On March 6, 2024, the U.S. Securities and Exchange Commission (SEC) adopted final enhanced and standardized climate-related disclosure rules requiring disclosure of climate-related information in registration statements and annual reports, by both domestic registrants and foreign private issuers (the Final Rules). The proposed climate-related disclosure rules, initially released in March 2022, received thousands of comments and widespread publicity. The Final Rules scale back the requirements from those under the proposed rules. The Final Rules are already subject to legal challenges, as described more fully below, and we anticipate that the Final Rules will draw continued publicity.

This client alert summarizes the Final Rules, beginning with an overview of the disclosure requirements for climate-related risks and measures to address them, greenhouse gas (GHG) emissions and climate-related expenditures. This client alert then provides an overview of the Final Rules’s scope, reporting, and timing, as well as of the legal challenges facing the Final Rules and next steps to prepare for the Final Rules. Please join our Climate Rules Webinar on Tuesday, March 19, at 1:00 p.m. PT, for an overview of the Final Rules and practical compliance tips.

Qualitative and Quantitative Disclosure in Registration Statements and Annual Reports

Under the Final Rules, a registrant will be required to disclose the following items related to climate-related risks and impacts, oversight, risk management, and goals in registration statements and annual reports:

• Climate-Related Risks.¹
  • A registrant must describe climate-related risks that have materially impacted or are reasonably likely to materially impact its business, results of operations and financial condition. 
  • In addition, a registrant must describe whether the risk are reasonably likely to manifest over the short-term (within the next 12 months) and long-term (beyond the next 12 months) and provide a description of any material “physical”² and “transition”³ risks, among other things.
  • If a registrant discloses physical risks, it must identify the location of such physical risks and the nature of the properties, processes, or operations subject to the physical risks.
  • The description must include actual and potential material impacts⁴ of these identified climate-related risks on a registrant’s strategy, business model, and outlook. To the extent a registrant identifies material impacts, it must describe how it considers such material impacts as part of its strategy, financial planning, and capital allocation.
• Risk Management.⁵
  • If a registrant has identified a material climate-related risk, disclose any existing processes for identifying, assessing, and managing material climate-related risks and whether and how any such processes are integrated into a registrant’s overall risk management system or processes.
  • If applicable, how a registrant identifies whether it has incurred or is reasonably likely to incur a material physical or transition risk, how it prioritizes whether to address a climate-related risk, and how it decides whether to mitigate, accept, or adapt to any such risk.
• Climate-Related Goals and Targets.⁶
  • Any climate-related target or goal if such target or goal has materially affected or is reasonably likely to materially affect a registrant’s business, results of operations, or financial condition. 
  • If applicable, additional information or explanation necessary to understand the material impact or reasonably likely material impact of such target or goal, including the scope of activities covered by the target, the units measured, the time horizon for achievement of the goal (and whether the time horizon is based on one or more goals established by a climate-related treaty, law, regulation, policy, or organization), the baseline time period for the target or goal, the means by which progress will be tracked, and a qualitative description of how a registrant intends to meet its climate-related target or goal.
  • Any progress made toward meeting the target or goal and how such progress has been achieved. This will need to be updated each fiscal year by describing the actions taken during the year to achieve the registrant’s targets or goals.
  • Material impacts to a registrant’s business, results of operations or financial condition as a direct result of the target, goal, or actions taken to make progress toward such target or goal, including quantitative and qualitative disclosure of any material expenditures, and material impacts on financial estimates and assumptions as a direct result of the target, goal, or actions taken to make progress toward meeting its target or goal.
• Board Oversight and Management’s Role.⁷ If a registrant’s board of directors and/or management oversees, assesses, or manages climate-related risks, then the registrant must disclose:
  • Board Oversight
    • The board of directors’ role in oversight of climate-related risks.
    • If applicable, any board committee or subcommittee responsible for oversight of climate-related risks and a description of the process by which the board or a committee is informed of climate-related risks.
    • If applicable, whether the board oversees progress against any climate-related target, goal, or transition plan.
  • Management’s Role
    • Management’s role in assessing and managing material climate-related risks.
    • If applicable, whether and which positions or committees are responsible for assessing and managing climate-related risks, and the relevant expertise of such position holders or committee members.
    • If applicable, the processes by which such positions or committees assess and manage climate-related risks.
    • If applicable, whether such positions or committees report information about climate-related risks to the board (or a committee or subcommittee thereof).
• Transition Plans.^8,9
  • If a registrant has adopted a transition plan, describe the plan adopted by the registrant to manage material transition risks. The registrant must update the disclosure each year by describing the actions taken during the year to achieve the plan’s targets or goals, including how such actions impacted a registrant’s business, results of operations, or financial condition.
  • Include qualitative and quantitative disclosure of material expenditures incurred, and material impacts on financial estimates and assumptions as a direct result of the disclosed actions taken under a transition plan.
• Carbon Offsets or Renewable Energy Credits (RECs).^10,11
  • If carbon offsets or RECs are used as a material component of a registrant’s plan to achieve climate-related targets or goals, the registrant must disclose the amount of carbon reduction, avoidance, and/or removal represented by the offsets or energy represented by the RECs, the nature and source of the offsets or RECs, a description and location of the underlying projects, any registries or other authentication of the offsets or RECs, and the cost of the offsets or RECs.
• Maintained Internal Carbon Price.¹²
  • If a registrant maintains an internal carbon price, provide information about any maintained internal carbon price, if a registrant’s use of such internal carbon price is material to how it evaluates and manages a climate-related risk that has materially impacted or is reasonably likely to materially impact a registrant’s business strategy, results of operations, or financial condition.
  • The disclosure should include price per metric ton of carbon dioxide equivalent (CO2e) and the total price, including how the total price is estimated to change over the short-term and long-term, in units of the registrant’s reporting currency.
    • If a registrant uses more than one internal carbon price, it will need to provide these disclosures for each price, and explain why a registrant uses different prices.
• Scenario Analysis.^13,14
  • If a registrant uses a scenario analysis and if, based on the results of such analysis, the registrant determines the climate-related risk is reasonably likely to have a material impact [on its business], it must provide information about the scenarios considered, including a brief description of a registrant’s parameters, assumptions, and analytical choices, and the projected material financial impacts on a registrant’s business strategy under each scenario.

