The Securities and Exchange Commission (SEC) adopted final rules requiring companies to disclose material climate-related information in registration statements and annual reports. Material is defined as information investors should know before they buy shares.
SEC Chair Gary Gensler said, “These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings.”
Their purpose is to provide transparent, consistent, and comparable data primarily for institutional investors — companies or organizations that invest on behalf of others.
The final rules include many disclosure requirements, the main ones being:
- Climate-related risks that have or are reasonably likely to have a material impact on business strategy, results of operations, or financial condition.
- The actual and potential material impacts of any identified climate-related risks.
- Material expenditures incurred and material impacts on financial estimates and assumptions resulting from activities to mitigate or adapt to a material climate-related risk.
- Specified disclosures regarding a registrant’s activities to mitigate or adapt to a material climate-related risk including the use of transition plans, scenario analysis, or internal carbon prices.
- Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks.
- Any processes the registrant has for identifying, assessing, and managing material climate-related risks and whether and how such processes are integrated into the registrant’s overall risk management system or processes.
- Information about a registrant’s climate-related targets or goals that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition.
- Information about material Scope 1 emissions and/or Scope 2 emissions.
- For those required to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level, which, for large accelerated filers, will be at the reasonable assurance level after a transition period.
- The capitalized costs, expenditures, charges, and losses incurred as a result of severe weather events and other natural conditions.
The timeline for Scope 1 and 2 emission reporting begins fiscal year 2028 and will be due 2029.
The material risks, however, must be reported beginning fiscal year 2025 and are due 2026.
Although Scope 3 emissions were not mentioned in this ruling, companies should be aware that institutional investors may be looking for this information as well.
A company must report these disclosures in its registration statements as well as in the Exchange Act annual reports filed with the Commission. It must also provide the Regulation S-K mandated climate-related disclosures.
One should be aware that adherence to the SEC rules does not exempt anyone from other requirements such as the European Union’s Corporate Sustainability Reporting Directive or California’s state climate disclosure acts.
Because of these multitude disclosure standards, companies need to carefully define and record their material risks.
The SEC has published both the full final rules and a fact sheet.
