Navigating the SEC Climate Rule
Introduction
The SEC Climate Rule was proposed in 2022 to standardize climate-related disclosures for public companies in the U.S. The rule requires companies to disclose greenhouse gas (GHG) emissions and other climate-related risks to provide investors with a more transparent and reliable view of how climate change affects their business operations and financial performance.
The rule has been delayed due to ongoing legal battles. With investors and other stakeholders pushing for consistent climate-related disclosures, we’ve seen states take charge amid lacking federal standards.
What the SEC Climate Rule is aspiring to do
The SEC Climate Rule aims to improve transparency by mandating that public companies disclose their climate-related risks and their plans to manage those risks. This information allows investors to make informed decisions when assessing company performance. Specifically, these disclosures relate to:
Physical risks: The impact of climate change on a company’s operations, such as damage from extreme weather events like floods and hurricanes, or long-term environmental shifts such as rising sea levels.
Transition risks: The impact of the shift towards a low-carbon economy, including regulatory changes, market shifts and evolving technology that can affect a company’s business.
What disclosures are required
The SEC Climate Rule disclosures focus on financial materiality, requiring information about the impact that climate-related risks could have on a company’s financial performance. As it currently stands, the Rule will require public companies to include the following in their annual reports (Form 10-K) and other filings:
Financial Disclosures (Earliest deadline)
These disclosures focus on how climate-related risks directly impact financial performance.
Financial Statement Impacts: Companies must disclose how climate-related risks impact their balance sheets, income statements, and cash flows. This includes changes in valuation of assets, liabilities arising from climate-change and operational impacts on revenue and costs.
Climate-Related Risks: Physical and transition risks must be disclosed, including their impact on a company’s business model, strategy, and financial planning.
Governance and Risk Management: Companies must describe how they manage climate-related risks and how their boards and management oversee this process.
Material Expenditures and Impacts (Second Deadline)
These disclosures capture significant costs and broader impacts associated with climate-related activities.
Material Expenditures: Any significant costs incurred due to climate-related actions such as investments in transitioning to low-carbon alternatives and compliance costs associated with new regulations
Climate Targets and Goals: Disclosure of any climate-related targets, as well as progress toward meeting them. Additionally, they must disclose material financial resources allocated to achieving targets and any potential business impacts.
Business Model and Strategy Adjustments: Companies must disclose how their business strategies might shift due to climate-related risks and opportunities.
GHG Emissions (Third Deadline)
The disclosures related to greenhouse gas (GHG) emissions have the latest deadline, with requirements for both Scope 1 and Scope 2 emissions, as well as later phased-in assurance requirements:
Scope 1 Emissions: Direct emissions from company-owned or controlled sources.
Scope 2 Emissions: Indirect emissions from purchased electricity or other forms of energy.
Assurance on GHG Emissions: Phased-in requirements for third-party assurance including Limited Assurance starting in the second phase of GHG emissions reporting and Reasonable Assurance for Large Accelerated Filers in later years.
Who it applies to & key dates to be aware of
Current status & key dates to be aware of
The SEC voluntarily stayed the Climate Rule in April 2024 as a result of legal challenges with interest groups and trade associations. Last month, the SEC reaffirmed the need for climate risk disclosures, defending the climate rule against legislation opposing it. Challengers had until September 17th to respond to the SEC’s brief. The judicial process is still in progress and likely will not resolve until late 2024 or early 2025.
What companies need to prepare
Assess Emissions Across Scopes 1 & 2: Companies should start tracking their emissions.
Evaluate Climate Risks: Companies should assess their exposure to climate-related risks, this process involves understanding how both physical and transition risks may affect financial performance and operations.
Strengthen Governance and Data Controls: Reliable data collection and reporting will be key, especially with the potential third-party assurance requirements. Companies should review their internal controls to ensure their existing climate-related disclosures are accurate and verifiable.
Our recommendation
Although the SEC Climate Rule has faced delays, companies should not wait for the final rule to act. With regulations continuing to evolve, focus on creating adaptable systems that will enable your company to meet current and future demands for climate-related disclosures. As climate risks increasingly become business risks, investors and stakeholders are demanding more robust disclosures, and businesses that are proactive will gain a competitive advantage.
How Bespoke ESG can support
At Bespoke ESG, we offer comprehensive support to help companies prepare for regulatory:
Emissions tracking & reporting
Climate risk assessment & strategy development
Governance and third-party assurance preparation
Tailored compliance solutions
Support leveraging regulation to advance sustainability strategy at your company
Disclaimer: The information provided in this document is for general informational purposes only and does not constitute legal advice. Regulatory advice is provided solely within the scope of contracts between Bespoke ESG and its clients.