The Coming Storm: Preparing for The SEC's Final Climate-Related Disclosure Rules

On March 6, 2024, the U.S. Securities and Exchange Commission (SEC) adopted final rules that will require expansive new climate-related disclosures in Form 10-K and Form 20-F annual reports and most registration statements.  The disclosure requirements and the initial compliance dates will vary, based on the specific climate-related practices and disclosure content and the company’s filer status.  The first disclosures by large accelerated filers will be required in Form 10-K reports for the fiscal year ending December 31, 2025, which must be filed by Monday, March 2, 2026.¹ Additional disclosure by large accelerated filers, and initial disclosures by accelerated filers, will be required one year later, with other disclosures and other filers phasing in as shown in the table in the next section.

The new climate-related disclosure requirements are already the subject of litigation challenging their validity; at least one petition seeking an order vacating the new rules was filed by the Attorneys General of ten states.  If the new rules become effective as adopted by the SEC, compliance will require significant amounts of time and significant increases in internal and external expenses for most companies. Large accelerated filers that have a December 31 fiscal year end, which will be the first group of companies that will be subject to the new rules, may not be able defer the potentially extensive and costly preparations that may be required to have the relevant internal financial and disclosure controls and procedures operating effectively starting on January 1, 2025.

The final climate-related rules, which are contained in the 886-page adopting release, scale back some of the requirements originally proposed by the SEC in March 2022. The proposed rules generated approximately 24,000 comment letters, which is an unprecedented number.  Proposed disclosure requirements that were modified or eliminated in the final rules include a variety of prescribed narrative disclosures, disclosures in the notes to audited financial statements, and a requirement to disclose material Scope 3 greenhouse gas emissions and provide an attestation report covering the Scope 3 disclosures.

The final climate-related rules will require new disclosures about: 

• Climate-related risks that have had or are reasonably likely to have a material impact on the company’s business, results of operations or financial condition, including actual and potential material impacts and the company’s activities to mitigate or adapt to these risks, including the use of transition plans, scenario analysis and/or internal carbon prices;
• Board oversight of climate-related risks and the role of management in identifying, assessing and managing the company’s material climate-related risks;
• The company’s climate-related targets or goals, including material expenditures and impacts on financial estimates and assumptions related to the company’s targets or goals and the company’s actions to meet these targets or goals;
• For large accelerated filers and accelerated filers, information about material Scope 1 and/or Scope 2 GHG emissions, and assurance reports provided by an independent third party expert at the limited assurance level for large accelerated filers and accelerated filers, unless exempt, and for large accelerated filers at the reasonable assurance level after an additional transition period; and
• Disclosure in the notes to the company’s audited financial statements providing information about:
  • Capitalized costs, expensed expenditures, charges, and losses incurred that result from severe weather events and other natural conditions such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures and sea level rise, subject to one percent and de minimis disclosure thresholds;
  • Capitalized costs, expensed expenditures and losses related to carbon offsets and renewable energy credits or certificates used by the company as material elements of its plans to achieve its disclosed climate-related targets or goals; and
  • Qualitative information about any material impacts of severe weather events or natural conditions on any estimates or assumptions used by the company to produce its financial statements or on any of the company’s disclosed climate-related targets or transition plans.

Continuing with a trend seen in recent SEC rulemaking, many parts of the new climate-related disclosure rules contain extensive and detailed prescriptive disclosure requirements, rather than the more general principles-based disclosure requirements that had become typical in SEC rulemaking during the preceding decade.

What Companies Should Do Now

This section reflects our initial assessment of the actions that many companies – especially large accelerated filers and filers with nascent climate-related risk management programs — should consider taking in the near future.  Because the new rules involve many new disclosure requirements, our views are likely to develop over the next several months.  We expect to provide additional analysis of the new rules and discuss the implications of the new rules in future alerts.

Because the new climate-related disclosure rules are likely to require significant preparation for many companies, we suggest that companies begin by reviewing the detailed compliance timetable below to determine when and how these rules will apply to the company.  As the table below indicates, preparation for compliance with the new rules will be more significant in the near future for large accelerated filers than other filers, since large accelerated filers will be the first group of companies that must provide the new climate-related disclosures.

