SEC’s climate disclosure rule: emissions, risks, and transparency

The SEC has approved the long-awaited climate disclosure rule, requiring large companies to disclose emissions and risks. Discover how this regulation emphasizes materiality and global standards for enhanced transparency and accountability.

This article has been updated to include recent developments: As of April 2024, the SEC has temporarily paused its climate rule, awaiting the outcome of court challenges. Continue reading to find out more about the climate disclosure rule, if your business is affected and what this pause may mean for you.

Almost two years in the making, the U.S. Securities and Exchange Commission (SEC) passed The Enhancement and Standardization of Climate-Related Disclosures for Investors, a rule requiring some of the largest publicly traded companies to disclose their direct greenhouse gas emissions and the significant risks that climate change poses to their business. The rule promotes transparency about companies’ exposure to environmental impacts and the potential vulnerabilities. This increased transparency fosters greater accountability among companies for their actions and decisions regarding climate change.

Aligned to established frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Greenhouse Gas (GHG) Protocol, the SEC’s rule aims to standardize climate reporting practices, and in doing so, further promotes the consistency, comparability, and reliability of reports that are crucial to investors. As evidenced by the rising trend of climate disclosures among many companies, investors are increasingly factoring climate risks into their decision-making processes.

5 key takeaways:

  1. Materiality is a key focus: The Commission doesn’t define “materiality” but expects registrants to apply traditional notions under federal securities law, giving firms significant discretion in determining what information to disclose in SEC climate filings. Many required disclosures are tied to materiality, allowing exclusion of immaterial disclosures. The rule adopts the traditional financial materiality standard and requires disclosure of greenhouse gas emissions only if they are deemed material to investors, avoiding the broader double materiality approach used in the EU.
  2. Climate-related disclosures: Companies will have to disclose climate-related risks that have a material impact on the business, actions taken to mitigate or adapt to such risks, management and oversight of climate-related risks, as well as the capitalized costs, expenses, and losses incurred as result of severe weather events. If applicable the use of transition plans and scenario analysis must also be disclosed. The framework for these disclosures, including risk and opportunity assessments, will be built off those provided by the TCFD.
  3. Emissions Reporting: The rule mandates that large accelerated filers (LAFs) and accelerated filers (AFs) disclose both Scope 1 and Scope 2 emissions, covering direct emissions and emissions from purchased electricity, respectively. These disclosures must undergo independent assurance reviews to ensure accuracy. Currently there is no requirement to disclose Scope 3 emissions, which account for emissions generated throughout a company’s supply chain and from the consumption of its products.
  4. Impacts on financial statements: The new rule mandates companies to include a note in their financial statements detailing the financial impacts of severe weather events, including costs, expenditures, and losses such as fires, sea-level rise, and flooding. Companies must also disclose how climate-related factors materially impact their financial statements.
  5. Electronic Tagging: The mandated climate-related disclosures must include electronic tagging either in a separate, clearly labeled section of their registration statement or annual report, or within relevant sections. Alternatively, companies can incorporate these disclosures by reference from another SEC filing, provided they meet electronic tagging requirements. Specifically, climate-related disclosures must be electronically tagged in Inline XBRL format, ensuring standardized and searchable data for investors and regulatory purposes.

Implementation timeline:

The implementation of the final rules will be gradual, with compliance dates varying based on the filer status of
each registrant. This phased approach ensures a smooth transition for companies as they adapt to the new requirements.

Temporary pause on SEC climate disclosure rule

As of April 2024, the SEC has temporarily paused its climate rule pending court challenges. This decision has sparked a variety of reactions across the financial and corporate sectors, with some viewing it as a setback for climate accountability, while others see it as a necessary pause to ensure the rule’s legal robustness and practical implementation. Despite this pause, it is crucial for companies to understand that the underlying need for transparent and standardized climate-related disclosures remains unchanged. The SEC’s initial move to enhance and standardize climate-related disclosures underscores the growing importance of environmental factors in financial performance and risk assessment. This regulatory focus aligns with increasing investor demands for more detailed, reliable, and comparable information about how climate-related risks affect businesses.

Companies should not wait to enhance their climate-related reporting practices. Proactively developing and refining climate disclosure strategies can provide companies with a competitive advantage, demonstrating leadership in corporate responsibility and foresight in risk management. It can also prepare companies for eventual compliance requirements, ensuring a smoother transition once regulatory uncertainties are resolved rather than being left wholly unprepared.

 

 

Need help navigating the evolving SEC climate disclosure rules? Stay ahead of the regulatory curve with Position Green and ensure your compliance while advancing sustainability initiatives.

 

 

How Position Green can help

The SEC’s climate disclosure rule represents progress, but it’s lacking the comprehensiveness of other climate reporting frameworks. While many companies mention climate change in their annual reports, the final SEC rule necessitates companies to disclose climate-related risks and emissions from direct operations in a more consistent and formalized manner. To successfully comply, companies will need more robust systems for managing their emissions data and assessing knowledge gaps.

Position Green offers a customizable sustainability solution, tailored to the precise needs and structure of your business. Our holistic approach includes software, advisory services, e-learning, and executive training. Our team assists companies in strategic decision-making, risk reduction, and value creation to drive sustainable transformation. We ensure compliance with evolving regulations and integrate ESG strategies for sustainable growth.

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