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SEC Adopts New Climate-Related Disclosure Rules

Siddharth Bahl

  585.231.1484

  sbahl@hselaw.com

On March 6, 2024, the Securities and Exchange Commission (the “SEC”) adopted highly anticipated rules to enhance and standardize climate-related disclosures by public companies and in public offerings. The new rules reflect the SEC’s effort to strike a balance between investor demand for more consistent, comparable, and reliable information about the financial-related effects of climate-related risks on a public company’s operations and concerns about the potential costs of compliance with the new rules (voiced by many in over 22,000 comments letters the SEC received!).

New Rules

The new rules will require disclosure of:

  • Risks:
    • material climate-related risks
    • actual and potential material impacts of any climate-related risks on a company’s strategy, business, and outlook
    • activities to mitigate or adapt to material climate-related risks and the associated expenses incurred
  • Governance:
    • processes that a company has for identifying, assessing, and managing material climate-related risks
    • the board of directors’ oversight in assessing and managing material climate-related risks and management’s role in that process
  • Financial Reporting-Related Items:
    • information on any climate-related targets or goals that are or could be material to a company’s business, results of operations, or financial condition
    • costs, expenses, and losses exceeding certain thresholds relating to:
      • severe weather events and other natural conditions; or
      • carbon offsets and renewable energy credits (if used as a material component of a company’s plans to achieve its climate-related targets)
    • information about the estimates and assumptions a company uses to produce its financial statements if the estimates and assumptions were materially impacted by risks and uncertainties associated with severe weather events, other natural conditions, or any disclosed climate-related targets or plans

 

Additionally, the new rules will require disclosure (except for smaller reporting companies and emerging growth companies) of Scope 1 greenhouse gas (“GHG”) emissions and/or Scope 2 emissions (indirect emissions from purchased electricity or other forms of energy), when material. After a phase-in period, the report of Scope 1 and Scope 2 emissions must be accompanied by an attestation report at the limited assurance level, and eventually at the reasonable assurance level for large accelerated filers.

The threshold for reporting capitalized costs and charges is 1% of the absolute value of stockholders’ equity (deficit) and the threshold for reporting expenses is 1% of the absolute value of income (loss) before income tax expense (benefit), subject in both cases to de minimis thresholds. This 1% threshold is a notable departure from the typical heuristics public companies use for evaluating materiality.

The new rules provide a safe harbor from private liability for forward-looking statements relating to certain climate-related disclosure, such as transition plans, scenario analysis, internal carbon pricing, and targets and goals. The new rules will require disclosure in registration statements and in annual reports on Form 10-K (“Form 10-K”) filed with the SEC. The disclosure associated with the new rules must be XBRL-tagged.

The new rules will not require public companies to disclose Scope 3 emissions (GHG emissions from upstream and downstream activities in a public company’s value chain), which had been included in the proposed rules. Another departure from the proposed rules is that the SEC added a materiality standard for the disclosure of Scope 1 and Scope 2 emissions. This means that while every public company that could become an accelerated filer will be required to evaluate the impact of emissions under these new rules, including by having the associated disclosure controls and procedures and internal controls over financial reporting, a company will not be required to report Scope 1 and Scope 2 emissions if they are not material.

The new rules are summarized in the SEC’s Fact Sheet.

Compliance Dates

The rules will become effective 60 days after publication in the Federal Register and will be phased in over time. For large accelerated filers with a calendar year-end, compliance with most risk and governance-related elements of the new rules will begin with the Form 10-K filed in 2026 for the year ended December 31, 2025. For accelerated filers (other than smaller reporting companies and emerging growth companies) with a calendar year-end, compliance with these items will begin with the Form 10-K filed in 2027 for the year ended December 31, 2026. For all other filers with a calendar year-end, compliance with these items will begin with the Form 10-K filed in 2028 for the year ended December 31, 2027.

For the financial reporting-related elements of the new rules, compliance begins in the year after the risk and governance-related elements of the new rules.

If Scope 1 and/or Scope 2 emissions disclosure is required, large accelerated filers and accelerated filers (other than smaller reporting companies and emerging growth companies) with a calendar year-end will be required to report those emissions from 2026 and 2028 in Form 10-Ks filed in 2027 and 2029, respectively.

Next Steps

As we previously reported, there is a high likelihood that the new rules will be challenged. However, given the uncertainty of any legal challenge, public companies (and those seeking to become a publicly-traded company) should begin strategizing and planning for compliance with the new rules, including implementing the systems and processes for gathering the data necessary for the required disclosure.

If you have any questions about the new rules, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets group.

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