Companies should note that the new rules are likely to require significant changes in internal control over financial reporting (ICFR) and/or disclosure controls and procedures (DCP) for many companies, as discussed further below.  Companies should allow sufficient time to design, test and implement these changes on or before the beginning the first fiscal year for which the company will be required to provide the new climate-related disclosures.  Among other things, the company’s principal executive officer (PEO) and principal financial officer (PFO) must be able to provide the certifications with respect to the company’s ICFR and DCP that are required in connection with the filing of the company’s Form 10-Q and Form 10-K reports, beginning with the Form 10-Q report for the first fiscal quarter of 2025.

Compliance Phase-In Timetable for Climate-Related Disclosure Rules.  The table below summarizes the phase-in dates for the new climate-related disclosure rules, based on a company’s filer status and the specific disclosure requirements.

When a company has determined its compliance dates, it should evaluate how the new climate-related disclosure requirements will affect the company and the nature and extent of actions that may be required for compliance.  We expect that the actions, and related time and expenses, that will be required to comply with the new rules will be significant for many companies, although the compliance burden will likely vary widely from one company to another, even within the same or similar industries and lines of business.

Internal Control over Financial Reporting and Disclosure Controls and Procedures.  A company’s internal control over financial reporting and disclosure controls and procedures are likely to be the most critical areas for companies to review and, if appropriate, revise, in preparation for compliance with the new climate-related disclosure rules.  ICFR and DCP are critical to compliance with SEC disclosure requirements, and SEC rules expressly dictate the operational and functional requirements for ICFR and DCP.  ICFR and DCP themselves are subject to various disclosure requirements, and require various certifications by the company’s PEO and PFO in exhibits filed with the company’s Form 10-Q and Form 10-K reports.  In addition, SEC rules generally require that large accelerated filers and accelerated filers obtain and file, with the auditor’s report on the company’s financial statements, a report from the company’s independent auditor attesting to management’s assessment that the company’s ICFR is effective.

Companies should review the impact of the new climate-related disclosure rules on their ICFR and DCP well in advance of the date on which the company first becomes subject to compliance with the new rules.  This review should allow adequate time to permit testing that will enable the company’s ICFR and DCP to operate at the beginning of the first fiscal year for which the company is required to comply with the new rules.  In the case of large accelerated filers and the new rules, this date will be January 1, 2025, which is less than nine months away.

Disclosure Requirements of Other U.S. and Foreign Regulators.  Companies should review the interaction of the SEC’s new climate-related rules on the disclosures required by other regulators, including certain U.S. states (for example, California) and non-U.S. jurisdictions (for example, the European Union).  Areas of potential concern may include potentially duplicative or inconsistent regulatory reporting and/or public disclosure requirements and different protocols or frameworks that apply to these requirements.  For example, the new SEC rules are generally consistent with certain aspects of the frameworks established by the Task Force on Climate-Related Financial Disclosures, also known as TCFD, and the GHG Protocol, but these are not necessarily the same as the E.U. Corporate Sustainability Reporting Directive and the IFRS Sustainability Disclosure Standards.  In particular, the new rules require only climate-related disclosures, and do not require any disclosure with respect to matters such as human capital or sustainability.  Companies should ensure that their systems enable them to meet the requirements of each of the regimes that apply to their business and operations; there may not be a one-size-fits-all solution.

Other Climate-Related Disclosures and Climate Governance.  Companies should review the impact of the new climate-related rules on public disclosures and reports that are not filed with the SEC.  This would in many cases include, for example, corporate sustainability and corporate responsibility reports and environmental, social and governance (ESG) reports that are posted on company websites or included, in part, in public documents such as the company’s annual report to shareholders or other investor communications.  As a preliminary matter, it is important that each company knows what the company currently discloses about climate and extreme weather risks and developments, where and how this information is distributed and updated, and who is responsible for authorship, review, and general oversight of these materials.  Consistent, fact-based disclosure across all of these publications and the company’s SEC filings is important.

Companies should also review – or establish if they have not already done so – their internal governance structures that are related to climate and extreme weather risks.  It may be helpful to understand also the general state of climate-related and extreme weather disclosure, especially disclosures made by the company’s peers and competitors.

