On March 6, 2024, the Securities and Exchange Commission (SEC) adopted final rules relating to climate-related risks, which are available here. The new rules will require extensive new disclosures, which in turn will require affected public companies to update their internal systems and procedures to facilitate compliance with the new rules. This alert provides a very brief overview of the new rules and then covers key compliance dates and actions that public companies might consider taking in order to prepare for complying with the new rules in a timely manner. 

Brief Overview
The SEC’s climate change rules have received extensive press coverage, and we highlighted some of the key changes in a previous alert here. The new rules cover climate-related corporate governance, business strategy, risk management, targets and goals, greenhouse gas (GHG) emissions metrics, attestation reports, and financial statement disclosures.

• Governance (Item 1501 of Regulation S-K). Companies must provide annual disclosures regarding management’s role in assessing and managing material climate-related risks, including relevant management positions, expertise, processes and reporting. The disclosure must address oversight of these activities by the board of directors and any relevant committee, including oversight of progress toward achievement of any climate-related target or goal.
• Strategy (Item 1502 of Regulation S-K). Companies must describe the actual and potential short-term and long-term impacts of material climate-related risks on their businesses, including business strategy, results of operations and financial condition. These risks include both acute and chronic physical risks (such as floods and rising sea levels, respectively) and transition risks (such as legal requirements to reduce emissions or reduced customer demand for carbon-intensive products). A company’s disclosures must address whether it has integrated the impacts of these risks into its business model or strategy, including financial planning and capital allocation decisions. Companies must also disclose any transition plans or climate-related targets or goals they have adopted, as well as the use of scenario analysis or any internal carbon price.
• Risk Management (Item 1503 of Regulation S-K). A company’s disclosures must address how it identifies, assesses and manages material climate-related risks, including whether those processes are integrated into its overall risk management system. While a company may determine that it faces no material climate-related risks, that determination does not exempt it from describing its process for making that determination. Risk management disclosures must address the company’s decisions to mitigate, accept or adapt to particular risks, as well as how the company prioritizes any risks it may face.
• Targets and Goals (Item 1504 of Regulation S-K). Companies must disclose any applicable climate-related targets or goals, such as percentage reductions in GHG emissions, if those targets or goals have materially affected or are reasonably likely to materially affect the company’s business, results of operations or financial condition. This disclosure covers targets or goals that are legally mandated as well as those that are adopted voluntarily. A company’s disclosures must address the baseline for the target or goal, the company’s plans to achieve the target or goal, the time horizon for achievement of the target or goal, any progress toward achievement and how that progress was achieved, including any material expenditures and impacts on financial estimates and assumptions as a direct result of the target or goal. Companies that use carbon offsets or renewable energy credits or certificates (RECs) as a material component of their plans must provide relevant details, including the amount, nature, sources and costs of any offset or REC, including the location of underlying projects.
• GHG Emissions Metrics (Item 1505 of Regulation S-K). Large accelerated filers (LAFs) and accelerated filers (AFs) must separately disclose their gross aggregate Scope 1 and Scope 2 GHG emissions, if material, as well as disaggregated information regarding any individually material GHG. Smaller reporting companies (SRCs), emerging growth companies (EGCs) and non-accelerated filers (NAFs) are exempt from these disclosures. The rules do not require scientifically precise calculations; instead, the rules permit the use of “reasonable estimates,” as long as the company describes relevant underlying assumptions and the reasons for the use of estimates. Companies must describe their organizational boundaries (the entities whose emissions are disclosed, which might exclude, for example, variable interest entities or minority interests), and their operational boundaries (the business operations or sources of GHGs whose emissions are disclosed).
• Attestation of GHG Emissions Metrics (Item 1506 of Regulation S-K). After three years of disclosures of Scope 1 and Scope 2 emissions, LAFs and AFs must provide an attestation report regarding those disclosures prepared by a qualified, independent GHG emissions expert, known as a “GHG emissions attestation provider.” The report must comply with free, publicly available or otherwise widely used standards for GHG emissions assurance. Initially, both AFs and LAFs must provide attestation reports at a “limited assurance” level, but after an additional four years, LAFs must provide reports at the higher “reasonable assurance” level. Similar to existing disclosure requirements for financial statement auditors, additional disclosures regarding the attestation provider include whether the provider is subject to any oversight inspection program and, where applicable, information about any resignation or dismissal of the provider and any relevant substantive disagreements with the provider.
• Financial Statement Impacts of Severe Weather Events and Other Natural Conditions (Article 14 of Regulation S-X). The new rules require financial statement footnote disclosures regarding specific climate-related expenditures, losses, capitalized costs and charges, subject to certain de minimis thresholds.
  • Rule 14-02(c) requires disclosure of expenditures and losses arising from “severe weather events and other natural conditions,” such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures and rising sea levels. 
  • Similarly, new Rule 14-02(d) requires disclosure of capitalized costs and charges resulting from these events and conditions, including costs to restore operations after a disaster, costs to replace or repair affected assets, and impairment charges for affected assets.
  • If an event or condition is “a significant contributing factor” to the incurrence of any climate-related expenditure, loss, capitalized cost or charge, the full amount of that item will be deemed to arise from the event or condition.
  • Rule 14-02 imposes additional footnote disclosure requirements relating to carbon offsets or renewable energy credits that are material to a company’s plan to achieve climate-related targets or goals, as well as any recoveries they may obtain.
  • Lastly, companies must provide a qualitative description of any estimates or assumptions used in their financial statements that were materially impacted by exposures to severe weather events and other natural conditions or any climate-related targets or transition plans.

