SEC adopts rules to enhance and standardise climate-related disclosures

The U.S. Securities and Exchange Commission (SEC) adopted on 6 March 2024 some significant and highly anticipated climate-related disclosure requirements for public companies in their periodic disclosure reports and in registration statements for public offerings (Final Rules).

The Final Rules, that were proposed two years earlier in March 2022, generated a huge response. Over 4,500 unique comment letters and 18,000 form letters were submitted to influence and support ‘The Enhancement and Standardisation of Climate-Related Disclosures for Investors’.

The SEC’s efforts to issue these new rules are the result of investor demands for consistent, reliable, and comparable information regarding climate-related risks. More specifically, these Final Rules set out the information needed to help investors assess how climate risks affect a registrant’s business and financial condition, and assess the registrant’s management and board oversight of its climate-related risks.

What distinguishes the SEC requirements from those issued by other sustainability standard setters, most notably the IFRS Sustainability Disclosure Standards (IFRS SDS) issued by the International Sustainability Standards Board (ISSB) and the European Sustainability Reporting Standards (ESRS) as required by the Corporate Sustainability Reporting Directive (CSRD) in the European Union, is that there is no requirement to disclose Greenhouse Gas (GHG) Scope 3 emissions.

Although the new rules require climate-related disclosures, there are significant differences between the Final Rules and the IFRS SDS and the ESRS in several main areas. Below is a snapshot of some of these differences:

These new rules apply to all SEC registrants. The SEC has implemented a phased-in approach for complying with the new rules based on registration filing status.

In addition to the phased-in approach by filing status, the SEC has also implemented a phased-in approach for certain more complex requirements in deference to the additional time needed for registrants to comply.

• Item 1502(d) requires a registrant to provide a narrative discussion of whether and how any climate-related risks described have affected or are reasonably likely to affect the registrant’s consolidated financial statements
• Item 1502(e) requires a registrant to describe a transition plan if it has adopted the plan to manage a material transition risk, and 
• Item 1504(c) requires a registrant to disclose any progress toward meeting a target or goal and how such progress has been achieved. 

These three items, as well as the assurance requirements, will come into effect at the specified later dates.

This table illustrates the compliance dates required for each type of filer and requirement, with the date indicating that compliance is required in the financial year beginning in the calendar year listed.

We welcome the adoption of these Final Rules because they are a first step towards U.S. public companies providing climate-related information to both investors and global entities that are involved in their value chains. These Final Rules will further improve the transparency of U.S. public company reporting on climate-related matters which are increasingly becoming of great interest to investors.

The extent of climate related disclosures that are set out in these Final Rules in many instances will require registrants to build new systems and controls, so there is likely to be a significant increase in compliance costs, not only in the first year of application, but in subsequent periods as well.