Materiality Standards Applicable to the New Climate-Related Disclosures.  Because many of the disclosure requirements in the new climate-related rules include materiality qualifications, companies may benefit from beginning to consider how these materiality qualifications, nearly all of which are qualitative in nature – that is, are not based on quantitative measures such as percentages or dollar amounts — may affect the company’s disclosures under the new rules.  Information that the company believes may be material in one context, either because of the percentage or amount involved or because of the significance of the fact or event, may not be material in another context.  Companies should consider how they would apply materiality qualifications to the new disclosures.  Companies should note that the process of reviewing specific potential disclosure items may require significant time and effort, especially during the years immediately after the company first becomes subject to the new rules, even if the company determines that no disclosure about a specific potential disclosure item is required.

Auditing, Financial Statement and ICFR Attestation Considerations.  The new climate-related disclosure rules include the three requirements for new disclosure in the notes to audited financial statements that are summarized above.  Companies should consider discussing with their independent auditor how generally accepted auditing and accounting standards will apply to the relevant disclosure, the company’s accounting records and the presentation of the disclosure in the notes to the audited financial statements.  At the same time, companies may also wish to confirm that the company understands the extent of any impact that the new rules may have on the auditor’s requirements in connection with its attestation report relating to the company’s ICFR.

GHG Emissions Disclosure and Attestation Reports.  Although large accelerated filers will not be required to provide Scope 1 and/or Scope 2 GHG emissions disclosure before fiscal years beginning on or after January 1, 2026 and will not be required to provide attestation reports from independent third party expert firms before fiscal years beginning on or after January 1, 2029, companies may wish to begin considering how they will satisfy both the disclosure requirements and, when they become applicable, the requirement to provide attestation reports with respect to that disclosure.

For example, companies may wish to develop a timeline for the process of identifying potential assurance providers and engaging an assurance provider in advance of the applicable compliance date.  The number of potential assurance providers may be limited, at least initially, which may result in lengthy lead times for obtaining an assurance report, as a result of the expertise, experience and other requirements that apply to assurance providers under the new rules.

Another factor that may affect the availability of assurance providers is the independence requirements that apply to assurance providers under the new rules.  These differ in some significant respects from the independence standards that apply to independent audit firms under the rules of the Public Company Accounting Oversight Board and SEC rules.  We will discuss the requirements that apply to GHG attestation reports and firms that will provide these reports in a future publication.

Internal Company Responsibility, Reporting and Review Structures.  Beyond any changes companies may make to specific internal subject-matter responsibilities and internal reporting and internal review structures in response to new ICFR and DCP requirements, companies may wish to consider whether other changes that may be less specifically disclosure-driven might be beneficial.  For example, companies may wish to review internal company responsibility, reporting and review structures and procedures, especially those that deal with operational, economic and financial modeling, scenario analysis, and reporting and compliance.  It is possible that changes in these or other areas might reduce unnecessary expenses and/or improve the efficiency or effectiveness of internal time burdens.

Company Accounting Systems and Software.  Companies should review their internal accounting systems and software in light of the new climate-related disclosure rules and determine whether the company’s current systems and software will allow the company to track and identify income, expenses, charges and other amounts at a level that will support compliance with the requirements of the new rules.  It is possible that some companies will need to supplement or replace existing software or related systems.

Companies Subject to the New Climate-Related Disclosure Rules

The final climate-related disclosure rules will apply to nearly all domestic and foreign companies that are required to file reports under the Securities Exchange Act of 1934, other than asset-backed issuers and Canadian companies that file annual reports on Form 40-F.

Smaller reporting companies (SRCs), emerging growth companies (EGCs) and non-accelerated filers are exempt from the Scope 1 and Scope 2 GHG emissions disclosure and attestation report requirements.  Accelerated filers are exempt from the requirement to provide attestation reports at the reasonable assurance level.  Other than these reduced requirements related to GHG emissions disclosure, the new rules do not provide any exemptions or scaled disclosure accommodations for SRCs or EGCs.  As is the case with the timing of most disclosure transitions after a company ceases to qualify as an EGC, the new rules provide no transition period that would extend the compliance phase-in for EGCs.

Similarly, the new rules do not provide any option for foreign private issuers (FPIs) to substitute home country climate-related disclosure or GHG reports for the disclosures required by the new rules.

