After two years, more than 24,000 comments, and many rumors, on March 6, 2024 the SEC adopted final rules “to enhance and standardize climate-related disclosures by public companies.” Some of us may not exactly view the rules as “enhancements,” but I suppose you can’t blame the SEC for trying to put a positive spin on things.
The good news (such as it is) is that the final rules call for far less disclosure than was contemplated by the proposed rules. In fact, a number of the most severely criticized proposals, such as a proposal to require disclosure of Scope 3 emissions, have been abandoned. In addition, the SEC appears to have restrained itself by limiting some of the rules to large accelerated filers and accelerated filers. Aside from the mind-boggling length of the adopting release (886 pages!) and the rules themselves, the bad news is that many the rules will apply to Smaller Reporting Companies and Emerging Growth Companies.
Under the new rules, companies will be required 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;
- the actual and potential material impacts of any identified climate-related risks on strategy, business model, and outlook;
- if, as part of its strategy, a company has undertaken activities to mitigate or adapt to a material climate-related risk, 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;
- specified information regarding 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;
- oversight by the board of directors of climate-related risks and any role by management in assessing and managing material climate-related risks;
- processes for identifying, assessing, and managing material climate-related risks and, if the company is managing those risks, whether and how any such processes are integrated into the overall risk management system or processes; and
- information about climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the company’s business, results of operations, or financial condition, such as 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.
In addition, large accelerated filers and accelerated filers will be required to disclose:
- information about material Scope 1 emissions and/or Scope 2 emissions;
- for those required to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level, which, for large accelerated filers, following an additional transition period, will be at the reasonable assurance level;
- the capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds, in a note to the financial statements;
- 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 company’s plans to achieve its disclosed climate-related targets or goals, in a note to the financial statements; and
- if the estimates and assumptions used 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, in a note to the financial statements.
The rules will become effective 60 days following publication of the adopting release in the Federal Register. Compliance dates will be phased in based upon their filer status, as follows:
| Compliance Dates Under Proposed Rules | |||
| Registrant Type | Disclosure Compliance Date | Financial Statement Metrics Audit Compliance Date | |
| All proposed disclosures, including GHG emissions metrics: Scope 1, Scope 2, and associated intensity metric, but excluding Scope 3. | GHG emissions metrics: Scope 3 and associated intensity metric | ||
| LARGE ACCELERATED FILERS | Fiscal year 2023 (filed in 2024) | Fiscal year 2024 (filed in 2025) | Same as disclosure compliance date |
| ACCELERATED FILERS AND NON-ACCELERATED FILERS | Fiscal year 2024 (filed in 2025) | Fiscal year 2025 (filed in 2026) | |
| SMALLER REPORTING COMPANIES (INCLUDING EMERGING GROWTH COMPANIES) | Fiscal year 2025 (filed in 2026) | Exempted | |
The foregoing assumes, of course, that the rules will not be invalidated by means of a court challenge. Although it is merely days since the rules were adopted, there have already been reports of court challenges, and it is noteworthy that the courts seem far less likely to defer to the SEC than has been the case in the past (the most recent case in point being the Fifth Circuit decision invalidating the SEC’s stock repurchase rules). For now, it makes sense to contemplate how your company will comply with the rules, but to do so cautiously, bearing in mind that the rules may not be around for long.
Please direct any questions or observations to Gunster securities law and corporate governance practice leader Bob Lamm.
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
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