SEC Adopts Climate Disclosure Rule

The Securities and Exchange Commission has finally adopted its rule for disclosure of greenhouse gas emissions and climate risks, voting Wednesday to impose the rule but dropping its original (and most controversial) proposal that companies would need to calculate and report greenhouse gasses caused by their supply chains.

The vote fell along the SEC’s usual 3-2 partisan split, the three Democratic commissioners in favor and the two Republican commissioners opposed. The final rule does include an unusually long adoption timeline and is considerably narrower than the original proposal proposed two years ago — but yes, people, we’re doing this.

Most notably, the SEC dropped its proposal to require disclosure of so-called Scope 3 emissions, generated by a company’s supply chain. Critics of the rule had said Scope 3 emissions would be imprecise at best and extremely difficult to calculate, and not worth the effort. 

Second, smaller companies will not need to make any disclosures about their carbon emissions at all. Specifically, non-accelerated filers (those with market cap below $75 million, or with market cap below $700 million and revenue below $100 million) and smaller reporting companies (those with market cap below $250 million, regardless of annual revenue) are exempt from the greenhouse gas disclosure requirement.

Large companies, however, will need to start disclosing their greenhouse gas emissions within two years. Large accelerated filers will need to disclose their emissions in early 2026, which means they will need to start collecting their emissions data in 2025. Accelerated filers (smaller than large accelerated, but still really big) will need to begin reporting emissions in early 2028.

Audits of your greenhouse gas disclosures are further off, but they are coming. Large accelerated filers will need to start providing limited assurance (“we have no reason to believe these disclosures are wrong”) in spring 2029, followed by reasonable assurance (“we’re confident these disclosures are right”) in 2033. Accelerated filers will need to provide limited assurance starting in 2031, and will never need to provide reasonable assurance unless they grow to become large accelerated filers. 

All of the above is just the greenhouse gas disclosure stuff. All companies, large and small alike, will also need to make extensive disclosures about their climate change risks, too.

The Climate Risk Disclosures

As nettlesome as those greenhouse gas disclosures might be, the SEC’s final climate rule (886 pages, the longest rule in SEC history) mostly deals with annual disclosures that all companies will need to make about what their risks from climate change are and how management assesses those risks.

For example, all companies will need to disclose… 

  • Climate-related risks that have had or are reasonably likely to have a material impact on business strategy, operations, or financial condition;
  • Any processes the company has for identifying, assessing, and managing material climate-related risks, as well as whether and how any such processes are integrated into the company’s overall risk management system or processes;
  • 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.

Large accelerated filers will need to start making those disclosures (plus a few more) in their annual reports that arrive in early 2025. Accelerated filers will follow suit in 2026, non-accelerated filers in 2027. 

One year after those disclosures, companies will also need to start making specific disclosures about the financial impact of climate change on their businesses, typically in a dedicated footnote in the financial filings. 

For example, companies will need to start reporting the financial cost of severe weather events (hurricanes, tornadoes, wildfires, sea level rise), although you will not first need to determine whether climate change actually caused the weather event. Companies will also need to report any material costs related to achieving net zero or carbon reduction targets the company has set. Those climate-related financial disclosures will need to be tagged in XBRL like all other financial data in SEC filings.

We’ll take much deeper dives into all these disclosures in the weeks and months to come. For now, that’s what it looks like at a high level. 

All the Usual Climate Commentary

All five SEC commissioners had something to say about the climate change rule before voting on it, and as usual they talked right past each other to their natural political constituencies.

For example, Republican commissioner Hester Peirce, the resident conservative theorist among the commissioners, said that even the slimmed-down final rule “still promises to spam investors with details about the commission’s pet topic of the day: climate.” (Peirce titled her statement “Green Regs and Spam.” Points for originality.) 

Even the reduced disclosure in the final rule, she continued, “does not alter the rule’s fundamental flaw: its insistence that climate issues deserve special treatment and disproportionate space in corporate disclosures and in managers’ and directors’ brain space.” 

Fellow Republican commissioner Mark Uyeda, meanwhile, argued that the final rule is so different from the original proposal (released two years ago) that the SEC should have re-proposed a new version — “raising the question of whether appropriate notice was provided under the Administrative Procedure Act.” In other words, he was telegraphing how critics of the rule might challenge it in court (which they inevitably will do).

[UPDATE: A bunch of Republican states filed a lawsuit against the new SEC rule Wednesday afternoon.]

On the other hand, the Democratic majority on the board argued that since so many large companies already make disclosures about their carbon emissions and climate change plans, the SEC needs to impose order on that cacophony. Otherwise companies will be calculating emissions and climate change targets according to their own metrics and investors won’t be able to compare disclosures accurately.

“Today’s rules enhance the consistency, comparability, and reliability of disclosures,” chairman Gary Gensler said. “The final rules provide specificity on what must be disclosed, which will produce more useful information than what investors see today.”

The two other Democratic commissioners, Carolyn Crenshaw and Jaime Lizárraga, also stressed that companies have already had to make disclosures about material climate risks since 2010 — although that SEC guidance was more principles-based, where each company decided for itself what climate risks were or weren’t material.

Now the new era of climate change disclosure is upon us. Let’s see how it works in practice.

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