Effective Date and Compliance Dates

The new rules will become effective 60 days after publication in the Federal Register. As stated earlier and shown in the compliance phase-in table above, compliance dates vary depending on a company’s filer status and the specific disclosure required.  The earliest compliance requirement will apply to large accelerated filers beginning with the fiscal year ending December 31, 2025, and will require most of the new Regulation S-K and Regulation S-X disclosures in these companies’ Form 10-K reports for that fiscal year.  The next group of companies subject to the new climate-related disclosure rules will be accelerated filers, with most Regulation S-K and Regulation S-X disclosures required in their Form 10-K reports beginning with the fiscal year ended December 31, 2026.  The last group of filers will be (1) non-accelerated filers and (2) SRCs and EGCs, even if the SRC or EGC does not qualify as a non-accelerated filer; these companies must provide the new climate-related disclosure beginning with their Form 10-K reports for the fiscal year ended December 31, 2027.

Filings Affected by the New Climate-Related Disclosure Rules

The new climate-related disclosure requirements will apply to annual reports on Form 10-K and Form 20-F.  They will apply also to registration statements under the Securities Act of 1933 on Form S-1, Form S-3, Form S-4 and Form S-11 for companies that file on U.S. domestic forms and Form F-3 and F-4 for companies that file on foreign private issuer forms, and registration statements on Form 10 under the Securities Exchange Act of 1934.

Location of Climate-Related Disclosures

The final rules modify the proposed requirement that the Regulation S-K disclosures must be provided in a separate section under the caption “Climate-Related Disclosure.”  As alternatives, the final rules permit companies to provide this disclosure in other appropriate sections of the filing, such as Risk Factors, Description of Business or Management’s Discussion and Analysis of Financial Condition and Results of Operations, or to incorporate the disclosure by reference from another SEC filing, if the disclosure satisfies the electronic tagging requirements of the new rules.

Delayed Filing of GHG Emissions Disclosure and Attestation Reports

The new rules permit companies to provide GHG emissions disclosure and attestation reports that would be required in the company’s annual report on Form 10-K to provide this disclosure with the company’s Form 10-Q report for the second fiscal quarter of the fiscal year following the fiscal year for which the GHG emissions disclosure and attestation report were due.  Alternatively, the company can provide this disclosure by filing, not later than the due date of the Form 10-Q report for the second fiscal quarter, an amendment on Form 10-K/A that amends the Form 10-K report for the relevant fiscal year.  FPIs that file annual reports on Form 20-F can provide the GHG emissions disclosure and attestation report by filing an amendment to the relevant Form 20-F not more than 225 days after the end of the relevant fiscal year.

In each of these cases, the company must include an express statement in its annual report indicating that it intends to incorporate this disclosure by reference from either a quarterly report on Form 10-Q or an amendment to its Form 10-K or Form 20-F annual report.  Not later than the due date specified by the new rules.

Expanded Safe Harbor

The final climate-related disclosure rules provide a new safe harbor for certain disclosures required by the new rules.  Covered disclosures include disclosures, other than disclosures of historic facts, that pertain to the company’s transition plan, scenario analysis, internal carbon pricing, and the company’s climate-related targets and goals.  In addition, the existing safe harbors for forward-looking statements under Securities Exchange Act Rule 3B-6 and Securities Act Rule 175 will be available for other aspects of the climate-related disclosures, to the extent that these disclosures satisfy the conditions of the safe harbor under Rule 3B-6 and Rule 175.

Structured Data/Inline XBRL 

The new climate-related disclosure rules require companies to tag most of the new disclosures using Inline XBRL, as required by Rule 405(b)(1) of Regulation S-T and the EDGAR Filer Manual.  It is important to note that although the new rules include a deferred compliance schedule that provides an additional year for compliance with Inline XBRL tagging requirements for most of the new disclosures, this deferral does not include the new disclosures that will be required in the notes to a company’s audited financial statements under new Article 14 of Regulation S-X.  Companies must properly tag these disclosures starting when the company first files an annual report or registration statement that incudes these disclosures.

 

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^[1] The 60^th day after December 31, 2025 is Sunday, March 1, 2026.  Rule 0-3 under the Securities Exchange Act of 1934 provides that when a due date falls on a Saturday, Sunday or federal holiday, the filing is due on the next business day.  As a result, the latest filing date for Form 10-K reports for the fiscal year ended December 31, 2025 will be Monday, March 2, 2026.

 

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