The US’ Securities and Exchange Commission (SEC) has finalised its rules for standardising how public companies should make climate-related disclosures to investors, but lawsuits filed in response could yet reshape the requirements.

The rules, published last week, are a response to “investors’ demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks”, the SEC says.

All SEC-regulated companies will need to include their climate risk disclosures in filings to the regulator rather than on their websites.

“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings,” says SEC chair Gary Gensler.

Disclosures include climate-related risks that “have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations or financial condition” and what these impacts might be.

The rules have undergone several iterations since they were first proposed in March 2022, including removing a requirement to report scope 3 emissions, which are all indirect greenhouse gas (GHG) emissions in the value chain of an organisation.

According to Deloitte, scope 3 emissions account for more than 70% of most businesses’ carbon footprint.

The SEC said it received more than 24,000 letters in response to the rules’ first draft, an “unprecedented” level of attention, according to Christopher McClure, partner and ESG services leader at public accounting, consulting and technology firm Crowe.

“Scope 3 was probably the most commented on, because it was so controversial. Even people in favour of scope 3 were commenting that we need more time or direction, and that it would present a lot of challenges,” McClure tells GTR.

Despite the weakened final form of the rules, a number of lawsuits have already been filed from US states such as Georgia and Alabama claiming the SEC is exceeding its legal authority. Litigation is also expected from climate groups disappointed by the scaled-back rules.

McClure compares the response to the climate risks rule to that of the US’ conflict minerals disclosure rule, brought in as part of the country’s 2010 Dodd Frank Act.

“At the time that rule was initiated, there was litigation against it, it went all the way to the Supreme Court, and the rule was adjusted based on the findings. We lived under the uncertainty of that for a number of years, but the litigation was impactful to the disclosures that companies made,” McClure says.

In 2015, the law was amended after opponents argued it violated the US’ First Amendment guarantee of freedom of speech for requiring firms to label their products “conflict-free” or not and effectively make declarations of sensitive commercial information.

McClure adds that while businesses will be glad of the extra certainty the climate risk rules provide, the plethora of other laws already in force has somewhat overshadowed the SEC’s.

“If this was the only climate rule we had received, then I think there’d be a lot more focus on it. But we’ve had in the interim the EU’s Corporate Sustainability Reporting Directive, and the California rules, which are more aggressive, so it feels like the SEC rule, which was way out front when it was proposed, is now a little bit behind,” McClure says.

California’s climate disclosure laws require firms doing business in the state with more than US$1bn in annual revenues to report their scope 1, 2 and 3 emissions.

Similar legislation has been proposed in New York and Illinois.


Assessing materiality

McClure says that the task of assessing whether climate-related risk is material will be “potentially challenging”, taking “a number of different people to properly look at it”.

“The concept the SEC employs is that it’s any fact an investor would find impactful, or if the absence of a certain fact might be impactful to an investor,” McClure says.

“When it comes to disclosing your emissions, how do you know if they’re material until you measure them first? You might have to measure them anyway, and then make a determination,” he says, adding that companies now need to be careful as they could be “subject to enforcement”.

Deadlines for compliance with the SEC’s climate risk rules will be phased in, with different start dates depending on how big a firm is.

So-called ‘large accelerated filers’ (LAFs) – firms with a public float of US$700mn or more – and ‘accelerated filers’ – those with a public float of at least US$75mn – must include information about material scope 1 emissions and/or scope 2 GHG emissions.

LAFs will need to file disclosure and financial statement effects audits for the fiscal year beginning in 2025, while GHG emissions reporting starts for 2026.

Other types of firms include non-accelerated filers, smaller reporting companies and emerging growth companies.

Additional elements companies should report on include the financial impact of activities taken to mitigate or adapt to climate risks, expenditure on actions to make progress towards meeting a climate target, and processes in place for managing material climate-related risks.

Businesses will have to disclose the costs and losses incurred due to carbon offsets as well as severe weather events, such as hurricanes, flooding, drought, wildfires, extreme temperatures and sea level rises.

Firms will also have to say whether “the estimates and assumptions” used to produce financial statements have been “materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans”.

The SEC’s rules represent “a significant milestone in climate reporting for investors”, says Diya Sawhny, managing director, strategy at Moody’s.

“While much of the dialogue about the new rule has centred on GHG emissions, disclosures related to the potential impacts of physical climate risks are also included,” Sawhny adds.