Emissions Disclosures

Under the Final Rules, a registrant will be required to disclose the following items related to GHG emissions:

• Scope 1 and Scope 2 GHG Emissions.¹⁵
  • If Scope 1 (a company’s direct emissions) and/or Scope 2 (emissions from a company’s purchase and consumption of energy) emissions are material, the registrant must disclose the total aggregate CO2e, not including offsets, of Scope 1 and Scope 2 emissions, separately, for the most recently completed fiscal year and for the other fiscal years for which disclosure of GHG emissions have previously been disclosed in an SEC filing.
    • This requirement is only applicable to Large Accelerated Filers and Accelerated Filers.
    • Smaller Reporting Companies (SRCs) or Emerging Growth Companies (EGCs) are exempt.
• Methodology.¹⁶
  • Brief descriptions of the methodology, the type and source of any emission factors used, significant inputs and significant assumptions used to calculate disclosed GHG emissions, as well as the method used to determine the organizational boundaries for GHG emissions and, if the organizational boundaries differ materially from the scope of entities and operations included in a registrant’s consolidated financial statements, a brief explanation of this difference in sufficient detail for a reasonable investor to understand.
    • A registrant may use reasonable estimates of emissions as long as the registrant describes its assumptions underlying and reasons for using the estimates.
• Assurance.¹⁷
  • Evidence of limited assurance¹⁸ of GHG emissions in fiscal year 3 after the date by which the registrant must begin providing climate-related disclosures (see the Compliance Timeline section, below).
    • This requirement is only applicable to Large Accelerated Filers and Accelerated Filers.
    • SRCs or EGCs are exempt.
    • Large accelerated filers will be required to obtain reasonable assurance¹⁹ in fiscal year 7 and beyond. The Final Rules provide that assurance will be required on the following schedule, assuming a registrant with a December 31 fiscal year-end:

Financial Statement Disclosures

The Final Rules require a registrant to disclose disaggregated climate-related expenditure metrics in a separate note to the financial statements. Since these expenditure metrics will be included in audited financial statements, they will be included in the scope of any required audit of the financial statements and within the scope of a registrant’s internal control over financial reporting. Registrants will need to disclose:

• Expenditure Metrics.²⁰
  • The total amounts (i) expensed and (ii) capitalized during the fiscal years presented as a result of severe weather events²¹ or other natural conditions.²²
  • The amount of any recoveries recognized during the fiscal year as a result of the severe weather events and other natural conditions for which costs, expenses, charges or losses have been disclosed. The Final Rules prescribe an attribution principle that a registrant must attribute a cost, expenditure, charge, loss, or recovery to (i.e., “as a result of”) a severe weather event or other natural condition when the event or condition is a significant contributing factor in incurring the cost, expenditure, charge, loss, or recovery.
  • Disclosure of expenditures expensed are subject to disclosure thresholds of the greater of (i) $100,000 in the income statement or $500,000 in the balance sheet and (ii) one percent of the absolute value of income or loss before income tax expense or benefit for the relevant fiscal year. Disclosure of capitalized costs and charges are subject to disclosure thresholds of the greater of (i) $100,000 in the income statement or $500,000 in the balance sheet and (ii) one percent of the absolute value of stockholders’ equity or deficit, at the end of the relevant fiscal year.
  • Whether estimates and assumptions used to produce the consolidated financial statements were materially impacted by exposures to risks and uncertainties associated with, or known impacts from, severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, or any climate-related targets or transition plans disclosed by a registrant—and if so, provide a qualitative description of how such events have impacted the development of the estimates and assumptions used by a registrant in the preparation of such financial statements.

