An overview of the SEC climate disclosure rules
Under Regulation S-K and S-X, the adopted SEC rules require public company registrants to disclose both qualitative and quantitative climate related
information in registration statements, Exchange Act reports and consolidated financial statements (e.g., Form 10-K, Form 10Q), and electronically tagged
using Inline XBRL. In-scope companies will be required to disclose material climate-related risks to their business and operations, board and management
oversight over such risks, information on material climate-related targets or goals, and details on material greenhouse gas (GHG) emissions for certain in
scope companies. In addition, independent attestation will be required around GHG disclosures for companies required to report on their carbon
emissions. The final rules include a phased-in, proportionate timeline for all U.S. public registrants to comply with the disclosure requirements.
Who does it apply to?
The new SEC rules around annual report and financial statement disclosures, registration statement disclosures, and electronic tagging will apply to all
publicly traded companies in the United States under the SEC’s purview – these include Large Accelerated Filers, Accelerated Filers, Smaller Reporting
Companies, Emerging Growth Companies, and NonAccelerated Filers. Requirements around material GHG emissions disclosures will only apply to
Accelerated and Large Accelerated Filers. These companies will eventually be required to get their Scope 1 and 2 emissions disclosures subjected to limited
assurance by an independent auditor on a phased-in, proportionate basis, and later rising to the reasonable assurance level for Large Accelerated Filers
only. The rules may also have an knock-on effect upon private companies, who may face increased pressures from investors to follow the best practice
disclosure actions of their public company peers, especially as these private companies prepare to enter the U.S. public market in the future.
What needs to be disclosed?
Overall, in-scope companies need to disclose material climate-related risks, oversight of such risks by the registrant’s board of directors and executive
management, GHG emissions when material, and information on any climate-related goals and targets if established. The requirements of the rules align
closely with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), and overlaps with the four pillars of the TCFD
recommendations are illustrated in the PDF.
Disclosure of Climate Risks
The requirements include disclosure of material climate risks and associated impacts on business condition or financial estimates and assumptions.
Climate risks are comprised of a combination of physical and transition risks. Companies would be required to disclose risk identification, assessment, and
management processes, as well as internal structures for oversight and governance at the board and senior management levels. These disclosures would
be written in registration statements and 10-Ks in new separate sections, other appropriate existing sections, or referenced from another SEC filing that
meets Inline XBRL electronic tagging requirements.
• Physical risks affect companies with assets concentrated in regions exposed to chronic and acute changes in climate patterns, such as severe weather
events (e.g., floods, wildfires, hurricanes, and droughts) or other natural conditions, that might be affected in frequency and intensity by climate change.
• Transition risks affect companies through the global shift to a low carbon economy, represented by legal, regulatory, policy, technology, and market
changes. Stranded asset risk, for example, would qualify as a transition risk.
The rules also require in-scope companies to report expenditures (revenue as well as capital) and losses incurred due to severe weather events and other
natural conditions as disaggregated disclosures in their notes to the financial statements, if the aggregate amount of expenditure is >= 1% of the absolute
value of profit/loss before taxes or >= 1% of the absolute value of stockholders equity. While companies are not required to disclose an explicit assessment of
whether these events resulted from climate change, these disclosures will nonetheless provide investors with greater transparency around the physical
risks from climate change that companies face. Companies must also qualitatively report within a note to the financial statement whether the estimates
and assumptions they used to produce the financial statements were materially impacted by risks and uncertainties associated with any severe weather
events, natural conditions, climate-related targets, or transition plans. These footnote requirements are not subject to audit but are subject to reporting
standards.
Disclosure of GHG Emissions
Public companies that are classified as Accelerated and Large Accelerated Filers under the SEC’s purview would be required to report on their direct (i.e.,
Scope 1 and 2) GHG emissions if deemed material. The table below explains how GHG emissions are categorized among Scope 1, 2, and 3 in company
operations, and it also indicates companies’ obligations for disclosure under the SEC’s climate rules.
