Rule requiring public companies to disclose climate risks adopted by SEC

A final rule requiring public companies to disclose climate-related information in registration statements and annual reports was adopted this week by the Securities and Exchange Commission (SEC).

This marks the first time that public companies will be required to report climate-related information in a detailed and standardized way to investors.

The rule comes in response to investors’ demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a company’s operations and how it manages those risks. The rule was first proposed two years ago in March of 2022 and has been amended since then in response to public feedback. The SEC considered more than 24,000 comment letters, including more than 4,500 unique letters.

“Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take so long as companies raising money from the public make what President Franklin Roosevelt called ‘complete and truthful disclosure,’” SEC Chair Gary Gensler. “The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”

Among the key provisions, the final rules will require a registrant to disclose:

• Climate-related risks that have had an impact on business strategy, results, operations or outlook;
• Actions the company has taken to mitigate or adapt to the risks, along with expenditures incurred from these mitigation or adaptation activities;
• Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
• Any processes the company has for identifying, assessing, and managing climate-related risks and how these processes are integrated into the overall risk management system;
• Information about a registrant’s climate-related targets or goals that have affected its business,
• Information about material Scope 1 emissions and/or Scope 2 emissions, for large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted, only;
• For those required to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level;
• Capitalized costs, expenditures, and losses incurred as a result of severe weather events and other natural conditions;
• Capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a component of a registrant’s plans to achieve its disclosed climate-related targets or goals; and
• If the estimates and assumptions a registrant uses to produce the financial statements were impacted by severe weather events and other natural conditions, a description of how the estimates and assumptions were impacted.

The final rule raised some concerns among some in the business community. The U.S. Chamber of Commerce said the revised rule, while axing some of the most onerous provisions from the initial draft, still remains complicated.

“For two years now, the U.S. Chamber of Commerce has raised significant concerns about the scope, breadth, and legality of the SEC’s climate disclosure efforts. We are carefully reviewing the details of the rule and its legal underpinnings to understand its full impact. While it appears that some of the most onerous provisions of the initial proposed rule have been removed, this remains a novel and complicated rule that will likely have significant impact on businesses and their investors. The Chamber will continue to use all the tools at our disposal, including litigation, if necessary, to prevent government overreach and preserve a competitive capital market system,” U.S. Chamber of Commerce Center for Capital Markets Competitiveness Executive Vice President Tom Quaadman said.

The Mortgage Bankers Association (MBA) had a mixed response to the rule.

“We are pleased that the SEC’s final rule addresses redundancies and that it does not contain some of the more complex and overly burdensome mandatory reporting requirements – particularly for Scope 3 emissions – that were issued in the proposal,” MBA’s President and CEO Bob Broeksmit said. “As recommended by MBA, the rule includes a longer implementation schedule for required registrants, which we appreciate given the substantial effort and resources necessary to comply with the rule.

Brokesmit added that MBA and its members are active participants in policy conversations and market developments on climate risk, extreme weather impacts, and ESG investing.

“We urge state legislatures to refrain from proceeding with, or introducing, proposals that exceed this rulemaking or that impose costly and time-consuming reporting requirements that adversely impact businesses and consumers in their state,” he added.

The final rule will become effective 60 days after the rule is published in the Federal Register. Compliance dates for the rules will be phased in for all registrants, dependent on the company’s filer status.

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