On March 6, the SEC finalized its long-awaited Climate Disclosure Rules. The approved rules will require SEC registrants to communicate with investors on ways in which climate change poses significant risks to their business.

In the final rules, the SEC articulates that:

“…Climate-related risks can affect a company’s business and its current and longer-term financial performance and position... Climate-related natural disasters can damage issuers’ assets, disrupt their operations, and increase their costs. Any widespread market-based transition to lower carbon products, practices, and services – triggered, for example, by recent or future changes in consumer preferences or the availability of financing, technology, and other market forces – can lead to material changes in a company’s business model or strategy and may have a material impact on a registrant’s financial condition or operations.”

The SEC’s decision reiterates the global trend that there is immense value for investors in climate-related reporting, and that public investor demand for such disclosures will continue to increase in the global landscape. This is evidenced domestically in the State of California by SB 253: Climate Corporate Data Accountability Act and SB 261: Climate-Related Financial Risk Act. The continued expansion of reporting aligns the U.S. more closely with other reporting standards, such as the European Union’s Corporate Sustainability Reporting Directive (CSRD).

Our team continues to monitor the new SEC rules, and the conversation around them, to provide best-in-class guidance on reporting timelines and requirements. Subscribe to receive our future updates and insights on this and other climate and sustainability matters.

Overview of technical requirements of the rule

SEC Registrant type and adoption timeline

There are different sets of actions to consider depending on the registrant type, as different disclosure mandates become effective starting with the registrant’s fiscal year beginning in the following years.

Financial statement disclosures

• New disclosures related to the financial impacts of climate events on the business must be included in the notes to the audited financial statements, as follows:

• The aggregate amount of expenditures expensed as incurred and losses incurred, net of recoveries, as a result of severe weather events and other natural conditions, if this amount equals or exceeds either (1) 1% of the absolute value of the pretax income (loss) for the relevant year or (2) $100,000. Amounts recognized in each financial statement line item affected must be disclosed.
• The aggregate of capitalized costs (excluding recoveries) recognized on the balance sheet due to severe weather events and other natural conditions, subject to a threshold of the greater of (1) 1% of the absolute value of stockholder’s equity (deficit) or (2) $500,000. Amounts recognized in each financial statement line item affected must be disclosed.
• If carbon offsets and renewable energy credits or certificates (RECs) are material to the registrant’s plan to achieve published climate-related commitments, a schedule of the beginning and ending balances must be included, with separate disclosure of the amount expensed, capitalized, and losses incurred – all in the aggregate.
• Estimates and assumptions that are materially affected by severe weather events and other natural conditions and disclosed climate-related goals and transition plans.

• Because the disclosures above will be located within the registrant’s annual audited financial statements, they will be subject to the registrant’s internal control over financial reporting (ICFR) and the independent auditor assessment of the effectiveness of such ICFR that is required for accelerated and large accelerated filers.

Greenhouse gas emissions (GHG emissions)

Only large accelerated filers (LAFs) and accelerated filers (AFs; except those accelerated filers that are also Smaller Reporting Companies (SRCs) and Emerging Growth Companies (EGCs)) will be required to disclose greenhouse gas emissions, and in later years, obtain limited or reasonable level of assurance over such disclosures. The disclosures required encompass Scope 1 and 2 GHG emissions on a gross basis (meaning no offsets are incorporated into the measure). This includes defining what ownership parameters were set for inclusion (an organizational boundary), particularly if it is different from the financial statements.

• Scope 1: All direct greenhouse gas emissions stemming from sources that a reporting entity owns or directly controls, regardless of location, including fuel combustion activities.
• Scope 2: Indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.

• The reporting must be submitted in metric tons of carbon dioxide equivalent (CO2e). Additionally, if there are other GHGs pertinent to the business, those must also be reported for SEC compliance.
• Depending on other jurisdictions where the SEC registrant operates, there may be additional considerations, like Scope 3 under California rules.
• These disclosures will be located in a newly created section of Form 10-K (or 20-F for foreign private issuers).
• Domestic LAFs and AFs will be permitted to delay filing the greenhouse gas emission disclosures for their most recently completed fiscal year in their Form 10-Q for the second quarter or in an amendment to their annual report on Form 10-K.

Governance

• The structural makeup of the company’s board, subcommittees, and management must be outlined as it pertains to sustainability and climate-related risk strategy. Any oversight on the assessment and management of planned actions and commitments must also be outlined.

Risk and strategy

• Enterprise risk management (ERM) strategy must be outlined, indicating if there is a clear process in place for detecting, evaluating, and managing climate-related risks.
• There must be an outlined strategy clearly communicating how climate-related risks could materially affect the business, financial condition, and operational results. This should include commentary on the strategy, business model, and outlook.
• If an internal price of carbon is used to make decisions internally, the price and other considerations in the weighting of this analysis mechanism must be disclosed.
• Scenario analyses and transition plans that are reasonably likely to have a material impact to the business must be disclosed with description of scenarios, assumptions, and projected financial impacts, including any progress along a timeline.

Five actions to take now to prepare

1. Have a clear action plan when getting ready for financial statement disclosures by understanding what climate-related disclosures are required for your first issuance. We recommend assessing current voluntary disclosures in line with this new rule.
2. Conduct a materiality assessment to justify whether climate-related risks and measures are or are not material to your business. This will also inform a gap assessment to identify opportunities to bolster data for future reporting and accelerate the progress of your sustainability initiatives.
3. Start to (or continue to) collect your greenhouse gas inventory, and make sure that the inventory and data collected for your scope 1 and 2 emissions can pass limited and reasonable assurance requirements for large accelerated filers and limited assurance for accelerated filers that are not SRCs or EGCs.
4. Implement clear governance and oversight of material climate-related risks both at the board and management levels.
5. Undergo a climate risk assessment to understand the material impact of climate risks (both physical and transition risk) on the company’s strategy, business model, and outlook. This work should consider both a short-term (next 12 months) and long-term (beyond 12 months) perspective.

How CohnReznick fosters climate readiness

The CohnReznick Sustainability Advisory practice uses Sustained Intelligence to bring forward your climate actions in the lens of value creation. The SEC requirements provide a reliable foundation for performance standards that can help improve return on investments, which can be identified as early as the initial gap assessment. Are you ready to capture that value as we transition to a low-carbon economy and drive toward a decarbonized future?