Emissions reporting would include Scope 1 and 2 GHG emissions if such information is ‘material’ to a reasonable investor – a materiality threshold previously set by the Supreme Court and used by the SEC for other requirements around investor-grade disclosures. That is, in-scope companies would need to report on their Scope 1 and 2 emissions disclosures if a reasonable investor would consider such information important in decisions related to her investment or voting decisions. Notably, a previously proposed Scope 3 emissions disclosure mandate has been removed from the finalized rules.
These disclosures will be required in a newly created section of annual SEC report, Form 10-K (Item 6). Or, in-scope companies may be granted certain accommodations to disclose their emissions for the fiscal year on a delayed basis – such as two fiscal quarters later in Form 10-Qs for domestic registrants, in annual report amendments for foreign private issuers, or 225 days prior to the effective date for those filing registration statements.
When reported, Scope 1 and 2 emissions disclosures will eventually be subject to limited assurance for both Accelerated and Large Accelerated Filers, later followed by reasonable assurance requirements for Large Accelerated Filers.
Disclosure of Climate-Related Goals and Targets
The final rules dictate that, if as part of their strategies, in-scope companies take actions to mitigate or adapt to identified material climate-related risks,
they must disclose the specific activities undertaken (e.g., use of transition plans, climate scenario analyses, or internal carbon prices) alongside a
quantitative and qualitative description of material costs incurred or financial impacts projected due to such activities. They must also disclose how any
established climate-related targets or goals affect or are likely to impact their business, result of operations, or financial condition. For example, in-scope
companies may choose to set climate-related targets or goals. If these companies utilize carbon offsets or renewable energy certificates (RECs) as a
material component of their developed climate transition plans, they would be required to report associated costs as disaggregated disclosures in their
notes to the financial statements. Again, these footnote requirements are subject to financial reporting but not audit standards.
Uniqus Point of View
Many public companies in the U.S. will be required to disclose material climate-related information and Scope 1 and 2 emissions under the SEC’s climate
rules. In-scope businesses should prepare for compliance, beginning by assessing their Scope 1 and 2 emissions. Although not mandated by the SEC rules,
many companies may also voluntarily report their Scope 3 emissions since some investors consider these to be relevant dependent on the nature of a
company’s products or services (e.g., financed emissions for financial institutions).
Private companies preparing to go public should also prepare for these disclosure requirements, as they may face increased pressure from their investors
to follow the market leading disclosure practices of their public company peers. These companies can begin taking proactive measures in preparation for
the SEC rules. Companies should be mindful of the following recommendations when approaching the new SEC regulations.
Focus on building understanding around TCFD elements
2. Leverage a phased approach
3. Prepare for independent assurance
4. Prepare for independent assurance
5. Prepare for independent assurance
6. Build organizational capacity
7. Anticipate Scope 3 GHG emissions disclosures to become increasingly best practice.
Conclusion
As the SEC’s climate disclosure rules come into effect, focusing on universal aspects and common themes in regulations and frameworks can be
paramount. The SEC’s rules indeed have major overlaps with similar regulatory standards and voluntary frameworks around climate-related disclosures,
including the EU CSRD, California climate laws, and the ISSB Standards and TCFD recommendations. Companies which prepare for these disclosure
standards should be better prepared to report against the new SEC’s rules. Like these other standards, the SEC’s rules will not only facilitate greater
transparency for investors to understand any climate risks associated with their investments but will also provide companies enhanced understanding and
management of their own climate-related risks and opportunities. Although the implementation of the SEC’s rules does not come into force until FY 2025
at the earliest, companies can begin now by building GHG inventories, engaging finance, audit and legal teams, aligning with the TCFD framework, as well
as establishing appropriate governance and oversight mechanisms.
As a tech-enabled global company that offers ESG and Accounting & Reporting Consulting, Uniqus looks forward to the new corporate climate disclosure
baseline that the SEC ushers in. The SEC rules mark a pivotal turning point for companies and investors alike. Embracing these regulations is an
opportunity to drive transparency, accountability, and sustainable growth.
