SEC’s Adoption of New Climate Disclosure Rules Increases Reporting Obligations for Companies

At the beginning of March 2024, the Securities and Exchange Commission (SEC) adopted new climate disclosure rules that apply to U.S. publicly listed companies. While the new rules impose additional reporting obligations on public companies, they are weaker than the original version of the climate disclosure rules proposed by the SEC.

Notably, the new climate disclosure rules do not require companies to report Scope 3 greenhouse gas (GHG) emissions. Scope 3 emissions refer to the indirect emissions produced by companies through their value chain. In other words, GHG emissions that are not the result of activities of the company itself or assets directly owned or controlled by the company are considered Scope 3 emissions. Examples include emissions produced by third party suppliers and emissions from waste generated in operations. The original version of the proposed rules included a requirement to report Scope 3 emissions. The final rules eliminated this controversial requirement, which received significant pushback from companies during the SEC comment period.

Under the final rules, companies that are classified as large accelerated filers and accelerated filers will be required to report material Scope 1 and Scope 2 GHG emissions. A large accelerated filer is defined as a company with a public float of $700 million or more; an accelerated filer is defined as a company with a public float of $75 million or more.

The new emissions reporting requirements draw inspiration from reporting frameworks published by the Task Force on Climate-Related Financial Disclosures as well as the Greenhouse Gas Protocol.

The new climate disclosure rules apply to domestic companies, which file their annual report using a Form 10-K, as well as foreign private issuers, which file their annual report using a Form 20-F. A foreign private issuer is a non-U.S. company that has less than 50% U.S. ownership or, if it has more than 50% U.S. ownership, is not located or managed in the United States.

As set forth under new Regulation S-K Item 1500, companies subject to the new SEC rules will be obligated to have a separate section titled “Climate-Related Disclosure” in their annual reports and in the notes to their audited financial statements. The disclosure is required to cover in detail topics such as:

  • Climate-related risks that have had or are reasonably likely to have a material impact on the company’s business strategy, results of operations, or financial condition;
  • The involvement of the company’s board of directors and management in overseeing, assessing, and managing the company’s climate-related risks;
  • The actual and potential material impacts of any identified climate-related risks on the company’s business strategy and outlook;
  • Efforts undertaken to mitigate the impact of climate-related risks;
  • The company’s climate-related goals or targets, and actions taken to make progress towards achieving such goals or targets;
  • A quantitative and qualitative description of material costs, expenses, and losses associated with severe weather events and other natural conditions
  • The capitalized costs, expenditures expenses, and losses associated with carbon offsets and renewable energy credits or certificates;
  • For large accelerated filers and accelerated filers, who are required to provide information about material Scope 1 and Scope 2 emissions, an attestation report from an independent third-party providing limited assurance on the company’s GHG emission disclosure

The 3-2 vote by the SEC commissioners came after a long process that involved significant pushback from corporations, industry groups, and lawmakers who accused the SEC of overreaching. Both Republican commissioners, Hester Peirce and Mark Uyeda, voted against the new climate disclosure rules. They view the new disclosure requirements as overly burdensome and having the potential to make the U.S. capital markets less attractive to companies. On the other side of the political aisle, SEC Chair Gary Gensler views the new disclosure rules as providing investors with increased transparency, comparability, and consistency of climate data and risks across U.S. reporting companies.