On March 6, 2024, the Securities and Exchange Commission (SEC) adopted new rules that increase public company reporting requirements regarding climate change. The new rules, which the SEC originally proposed in March 2022, have been scaled back significantly in their final form. They require registrants, including foreign private issuers, to include expanded climate-related disclosures in their annual and quarterly reports (i.e. Forms 10-K, 10-Q and 20-F) and 1933 Act registration statements, as well as new disclosures in the notes to annual audited financial statements. Some registrants will also be required to submit a new attestation report in certain filings, relating to additional quantitative disclosures on greenhouse gas emissions. Additionally, the requirement to include the additional climate-related disclosures in registration statements and annual reports will subject registrants to liability for these disclosures.
The final rules constitute a significant expansion of issuers’ climate related disclosure obligations compared to current rules and regulations. Since their initial proposal in 2022, the rules have received extensive comments – both in support and opposition. Further, the final rules have already been challenged in a lawsuit filed by 11 states. On the day the final rule was released, the Attorney General of West Virginia announced that a multi-state coalition, led by West Virginia and Georgia, is filing a petition in the 11th circuit for the regulations to be reviewed. The petition addresses whether the SEC has the statutory authority to create these rules, possible First Amendment issues involving compelled speech, and complaints that the new rules are a backdoor attack on the energy industry.
Set forth below are the key disclosure requirements of the new rules.
Narrative Disclosure Requirements
The rules make certain additions to Regulation S-K that would require robust disclosure of information regarding:
- climate-related risks reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition, as well as the impacts, including material expenditures, of those risks on its strategy, business model, and outlook;
- the oversight and management of climate-related risks by the registrant’s board of directors and management, as well as, if applicable, any board committee or subcommittee responsible for the oversight of climate-related risks and a description of the processes by which the board or such committee or subcommittee is informed about such risks;
- the registrant’s process for assessing, identifying and managing climate-related risks and whether any such processes are integrated into their overall risk management system or processes; and
- if the registrant has adopted a transition plan to manage a material climate relates transition risk, a description of how the registrant plans to mitigate or adapt to such identified physical or transition risks, and an annual update describing actions taken in accordance with the plan’s targets or goals.
GHG Emissions Disclosure Requirements
One of the more significant changes from the proposed rule relates to emissions data regarding greenhouse gasses (GHG). The rule requires a registrant that is a large accelerated filer (LAF)1 or an accelerated filer (AF)2 to disclose its GHG emissions data for its most recently completed fiscal year, as well as for prior fiscal years (to the extent available) in its consolidated financial statements. This information includes:
- Scope 1 GHG emissions – GHG emissions from operations that are owned or controlled by the registrant; and
- Scope 2 GHG emissions – GHG emissions from the generation of purchased or acquired electricity or other energy consumed by operations the registrant owns or controls.
The final rule completely removes a third category (Scope 3) that would have covered all indirect GHG emissions not otherwise included in Scopes 1 or 2 (but only if material or the subject of a GHG emissions reduction target or goal). Additionally, the final rule only requires Scope 1 and 2 emission disclosures for material emissions and only by a registrant that is a large accelerated filer (LAF) or accelerated filer (AF) that is not an emerging growth company (“EGC”)3 or smaller reporting company (“SRC”).4
Financial Statements
In a narrowing from the proposed rules, the final rules require registrants to disclose certain costs and expenditures incurred to meet climate change goals or from certain weather-related events and natural disasters as well as certain material components of plans to achieve climate-related goals. The final rules also require qualitative disclosure of the impact risks and uncertainties from these events and climate plans have on estimates and assumptions used in producing the financial statements. Significantly, the rules require registrants to include these disclosures in the footnotes to its financial statements meaning they will be subject to audit by the registrant’s independent registered public accounting firm.
Attestation Requirement
The new rules will require both LAFs and AFs, including foreign private issuers, to include in certain filings an attestation report covering the disclosure of its Scope 1 and Scope 2 emissions. The final rules also outline treatment of voluntary GHG emission disclosures, such as Scope 3 disclosures. Should an LAF or AF that is subject to the emissions disclosures listed above elect to disclose GHG emissions outside the scope of the requirements, the assurances related to those voluntary disclosures, made after the below-mentioned phase in periods, will be subject to the same requirements as the non-voluntary disclosures.
Safe Harbors and Compliance Dates
Item 1507 in the final rules states that disclosures, other than historic facts, provided pursuant to the following subparts of new Section 1500 constitute “forward-looking statements” for purposes of the safe harbors in the Private Securities Litigation Reform Act: (i) 1502(e) “transition plans”; (ii) 1502(f) scenario analysis”; (iii) 1502(g) internal carbon pricing” and (iv) 1504 (targets and goals).
Subject to delays resulting from ongoing legal challenges, the final rules will become effective 60 days after publication in the Federal Register, and compliance will be phased in as illustrated in the table below:
| Compliance Dates under the Final Rules1 | ||||||
| Registrant Type | Disclosure and Financial Statement Effects Audit | GHG Emissions/Assurance | Electronic Tagging | |||
| AR Reg. S-K and .S-X disclosures, other than as noted in this table | Item 1502(d)(2)2, Item 1502(e)(2)3, and Item 1504(c)(2)4 |
Item 1505 (Scopes 1 and 2 GHG emissions) | Item 1506 – Limited Assurance | Item 1506 – Reasonable Assurance | Item 1508 Inline XBRL tagging for subpart 15005 | |
| LAFs | FYB 2025 | FYB 2026 | FYB 2026 | FYB 2029 | FYB 2033 | FYB 2026 |
| AFs (other than SRCs and EGCs) | FYB 2026 | FYB 2027 | FYB 2028 | FYB 2031 | N/A | FYB 2026 |
| SRCs, EGCs, and NAFs | FYB 2027 | FYB 2028 | N/A | N/A | N/A | FYB 2027 |
| 1 As used in this chart. “FYB” refers to any fiscal year beginning in the calendar year listed. 2 Item 1502(d)(2) will require a registrant to describe quantitatively and qualitatively the material expenditures incurred and material impacts on financial estimates and assumptions that, in management’s assessment, directly result from activities to mitigate or adapt to climate-related risks disclosed pursuant to Item 1502(b)(4). 3 Item 1502(e)(2) will allow for the development of systems, controls, and procedures to track and report material expenditures and material impacts on financial estimates and assumptions directly resulting from actions taken under a transition plan. 4 Item 1504(c)(2) is related to disclosure regarding material impacts that directly result from actions taken by a registrant to achieve a disclosed target or goal. 5 Financial statement disclosures under Article 14 will be required to be tagged in accordance with existing rules pertaining to the tagging of financial statements. See Rule 405(b)(1)(i) of Regulation S-T. |
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Conclusions
These rules represent a significant change in public companies’ reporting obligations with respect to climate change and environmental impact. Registrants will have to expend significant efforts to compile and verify the required disclosures. Importantly, mandatory inclusion of the enhanced disclosures in SEC reports and registration statements will also subject public companies to additional liability for any misrepresentation or omissions in their climate-change disclosures.
While the rules already face legal challenges (and there may be additional challenges), the uncertainly about the timing and substance of the ultimate forms of these rules should not prevent issuers from starting to focus on and prepare for the compliance requirements.
If you have any questions about these rules, please contact either of the partners listed below or your primary Seward & Kissel attorney.
