The US Securities and Exchange Commission (SEC) has adopted new standardised rules on climate-related disclosures, a scaled-down version of its proposals first put forward in 2022. 

This follows an extensive period of reflection, prior to which the SEC received more than 4,500 unique letters in response to its initial proposals. The major differences include the elimination of Scope 3 requirements for all registrants, using a standard definition of materiality as opposed to a 1% threshold, limits on Scope 1 and 2 disclosure requirements for large and standard accelerated filers, and an extension of certain phase-in periods. 

Smaller reporting companies and emerging growth companies will be exempt from the new rules. Registrants will be required to disclose 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.

Quantitative and qualitative description

If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, it must provide a quantitative and qualitative description of material expenditures incurred, impacts on financial estimates and assumptions that directly result from those activities. The rules also expect specific disclosures relating to any transition plans, scenario analysis or internal carbon prices the entity might be using. 

The rules include requirements to report on governance measures such as board oversight over climate-related risks, processes for managing and identifying such risks and potential material impacts of climate-related targets.

Companies required to disclose Scope 1 and Scope 2 emissions should also provide an assurance report at the limited assurance level. Following an additional transition period, large entities will be required to report at the reasonable assurance level.

The rules require reports of material capitalised costs, expenditures expensed, charges and losses incurred as a result of severe weather events and other natural conditions, and related to carbon offsets and renewable energy credits or certificates. These would be disclosed in a note to the financial statements.

Consistent, comparable and reliable

With the rules, the SEC aims to provide investors with more consistent, comparable and reliable information about the financial effects of climate-related risks and how those risks are managed, while addressing concerns about associated costs.

“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. 

“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.”

Laura Woods, ICAEW’s Technical Manager, Corporate Reporting, says: “We welcome the finalisation of this much-awaited rule from the SEC and it is pleasing to see that many of the comments that ICAEW made in its comment letter back in 2022 have been taken into account.

“It is not surprising that the SEC has scaled back from the initial proposals, given the unprecedented levels of feedback received, but the lack of any Scope 3 reporting requirement contrasts starkly with the wider climate reporting landscape such as the standards issued by the International Sustainability Standards Board and the European Sustainability Reporting Standards.”