The SEC’s Climate Rule: Too watered down?

Summary

Marking the first nationwide climate disclosure rule in the US, on 6 March 2024, the U.S. Securities and Exchange Commission (SEC) adopted rules to ‘enhance and standardise climate related disclosures’ provided by public companies, with disclosure in annual reports required for the year ending December 31, 2025 (phased-in approach applies).

However, the scope of the rule has been stripped back, with disclosure requirements being massively watered down in comparison to the draft of proposed rules put forward in March 2022.

Inclusions in SEC’s Climate Disclosure: What to Expect?

The final rules require registrants to disclose, among other elements, the following:

• Material impacts: Climate related risks that have had or expected to have a material impact on the company’s strategy, business model and outlook.

• Scope 1 and 2: For large accelerated filers (LAFs) and accelerated filers (AFs), information about material Scope 1 and Scope 2 GHG emissions, subject to assurance requirements (via a phased-in basis).

• Governance: Governance and oversight of material climate-related risks.

• Risk management: Processes for managing material climate-related risks.

Divergence from the Proposed Rules: What are the Key Differences?

A seismic shift from the proposed rules is evident in the final SEC Rule, which received over 24,000 public comments on the 500-page draft proposal.

• Scope 1 and 2 Emissions: Smaller reporting companies (SRCs) and emerging growth companies (EGCs) have been made exempt from disclosing in line with the Scope 1 and Scope 2 requirements. Additionally, a materiality threshold for Scope 1 and Scope 2 GHG emissions has been established, allowing registrants to delay disclosure of such information and related attestation (allowing instead for filing by the due date of their second fiscal quarterly report for the following year).

• Scope 3 Emissions: In stark contrast to the draft, all companies are exempt from Scope 3 emissions disclosure. Given that up to 95% of emissions forming a company’s carbon footprint are captured under scope 3, this will have massive implications on the net zero transition.

• Board climate expertise: The released rules have also eliminated the proposed requirement to describe board members’ climate expertise. This therefore impacts the level of climate considerations at board level.

Key Takeaway: Limited in Scope but a Step Forward?

Despite the restrained scope of the SEC’s climate disclosure, it positions the US alongside other countries which require climate related disclosure such as Chile, Egypt, European Union member countries, India and the United Kingdom. Though, extending the rules to include some that were noted in the draft would improve the effectiveness of SEC aligned disclosure moving forward.

Further information

For more information, consult the SEC’s resources or the following fact sheet.