates under the Rules | ||||||
Registrant | Disclosure and Financial Statement Effects Audit | GHG Emissions/Assurance | Electronic Tagging | |||
All Reg. S-K and S-X disclosure, 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 1500 | |
LAFs | FYB* 2025 | FYB 2026 | FYB 2026 | FYB 2029 | FYB 2033 | FYB 2026 |
AFs | 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 |
*FYB refers to any fiscal year beginning in the calendar year listed.
Accommodations. The Rules also provide several accommodations, including:
- a safe harbor from private liability for climate-related disclosures (excluding historical facts) pertaining to transition plans, scenario analysis, the use of an internal carbon price, and targets and goals;
- an exemption from the GHG emissions disclosure requirement for SRCs and EGCs; and
- an accommodation that allows Scope 1 and/or Scope 2 emissions disclosure, if required, to be filed on a delayed basis in certain circumstances.
Application to Canadian registrants. The SEC has noted that the Rules will not apply to Canadian registrants that use the Multijurisdictional Disclosure System (“MJDS”) and file their Exchange Act registration statements and annual reports on Form 40-F. The SEC determined that excluding MJDS filers from the Rules is consistent with the purpose of the MJDS and will continue to allow MJDS registrants to follow their home jurisdiction laws and rules when registering securities in the United States and satisfying their reporting obligations under the Exchange Act. The Canadian Securities Administrators (“CSA”) last conducted consultations on proposed National Instrument 51-107 Disclosure of Climate-related Matters in late 2021 and early 2022 (see our earlier bulletin here). We anticipate that the CSA will aim to align its rules with those of the SEC.
For further information or to discuss the contents of this bulletin, please contact Lisa DeMarco at lisa@resilientllp.com.