Advisories March 8, 2024

Securities Law / Environmental, Social & Governance (ESG) Advisory: SEC Adopts Scaled-Back Version of Its Proposed Climate Risk Rules

Executive Summary
Minute Read

Our Securities and Environmental, Social & Governance (ESG) teams examine the Securities and Exchange Commission’s final rules on what kinds of climate-related risks companies need to disclose to investors.

  • Companies will need to disclose greenhouse gas emissions and how climate risk affects the company’s bottom line and management processes
  • The disclosures must appear in registration statements and annual reports
  • Ten states have already challenged the rules in the Eleventh Circuit

On March 21, 2022, the Securities and Exchange Commission (SEC) proposed rules intended to enhance and standardize climate-related disclosures provided by public companies.   Nearly two years later, on March 6, 2024, the SEC adopted its climate risk rules that require public companies to provide certain climate-related disclosures in their registration statements and annual reports, with notable modifications due to comments received by interested parties.

Table showing key differences between proposed and final rules

New Climate-Related Disclosure Requirements

The adopted climate risk rules require issuers to:  

  • Disclose information related to direct and indirect greenhouse gas (GHG) emissions, if material.
  • Disclose how the board of directors oversees climate-related risks and identify any committees or subcommittees responsible for such oversight, as well as management’s role in assessing and managing climate-related risks.
  • Disclose how any climate-related risks have had or are likely to have a material impact on business and financial statements.
  • Disclose how any climate-related risks have affected or are likely to affect strategy and outlook.
  • Disclose information about the registrant’s climate-related risks and risk management processes.
  • Disclose any recoveries recognized during the fiscal year as a result of severe weather events and other natural conditions.

Direct and indirect GHG emissions

Issuers that are large accelerated or accelerated filers are required to disclose information about their Scope 1 and Scope 2 emissions, if material. An issuer’s Scopes 1 and 2 emissions may be material if they are reasonably likely to materially impact its business, results of operations, or financial condition in either the short or long term or if their calculation and disclosure are necessary to disclose to investors whether the issuer has made progress toward achieving an emissions target or goal.  

  • Scope 1 – Direct GHG emissions from operations owned or controlled by the issuer.
  • Scope 2 – Indirect GHG emissions from purchased or acquired energy that is consumed by operations owned or controlled by the issuer.

Oversight and governance

Issuers are required to identify any board committee or subcommittee responsible for any oversight of climate-related risks if the issuer has such a committee or subcommittee. Additionally, the final rules require applicable issuers to disclose any climate-related target or goal if the target or goal has materially affected or is reasonably likely to materially affect the issuer’s business, results of operations, or financial condition.  

Material impact on business

Issuers are required to disclose whether any climate-related risk is reasonably likely to have a material impact on an issuer’s business or consolidated financial statements, including the risks that may manifest in the short and long terms. Issuers would also have to provide their assessment of the materiality of climate-related risks over the short and long terms.  

Effect on strategy and outlook

After identifying climate-related risks reasonably likely to have a material impact, issuers are required to describe the actual and potential impacts of those risks on their strategy, business model, and outlook. Issuers are required to discuss how they considered the identified impacts, as well as provide disclosures that help to understand whether the implications of the identified risks have been integrated into the issuers’ business model or strategy. The disclosure must include how any of the metrics or targets relate to the issuers’ business model or strategy. Issuers may adopt transition plans to reduce or adapt to climate-related risks, and if so, they must update their annual report disclosure each fiscal year by describing any actions taken during the year relating to the transition plan.  

Climate risks and risk management   Issuers are required to describe any processes for identifying, assessing, and managing material climate-related risks. When describing the processes for identifying and assessing risks, issuers are required to disclose, as applicable, which factors are more significant, and thus which factors should be addressed, based on their specific facts and circumstances. When describing the processes for managing climate-related risks, issuers are required to disclose, as applicable, how they decided whether to mitigate, accept, or adopt to a particular risk and how they prioritize addressing risks. If an issuer has not identified a material climate-related risk, no disclosure is required.  

Recoveries The final rules require issuers to disclose any recoveries, such as insurance proceeds, as a result of severe weather or natural conditions for which costs, expenditures, charges, or losses have been disclosed. Here, the issuer must identify where the recoveries are presented in the income statement and balance sheet.

Disclosure Requirements

  • Issuers are required to provide the climate-related disclosure in their registration statements and annual reports, under separate, appropriately captioned sections.
  • Issuers are required to provide the climate-related financial statement effects disclosure in a note to their consolidated financial statements.
  • Issuers are required to electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL.
  • For accelerated or large accelerated filers, issuers are required to obtain an attestation report covering the disclosure of Scopes 1 and 2 emissions.

Compliance Dates

The adopted rules include phase-in periods for all registrants and for the assurance and level of assurance requirements for large accelerated filers and accelerated filers.  

Table showing compliance dates

* Item 1502(d)(2) requires issuers to describe quantitatively and qualitatively material expenditures incurred and material impacts on financial estimates and assumptions that directly result from activities to reduce or adapt climate-related risks.
Item 1502(e)(2) requires issuers to disclose material expenditures incurred and material impacts on financial estimates and assumptions as a direct result of a disclosed transition plan.
Item 1504(c)(2) requires issuers to discuss whether and how actual and potential impacts of physical and transition risks are considered as part of their business strategy, financial planning, and capital allocation.

What Should We Do Now?

To best prepare for the new rules, companies should:  

  • Review internal controls of financial reporting, disclosure controls, and related procedures to ensure that they comply with the enhanced climate-related disclosure.
  • Prepare to provide additional disclosure on climate-related risks and risk management, along with their impact on business, strategy, and outlook.
  • Understand the enhanced disclosure requirements related to Scopes 1 and 2 emissions, including whether such emissions are material to the company and its business.

Since the rules’ adoption, 10 states have filed a petition in the Eleventh Circuit challenging the new regulations requiring public companies to provide enhanced climate-related disclosure. Additional challenges from other states and from business groups are expected. Companies should monitor the progress of the petitions against these newly adopted rules.

Effective Date

The final rules will become effective 60 days after the rules are published in the Federal Register.    

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If you have any questions, or would like additional information, please contact one of the attorneys on our Securities Law Team or one of the attorneys on our Environmental, Social & Governance (ESG) Team.

Media Contact
Alex Wolfe
Communications Director

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