Scope, Reporting, and Timing of Final Rules

• Scope. All SEC registrants will eventually be required to provide some climate-related disclosure pursuant to the Final Rules. The table above provides the compliance timelines for GHG emissions reporting and assurance. The table below provides the compliance timelines for the other disclosures covered in this client alert.
• Reporting.
  • Registrants will be required to disclose information under the Final Rules in their Annual Reports on Forms 10-K or 20-F and in their registration statements on Forms S-1, S-3, S-4, S-11, F-1, F-3, and F-4 filed with the SEC. The Final Rules will not apply to a private company that is a party to a business combination transaction involving a securities offering registered on Forms S-4 or F-4. Disclosure in registration statements would be required in any registration statement that is required to include financial information for the full fiscal year indicated in the table below.
  • The Final Rules recognize that many companies report their GHG emissions mid-year and therefore allow registrants to elect to provide their Scope 1 and Scope 2 GHG emissions information in their Quarterly Report on Form 10-Q for the second fiscal quarter in the fiscal year immediately following the year for which the GHG emissions metrics disclosure relates and incorporate it by reference into the Annual Report on Form 10-K.
  • The new disclosure can also be incorporated by reference from other filed or furnished reports, as long as a registrant satisfies the general incorporation by reference requirements.
• Rule Reciprocity. The SEC notes that a meaningful number of registrants may be subject to the climate-related disclosure and reporting requirements of other jurisdictions. The SEC structured the Final Rules to incorporate widely used standards and frameworks, such as those provided by the Task Force on Climate-Related Financial Disclosures, the International Sustainability Standards Board, and the GHG Protocol, to facilitate cross-jurisdictional compliance. In addition, certain laws, such as California’s Climate Corporate Data Accountability Act, provide that California reporting requirements should be structured to minimize duplication of effort such that reports required by the SEC may satisfy the California requirements.²³
• Safe Harbor.²⁴ The Final Rules extend the Private Securities Litigation Reform Act (PSLRA) safe harbors to disclosures (other than historic facts) regarding transition plans, scenario analysis, internal carbon pricing, and targets and goals.²⁵ In addition, the Final Rules extend the PSLRA safe harbors for these specified disclosures to certain issuers and/or in connection with certain transactions currently excluded from the PSLRA safe harbors (e.g., IPO registration statements).
• Timing. The table below summarizes the compliance dates for climate-related disclosures, assuming a registrant with a December 31 fiscal year-end.

Legal Challenges to the Final Rules

Since the announcement of the Final Rules, several legal challenges have emerged:

• Several states filed a suit in the U.S. Court of the Appeals for the Eleventh Circuit asking the court to vacate the Final Rules and declare them unlawful.²⁶ Led by the Attorney General from West Virginia, Attorneys General from ten states, including Alabama, Georgia, Indiana, and Wyoming, assert that the SEC exceeded its statutory authority and the Final Rules are “arbitrary, capricious, an abuse of discretion, and not in accordance with law.”²⁷ We expect the SEC to respond to the challenge in the coming days.
• Members of Congress have indicated their intent to challenge the Final Rules. Rep. Bill Huizenga and Sen. Tim Scott signaled their plan to use the Congressional Review Act to disapprove the Final Rules.²⁸ Pursuant to the Congressional Review Act, Congress may disapprove an agency rule with a majority vote via a joint resolution, subject to a Presidential veto.²⁹ If a joint resolution to disapprove the Final Rules is enacted and not vetoed, the Final Rules would be treated as not in effect. Rep. Huizenga and Sen. Scott stated that their work on the challenge via the Congressional Review Act has been ongoing since the proposed rules were announced two years ago.³⁰
• House Financial Services Committee (the HFSC) Chairman Patrick McHenry also announced a pair of hearings by the HFSC to review the Final Rules.³¹ Specifically, the HFSC will review the Final Rules’ impact on U.S. capital markets and the alleged “gross regulatory overreach” by the SEC.³² The House Financial Services Subcommittee on Oversight and Investigations will hold the initial hearing on March 18, 2024, followed by a hearing of the entire HFSC on April 10, 2024.³³

We expect that the Final Rules will be subject to a number of legal challenges, including those discussed above, that may impact registrants’ ultimate compliance requirements.

