On March 6, 2024 the US Securities and Exchange Commission (SEC) announced new requirements that selected “public companies” (i.e, listed on national securities exchanges) provide “climate-related disclosures for investors” in their registration statements and annual reports. SEC is incorporating them into existing requirements to disclose “material information,” under the Securities Act of 1933 and the Securities Exchange Act of 1934. These new requirements are more limited than those proposed by SEC in March 2022 (which I wrote about HERE). The remainder of this note summarizes SEC’s new requirements.
Which reporting requirements is SEC revising?
SEC is adding similar climate-related disclosure requirements in:
- non-financial statements (Regulation S-K, 17 CFR part 229)
- financial statements (Regulation S-X, 17 CFR part 210)
As summarized below, these include requirements for disclosures by companies, attestation by company management, and audits as part of accounting reviews. These may apply in prospectus and registration statements, and in annual reports. SEC is choosing to codify climate-related disclosures in existing disclosure requirements, to integrate them into general regulation rather than isolate them in separate requirements.
What information will SEC require?
SEC recognizes that many companies provide at least some public disclosures about climate-related risks to their enterprises, but that such disclosures vary widely in methodologies and details. Accordingly, SEC intends that the new rules will “elicit enhanced and more consistent and comparable disclosure about the material risks that companies face and how companies manage those risks.” Registrants will be required to disclose information about the following:
- any climate-related risks that have materially impacted or are reasonably likely to have a material impact on the registrant, including on its strategy, business model, results of operations, financial condition, and outlook;
- specified disclosures, regarding any registrant’s activities to mitigate or adapt to a material climate-related risk or use transition plans or other methods to manage a material climate-related risk;
- any oversight by the registrant’s board of directors of climate-related risks
- any role by management in assessing and managing material climate-related risks;
- any processes used to assess or manage material climate-related risks; and
- any targets or goals that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition.
In addition, “to facilitate investors’ assessment of particular types of risk,” the rules will phase in requirements for large accelerated filers (LAFs; generally more than $700 million in qualifying equity) and accelerated filers (AFs; generally $75-700 million in qualifying equity) that are not otherwise exempted to disclose:
- emissions - “Scope 1” (direct company emissions) and “Scope 2” (from energy purchased by the registrant) emissions of greenhouse gases (GHGs). Note that the final rules remove proposals in the proposed rules to also require “Scope 3” GHG emissions (from the filers’ entire value chain) in some circumstances; and
- financial effects - of severe weather events and other natural conditions including costs and losses.
How and where is this information to be reported?
SEC will require a qualifying registrant (both domestic and foreign private issuers) to:
- provide the climate-related disclosure in its registration statements and annual reports;
- provide mandated climate-related disclosure in a separate, appropriately captioned section of its registration statement or annual report, or incorporate that information in a separate, appropriately captioned section by reference from another section (such as Risk Factors, Description of Business, or Management’s Discussion and Analysis (MD&A)) (Regulation S-K);
- provide mandated climate-related financial statement financial impact metrics, expenditure metrics, and financial estimates and assumptions metrics and related disclosure (Regulation S-X);
- electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL (eXtensible Business Reporting Language) in reports required to be electronic; and
- file rather than furnish the climate-related disclosure (triggering potential liabilities for misleading or false filings).
What happens next?
The new requirements will become effective 60 days after their publication in the Federal Register, and SEC has scheduled phase-ins for all registrants, with the compliance date dependent on the registrant’s filer status (large accelerated filer, accelerated filer, or smaller reporting company), beginning with fiscal year (FY) 2025 filings for LAFs. These requirements supplement disparate federal and state requirements covering some organizations, and voluntary disclosures by many additional organizations.
However, readers should note that lawsuits have already been filed against these rules, including suits brought by reporting companies, (Republican) states, and the Sierra Club. On March 15, the US Fifth Circuit Court of Appeals stayed the new rules pending litigation, in a case brought by Texas-based fracking companies. As of March 21, the nine pending cases have been consolidated for trial in the Eighth Circuit (which is based in Saint Louis).
Self-Assessment Checklist
Is the organization a “public company” subject to SEC reporting requirements?
Whether or not a public company, does the organization provide formal disclosures to shareholders, regulators, market or non-profit reporting organizations, or other stakeholders?
Has the organization assessed potential impacts of climate change on its activities and investments?
- If so, has the organization quantified any of these impacts, and assessed whether they are or would be material to its operations and results?
- If so, is the organization undertaking efforts to adapt to these impacts by reducing negative impacts and enhancing positive impacts?
Has the organization identified which of these activities and investments are presently or potentially insured for climate-related impacts?
Where can I go for more information?
- SEC
- proposal (pre-publication version on SEC website)
About the Author
Jon Elliott is President of Touchstone Environmental and has been a major contributor to STP’s product range for over 30 years.
Mr. Elliott has a diverse educational background. In addition to his Juris Doctor (University of California, Boalt Hall School of Law, 1981), he holds a Master of Public Policy (Goldman School of Public Policy [GSPP], UC Berkeley, 1980), and a Bachelor of Science in Mechanical Engineering (Princeton University, 1977).
Mr. Elliott is active in professional and community organizations. In addition, he is a past chairman of the Board of Directors of the GSPP Alumni Association, and past member of the Executive Committee of the State Bar of California's Environmental Law Section (including past chair of its Legislative Committee).
You may contact Mr. Elliott directly at: tei@ix.netcom.com