Climate-Related Disclosures: SEC Final Rule

03 Apr

Energy / Environment

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Agencies across the globe have implemented various voluntary and mandatory sustainability and carbon disclosure reporting requirements, ranging from the International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards, to the EU Corporate Sustainability Reporting Directive, to the State of California’s climate disclosure legislation. Even the International Organization for Standardization (ISO) recently issued an amendment to ensure climate change impacts are considered by all organizations in their management system design and implementation.

On March 6, 2024, the U.S. Securities and Exchange Commission (SEC) followed suit, approving its much-anticipated final rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors (Climate-Related Disclosure Rule). Initially proposed in March 2022, the SEC’s final rule requires publicly listed companies to report on greenhouse gas (GHG) emissions; climate-related risks; and other relevant environmental, sustainability, and governance (ESG) information. According to the SEC, the final rules are a continuation of the SEC’s efforts to respond to investor needs for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant’s business.

Overview of Requirements

The SEC’s recent action represents a significant milestone in the U.S., as it integrates climate-related risks and opportunities into business practices and investment decisions. Fundamentally, the final rule requires companies to:

  • Identify any material climate-related risks, assess their impacts on financial performance and business strategy, and outline activities to mitigate or adapt to such risks.
  • Disclose how they manage the oversight and governance of identified climate-related risk (i.e., the role of management and the Board of Directors).
  • Provide information on any climate-related targets or goals that are material to the registrant’s business or financial condition.
  • Provide comprehensive disclosure and attestation reporting on Scope 1 (i.e., direct) GHG emissions and Scope 2 (i.e., indirect) GHG emissions (large accelerated filers (LAF) and accelerated filers (AFs)). 
  • Disclose financial impacts of severe weather events and other natural conditions.

The final rule modifies the March 2022 proposed rule in several ways, most notably by removing the requirement for Scope 3 GHG emission disclosures and providing more time to implement disclosures and related assurance requirements. The SEC Fact Sheet provides a more comprehensive overview of all requirements included in the final rule.

The SEC Fact Sheet provides a more comprehensive overview of all requirements included in the final rule.

Timeline for Compliance

The final rule becomes effective 60 days after publication in the Federal Register. The requirements will be phased in for all registrants with the compliance date dependent upon the status of the registrant as an LAF, AF, or non-accelerated filer (NAF); smaller reporting company (SRC); or emerging growth company (EGC) and the content of the disclosure. Initial deadlines for Scope 1 and 2 GHG disclosures for LAFs begin as early as FY 2026. Refer to the SEC Fact Sheet for a breakdown on all deadlines.

What to Do

If it isn’t happening already, facilities need to start gathering emissions data, develop and implement a system to track GHG emissions, and create an action plan for climate disclosure. Even non-publicly traded companies can benefit from adhering to the general requirements of the new regulations, as publicly traded customers may require climate-related information. This presents an opportunity to demonstrate a commitment to ESG and improve brand reputation; an energy consumption analysis can also lead to improved efficiencies and cost savings.

For many, the SEC’s final rules have the potential to significantly expand requirements beyond what the company is already doing. The transition timeline is designed to allow companies the time needed to:

  • Ensure the company has a robust management system in place to provide a solid framework for conducting the required risk assessments, managing new reporting requirements, and organizing required documentation. Note that ISO has taken recent steps to build climate change considerations into all its management system standards.
  • Understand current disclosure reporting capabilities, data requirements, processes, and controls, then analyze what climate-related data has already been gathered and what additional information is needed to comply with the final rule.
  • Establish or refine corporate governance and define clear roles, responsibilities, and charters for management oversight.
  • Develop an action plan for implementation and integrate it with any other existing climate-related initiatives.

As organizations prepare to meet SEC disclosure requirements, KTL can help ensure they have the systems and processes in place to comply and to realize sustainable business value, including:

  • Developing and implementing management systems that incorporate climate change considerations, including identifying environmental aspects and impacts, risks, and opportunities.
  • Conducting energy audits and analyzing enterprise-wide energy consumption, trends, and opportunities for improvement.
  • Calculating and tracking Scope 1, 2, and 3 GHG emissions.
  • Identifying and planning for GHG emission reduction targets, renewable energy projects, and other opportunities to improve the organization’s carbon footprint.
  • Developing information management tools to manage and track data and trend goals and objectives related to climate change.

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