What to Do Now?

The Final Rules are comprehensive, detailed, and intended to encourage consistent, comparable, and reliable disclosure of climate-related information in companies’ registration statements and annual reports. Registrants should familiarize themselves with the Final Rules and prepare for the disclosure requirements and the implementation of the governance processes, operational systems, and controls systems necessary to collect, manage and report required information.

We expect that companies of all sizes and across all industries will have questions as they familiarize themselves with the Final Rules and the potentially far-reaching implications for their businesses. 

[1] Regulation S-K Item 1502(b)-(d).

[2] Physical risks include both acute and chronic risks. Acute risks are event-driven risks like extreme weather events. Chronic risks are risks that result from longer term weather patterns and related effects.

[3] Transition risks are the actual or potential negative impacts on a registrant’s business, results of operations or financial condition attributable to regulatory, technological and market changes to address the mitigation of, or adaptation to, climate-related risks. Transition risks include such risks as increased costs attributable to climate-related changes in law or policy, reduced market demand for carbon-intensive products, changes in consumer behavior, competitive pressures associated with adoption of new technology, the devaluation or abandonment of assets, or risk of legal liability and litigation defense costs.

[4] The Final Rules provide a non-exclusive list of potential material impacts, including on: business operations, including the types and locations of a registrant’s operations; products or services; suppliers, purchasers, or counterparties to material contracts, to the extent known or reasonably available; activities to mitigate or adapt to climate-related risks, including adoption of new technologies or processes; and expenditure for research and development.

[5] Regulation S-K Item 1503.

[6] Regulation S-K Item 1504(a)-(c).

[7] Regulation S-K Items 1501(a)-(b).

[8] Regulation S-K Item 1502(e).

[9] A transition plan is a registrant’s strategy and implementation plan to reduce climate-related risks. Reg. S-K Item 1500.

[10] Regulation S-K Item 1504(d).

[11] A carbon offset is an emissions reduction, removal or avoidance of GHG emissions in a manner calculated and traced for the purpose of offsetting an entity’s GHG emissions. Regulation S-K Item 1500. A REC is a credit or certificate representing each megawatt-hour (1MWh or 1,000 kilowatt-hours) of renewable electricity generated and delivered to a power grid. Id.

[12] Regulation S-K Item 1502(g).

[13] Regulation S-K Item 1502(f).

[14] Scenario analysis means a process for identifying and assessing a potential range of outcomes of various possible future climate scenarios, and how climate-related risks may impact a registrant’s business strategy, results of operations or financial condition over time. Regulation S-K Item 1500.

[15] Regulation S-K Item 1505(a).

[16] Regulation S-K Item 1505(b).

[17] Regulation S-K Item 1506(a).

[18] Limited assurance is the level of assurance provided over a registrant’s interim financial statements, which primarily requires inquiries into factual assertions.

[19] Reasonable assurance is the level of assurance provided in an audit of a registrant’s audited consolidated financial statements and requires the assurance provider to obtain an understanding of the registrant’s internal controls.

[20] Regulation S-X Rule 14-02(c)-(d).

[21] E.g., hurricanes and tornadoes.

[22] Registrants will not be required to make a determination that any severe weather event or natural occurrence was caused by climate change.

[23] See SB-253, Climate Corporate Data Accountability Act (Oct. 7, 2023), available at https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB253.

[24] Regulation S-K Item 1507.

[25] Covers disclosures made pursuant to Items 1502(e), 1502(f), 1502(g) and 1504 of Regulation S-K.

[26] West Virginia v. SEC, 11^thCir., March 6, 2024, https://ago.wv.gov/Documents/SEC%20Climate%20Disclosure%20Petition%20for%20Review.pdf. 

[27] Id.

[28] David Hood, Congressional Republicans Maneuver to Block SEC’s Climate Rules, Bloomberg Law (March 6, 2024), https://news.bloomberglaw.com/esg/congressional-republicans-maneuver-to-stifle-secs-climate-rule.

[29] See 5 U.S. Code §§ 801, 802.

[30] Hood, supra note xxi.

[31] Press Release, Financial Services Committee, Chairman Patrick McHenry, McHenry Slams SEC’s Final Climate Disclosure Rule (March 6, 2024) https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=409174.

[32] Id.

[33] Id.