Key Compliance Dates
Here are a few key compliance dates for the new climate-related disclosures:

What to Do Now
Here are steps that public companies can take to help prepare for the upcoming disclosure requirements:

Secure relevant expertise. While many of the largest public companies already provide some qualitative and quantitative disclosures regarding climate-related matters, many more do not. Accordingly, many public companies – LAFs in particular – will quickly need to develop internal expertise, hire new staff and/or engage third parties to develop and implement appropriate systems and procedures that will enable them to comply with the new rules. There is limited existing expertise regarding GHG emissions disclosures, and competition for qualified personnel is likely to become fierce. The earlier companies start their efforts to procure relevant expertise, the greater the likelihood that they will be able to hire and retain highly qualified personnel.

Update disclosure controls and procedures. Under Rules 13a-15 and 15d-15, public companies must implement controls and procedures designed to ensure that the information required to be disclosed in SEC filings is recorded, processed, summarized and reported in a timely manner. In order to satisfy this requirement, LAFs will need to have effective disclosure controls and procedures in place no later than January 1, 2025. LAFs that lack existing reporting mechanisms should immediately commence the effort to identify and implement necessary procedures. AFs (other than SRCs and EGCs) will have only one extra year to meet this standard, and SRCs and EGCs will have only two extra years. While these companies will have additional time to comply, companies with limited or no existing infrastructure in place for climate-specific disclosures would benefit from starting the process early. Fluctuations in a company’s stock price may cause the company unexpectedly to cease to qualify as an AF, SRC or EGC, which could accelerate the company’s climate reporting obligations.

Update internal control over financial reporting. Public companies (including SRCs) will need to extend their internal control over financial reporting to address new disclosure requirements for the footnotes to their audited financial statements. Moreover, LAFs and AFs (other than EGCs) will need to ensure that their new controls will withstand the scrutiny of auditors as they prepare their attestation reports regarding internal control over financial reporting. As with all new financial statement disclosure requirements, members of the issuer and auditor communities may have a range of views regarding the minimum requirements for effective internal controls. Prompt action to identify, implement and test the necessary reporting infrastructure should help to mitigate the risk that a significant deficiency or material weakness will be identified during the annual assessment of internal control over financial reporting.

Establish or update board oversight and risk management procedures. While most public company boards of directors have likely discussed climate-related risks during the normal course of operations, it is also likely that fewer boards have instituted procedures, mechanisms and timelines for management to make formal reports regarding their identification, assessment and management of climate-related risks. These companies should review their existing risk management procedures and determine how best to adapt them to comply with the new rules. Management may need to obtain board approval for additional qualified personnel, as well as budgetary resources to engage outside experts. Directors should consider whether to establish a new committee of directors with specialized expertise regarding climate-related matters, if any, or whether to delegate responsibility for overseeing compliance efforts to an existing committee.

Decide whether to adopt or continue climate-related targets and goals. Companies that are subject to, or that voluntarily adopt, climate-related targets or goals, such as a “net zero” target or a specified percentage reduction in GHG emissions, must provide specific disclosures about those targets and goals and the means by which they calculate, measure and strive to achieve those targets and goals. Companies that voluntarily disclose targets or goals should consider whether they have already established, or can establish in a timely way, an adequate reporting infrastructure to comply with the new disclosure requirements. If not, those companies should consider whether they should discontinue their voluntary disclosures until they have established the necessary systems and procedures.

Consider whether to adopt or continue voluntary assurance regarding GHG emissions. Although it will be several years before any public company is required to engage a GHG emissions attestation provider to provide an attestation report regarding Scope 1 and Scope 2 emissions, that deadline may be accelerated for companies that voluntarily obtain third-party assurances for their GHG emissions disclosures. Accordingly, companies should take that potential acceleration into account when deciding whether to engage an attestation provider or to extend an existing engagement. Companies that obtain voluntary assurance will be required to identify the service provider, describe the assurance standard used, describe the scope of assurance services provided, disclose the results of the assurance services, disclose certain conflicts of interest and disclose any relevant oversight inspection program applicable to the service provider. These companies will need to weigh the business risks of discontinuing their voluntary assurances against the added legal risks of being among the first to file attestation reports.