On March 6, 2024, the Securities and Exchange Commission (SEC) released its long-awaited final ruling on corporate climate disclosures for public companies and in public offerings.
“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,’” said SEC Chair Gary Gensler, “…these final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements.”
These rules have set the stage for filers to begin disclosing the risks that climate change might pose to their business. All filers must disclose certain financial related risks, but Large Accelerated Filers (LAFs) and Accelerated Filers (AFs), the nation’s largest firms, must disclose their climate targets, GHG emissions, and renewable energy certificate (REC) and carbon credit procurements. While many large corporations are already disclosing some of their climate targets to the CDP (formally known as the Carbon Disclosure Project), the SEC’s new mandate aims to bring the green transition into the forefront of investors’ decision making.
What you need to know about the new rules:
LAFs and AFs must begin disclosing the following information under the rules:
- Internal carbon prices,
- Climate-related goals,
- Strategies for achieving those goals,
- REC and Offset procurement and financial impacts, and,
- Mitigation strategies for climate related risks.
SEC Policy Intended Impacts
- The new rules prioritize standardizing the disclosure process to allow for “consistent, comparable, and reliable [reports] for investors”.
- The new disclosure rules will enable investors to assess the degree to which a board integrates climate-related risks into its strategic business model by creating more transparency.
These disclosures will be phased in over time. Financial risk disclosures will begin in 2025 for LAFs, 2026 for AFs and 2027 for all other filers. LAFs will not phase in Greenhouse Gas Emissions related disclosures until 2026, and AFs will not do so until 2028.
The key to the rules is Materiality
The rule states that materiality “refers to the importance of information to investment and voting decisions about a particular company, not to the importance of the information to climate-related issues outside of those decisions.”
In simple terms, the “materiality” in this rule refers to the significance of the climate risk to a firm’s operation. At this stage, the SEC allows companies to determine their own materiality instead of setting strict guidelines. Firms are expected to determine "materiality" in good faith.
How does this rule compare to the EU’s CSRD?
The emission disclosures within the SEC’s rule are significantly different from those mandated by the European Union’s Corporate Sustainability Reporting Directive (CSRD). The two programs have significant differences including the definition of obligated firms, the scope of the disclosures, and the materiality requirement.
Parties obligated to disclose
Under the EU Corporate Sustainability Reporting Directive (CSRD), reporting is mandatory for large public-interest entities, including listed companies, banks, and insurers with over 500 employees. Large EU companies that meet specific financial and employment criteria, listed SMEs, and third-country corporations with significant operations in the EU must also adhere to compliance through a phased-in approach. This directive significantly broadens the scope of entities accountable for detailed sustainability reporting compared to the SEC. Based on the SEC's own estimations, roughly 2,800 US companies and 540 foreign companies with business in the U.S. will have to fulfill the new disclosure obligations, while CSRD is expected to ultimately impact 49,000 companies.
Scope
First, the overall scope of the regulation is much broader with CSRD, which doesn't just cover climate but many other Environmental, Social and Governance (ESG) factors like pollution, biodiversity, human rights, social responsibility.
Regarding climate reporting, CSRD mandates firms disclose their Scope 3 emissions, while the SEC determined this requirement to be overly burdensome. Under SEC climate disclosures rules, organizations do not need to disclose Scope 3, given its complexity. As a result, investors will have less information about the supply chain emissions for US firms compared to EU firms. Investors should seek other methods to understand how this might affect their decision making.
Materiality
CSRD handles disclosure using double materiality. In short, disclosing companies must consider both how sustainability issues affect the company's financial position and performance; and how the company's activities and operations impact people, the environment, and society.
Companies must report on the suggested ESG factors only if they find them material according to either side of the double materiality principle. This requires assessing both the "outside-in" impacts on the company and the "inside-out" impacts the company has. Climate disclosure receives special treatment. If it is deemed not material, companies will have to justify their decision.
This is a different, broader, approach from the SEC’s decision to require only financial materiality, and only on climate. In short, the SEC exclusively focuses on the impact that climate might have on investment.
Legal challenges
Following SEC’s Climate Disclosure Rule, corporate stakeholders successfully stalled the new rule by filing multiple motions for judicial review of the legality of the new rule’s regulatory reach. In response, the SEC issued a motion to stay the new Climate Disclosure rule and affirmed the SEC’s intent to uphold and implement the new rule.
- March 8th 2024, multiple petitions filed against the Climate Disclosure Rule which prompted the SEC to file a request to consolidate all motions into one case
- On March 21st, 2024, the US Court of Appeals for the Eighth Circuit consolidated petitions into one case, aiding in expediting the litigation process.
- On April 4th 2024, the SEC issued a stay order on the Climate Disclosure Rule that highlighted their intent to “vigorously” defend the new disclosure policy, specifically its regulatory mechanisms
- The new rule awaits judicial review by the U.S. Court of Appeals Eighth Circuit Court, and with the stay in effect the SEC is preparing for litigation to defend the new rule
In contrast, the CSRD entered into force in January 2023, with the European sustainability reporting standards adopted in July 2023. The first group of companies must apply the new rules for the 2024 financial year, with the first reports to be published in 2025.
Though the SEC has currently paused their climate disclosures, multinational companies are not ‘off the hook.’ Organizations will still need to prepare to comply with international regulations such as CSRD and state regulations like the California climate disclosure rulings.
If you are stuck in the middle of this maze of climate disclosure regulations, fill out this form to get in touch with one of our sustainability experts.
