In March, 2024, the Securities and Exchange Commission adopted new rules requiring publicly traded companies to disclose financial risks to their investors caused by climate change and efforts to address the crisis. The finalized rule drops requirements in the originally proposed rule to disclose Scope 3 emissions — those three-quarters of emissions released by their supply chain and customers. The revisions weakening the rule were made by the SEC in an effort to preempt or survive pending congressional repeal efforts and legal challenges. Consequently, the revised rules fall short comparable rules adopted in California and the EU.
The final rules will require a registrant to disclose, among other things:
- Climate-related risks and related material impacts on the registrant’s business strategy, results of operations, or financial condition, as well as the processes for identify and managing these risks;
- Adaptation and mitigation plans and expenditures incurred, if applicable;
- Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
- Registrant’s climate-related targets or goals, if any;
- For large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted, information about material Scope 1 emissions and/or Scope 2 emissions;
- The capitalized costs, expenditures expensed, charges, and losses incurred as a result of purchasing carbon offsets and renewable energy credits, as well as severe weather events and other natural conditions.
A recap of the rulemaking process follows, and previous versions of the proposed rule and related analyses remain available below:
The rule was originally proposed on March 21, 2022. The SEC proposed several climate-related disclosure rules, representing a comprehensive new set of disclosure requirements ranging from discussions of climate-risk evaluation and governance to the impact of specific climate-related events on financial statement line items and related expenditures. Proposed disclosures include:
- Climate-related risks faced by the issuer, including physical risks (e.g., impact from extreme weather events, sea-level rise and drought) and the identification of the physical location and nature of the properties, processes, or operations at risk, and transition risks (i.e., the risks associated with a transition to a less carbon-intensive economy);
- The governance and oversight of climate risks by the issuer’s board and management;
- An assessment of climate-related impacts on the issuer’s strategy, business model, and outlook;
- The issuer’s process for identifying, assessing, and managing climate-related risks; and
- If applicable, any climate-related targets and goals (e.g., net-zero carbon emissions by 2050).
In addition, the proposed rules would require disclosure of greenhouse gas (GHG) emissions in a format consistent with the GHG Protocol, which divides GHG emissions into three categories: Scope 1, Scope 2, and Scope 3. Scope 1 emissions are those from operations owned or controlled by the issuer; Scope 2 emissions are indirect GHG emissions from the generation of purchased power (e.g., electricity); and Scope 3 emissions are indirect GHG emissions from other sources, including those from the issuer’s suppliers and consumers.
With respect to GHG emissions, the proposed rules would require quantitative disclosure of:
- Scope 1 and Scope 2 GHG emissions; and
- For some issuers, Scope 3 GHG emissions, if material.
The full SEC proposal, at more than 500 pages, provides a detailed explanation of each of the above requirements.
In November, 2023, the Institute for Policy Integrity issued a report, also included below, examining how recently-passed California and E.U. requirements may affect the SEC’s cost-benefit analysis of its proposed rule. Overall, the report finds that the new disclosure regimes do not undermine the economic case for the SEC’s proposed rule; if anything, they bolster it.