The SEC Adopts Final Climate-Related Disclosure Rules

By: David A. Bell , Ran Ben-Tzur , Julia Forbess , Aman Singh , Per Chilstrom , Michael Pilo , Ron C. Llewellyn

What You Need To Know

  • On March 6, 2024, the SEC adopted landmark disclosure rules (Final Rules) mandating extensive climate-related disclosure in companies' annual reports and registration statements.
  • While the Final Rules eliminate the requirement to disclose Scope 3 emissions from indirect sources and make numerous other changes from the proposed rules, the overall compliance burden for reporting companies will increase, in some cases very significantly. Even companies that ultimately reach the conclusion that many aspects of the disclosure are not required because they are not material will need to expend significant resources and effort in reaching that conclusion.
  • With the European Union, the State of California and other jurisdictions and private organizations adopting and releasing climate-reporting regulations and guidelines, companies will face a patchwork of overlapping climate-related regulations that they will need to prepare for in the coming years.
  • Following the announcement of the Final Rules, a strong wave of opposition surfaced from various Republican-led states and attorneys general, as well as private litigants such as the U.S. Chamber of Commerce and the Sierra Club, challenging the rules on both sides of the spectrum. In addition, the Fifth Circuit has temporarily stayed the Final Rules. The resolution timeline, as well as the ultimate outcome of these challenges, is currently uncertain.
  • Companies should begin the process of allocating resources and identifying consultants and advisers that can aid them in carbon accounting and related analyses, reporting climate data and establishing systems and controls for the collection, reporting and assurance of climate data.

On March 6, 2024, the SEC adopted final rules (Final Rules) requiring extensive climate-related disclosures in companies’ annual reports and registration statements. The new rules are set forth in Release No. 33-11275. The climate disclosure rules were proposed in March 2022 and drew considerable attention, with the SEC receiving approximately 24,000 comment letters from a variety of stakeholders (including Fenwick). Many of the comment letters from reporting companies and their advisors expressed concern around the extremely detailed, prescriptive and burdensome nature of certain provisions in the proposed rules.

The Final Rules include a new set of disclosure requirements in Regulation S-K and a new section of Regulation S-X mandating the addition of certain quantitative and qualitative climate-related disclosures in audited financial statements. While maintaining the basic disclosure structure contained in the proposed rules, the Final Rules have been extensively revised in terms of the details of the required disclosure. The most significant changes between the proposed rules released in 2022 and the Final Rules include:

  • Eliminating the proposed Scope 3 greenhouse gas (GHG) emissions disclosure requirement;
  • Adding a materiality qualifier to the obligation to report Scope 1 and Scope 2 GHG emissions, and exempting emerging growth companies (EGCs) and smaller reporting companies (SRCs) from the requirement to report such emissions;
  • Adding other materiality qualifiers throughout the rules and paring back some of the most prescriptive disclosure requirements, including the proposed requirement to describe board members’ climate expertise;
  • Removing some of the most detailed financial statement footnote disclosure requirements and adding thresholds that should result in fewer instances of required disclosure than had been proposed; and
  • The express application of the forward-looking statement safe harbor to a number of the new disclosure requirements.

The revisions from the proposed rules will be welcomed by reporting companies. Nonetheless, the new rules are some of the most extensive additions to public company reporting requirements in decades. Per the SEC’s estimates of compliance costs, which have been substantially below the costs actually incurred for new disclosure in the case of other new disclosures, the cost for a reporting company to comply with the Final Rules will likely be hundreds of thousands of dollars per year. For example, the SEC estimates that the average cost for providing the new disclosures under Regulation S-K related to governance, impacts of climate-related risks on strategy, business model, and outlook, and risk management will be $327,000 in the first year and $183,000 annually in subsequent years.

The new disclosure will be required in annual reports on Form 10-K for domestic public reporting companies, subject to permitted forward incorporation by reference of annual GHG emissions disclosures (where required), and will also be required in registration statements on Form S-1 and Form S-4. This will include registration statements filed by private companies seeking to go public. The disclosure requirements will also apply to annual reports and registration statements on Form 20-F, Form F-1 and Form F-4 filed by foreign private issuers.

A summary of the Final Rules can be found below. Although the SEC’s modifications have made the Final Rules less prescriptive than the proposed rules and many provisions will be subject to a materiality qualifier, compliance with the Final Rules will be challenging for many companies. Accordingly, we first provide key takeaways that companies should keep top of mind as they read through the Final Rules, followed by a description of the new disclosure requirements and financial statement disclosures and related considerations.

Key Takeaways

While the first compliance date for large accelerated filers is in 2025, companies will need to take action soon to be prepared for these extensive compliance requirements. Below are some of the issues that companies will need to consider at the outset.

  • Companies that are already reporting on climate risk voluntarily or that are subject to state or foreign disclosure requirements should be able to leverage the systems, controls and procedures that they have developed to enable such reporting. However, because the disclosures required by the Final Rules will be provided in SEC filings, companies will need to ensure that they have effective disclosure controls and procedures (DCPs) for climate reporting, and effective internal controls over financial reporting (ICFRs) for the new climate information included in their financial statements. In addition, while there is some overlap between these other climate regulations and the Final Rules, there are still enough differences that companies’ internal processes and disclosure controls will need to account for the variances between the regulations.
  • For EGCs, SRCs and others that have not yet considered or reported on climate-related risks, they should consider building a cross-functional working group and establishing climate risk assessment processes. Although many of the various disclosure requirements have a materiality qualifier, companies will still need to have enough information around these climate-related topics to make a judgment on whether they are in fact material and therefore require disclosure.
  • Companies will have to ensure that they have adequate governance structures in place to properly oversee and report on climate risk, taking into account the evolving expectations of important stakeholders. Companies should consider formalizing or enhancing their existing procedures and reporting and oversight structures as part of their preparation to comply with Item 1501 of Regulation S-K.
  • For companies that have established targets or goals to reduce their carbon or GHG emissions, they should consider whether such targets or goals have materially affected or are reasonably likely to materially affect their business, results of operations or financial condition, in which case they will need to provide more granular details surrounding such goals, even if the goal has not been publicly announced, including the means by which progress against goals will be tracked and how they intend to meet their goals. Companies may wish to reconsider, revise or withdraw such targets or goals, balancing business purposes of the goal against the burden and impact of the required disclosures.
  • Companies that already disclose their Scope 1 and Scope 2 emissions data outside of SEC filings and consider such data immaterial will need to consider whether to disclose prophylactically such figures in their SEC filings despite their immateriality, or at a minimum, be prepared for an SEC comment querying why the emissions data was published in a voluntary report but not in the annual report or registration statement. Larger companies will also need to assess whether Scope 1 and Scope 2 emissions are material to their business and may need to expend significant resources to make such determination.
  • Many companies will have to procure internal and external resources to meet the disclosure requirements under the Final Rules. Companies may need to train or hire staff or engage outside consultants or advisers just to determine whether climate-related risks are reasonably likely to have a material impact on their strategy, results of operations, or financial condition. To the extent they have not done so already, companies should begin the process of allocating resources and identifying consultants and advisers that can aid them in carbon accounting and related analyses, reporting climate data and establishing systems and controls for the collection, verification and reporting of climate data. If applicable, a company may also need to engage an attestation provider that meets the requirements of Item 1506 of Regulation S-K, which should be different from the service provider that assists the company with the analysis and reporting of its Scope 1 and Scope 2 emissions.

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