Complying with the Final SEC Climate Disclosure Rule

What are the new SEC Climate Disclosure Requirements? 

On March 6, 2024, the United States Securities and Exchange Commission (SEC) finalized its landmark climate disclosure rule, mandating the disclosure of material climate risks, Scope 1 and 2 greenhouse gas (GHG) emissions, climate targets, and more in registrants’ annual reports and registration filings. The final rule is scaled back from the initially proposed legislation with the addition of materiality qualifiers in certain rule provisions and revisions to make the final rules less prescriptive. 

The rule applies to all companies listed on U.S. exchanges, though timelines and applicability vary by size and filing status. The emissions reporting requirements under Scope 1 and Scope 2 primarily apply to large-accelerated filers (LAFs) and accelerated filers (AFs), as well as large non-U.S. companies that trade U.S. stock. However, all public entities and those filing to go public are required to disclose their climate-related financial risks (if material). 

On April 4, 2024, the SEC announced a pause on implementation of the new climate rule, which is pending review in the U.S. Court of Appeals for the Eighth Circuit. BDO is closely monitoring the proceedings and will provide updated insights as new developments unfold.

Understanding the New Requirements

The regulation has several important components that require immediate attention. 
Notable disclosure highlights include:

  • Board members, committees or subcommittees responsible for the oversight of climate-related risk
  • Board processes for identifying climate-related risks
  • Management’s role in assessing and managing climate-related risks
  • Management positions or committees responsible for assessment and management of climate-related risks; and their relevant expertise

For each target or goal:

  • The scope of activities related to the target.
  • The unit of measurement.
  • The timeframe to meet the target along with any progress made and how such progress was achieved.
  • The baseline used to track progress (if applicable).
  • A description of the company’s plan to meet the target and any actions taken to do so.
  • The use of carbon offsets or renewable energy credits (RECs), if material to the climate-related targets or goals.

  • Aggregate amounts of expenses, losses, capitalized costs, and charges related to severe weather and conditions
  • Aggregate amounts of carbon offsets and RECs
  • Financial estimates and assumptions materially impacted by severe weather and conditions
  • Contextual information about financial statement effects, estimates and assumptions, and accounting policies.

  • Material climate-related expenditures
  • Climate-related risks and impacts on strategy, business, and outlook
  • Climate-related targets and goals (if any)
  • Governance and management of climate-related risks

  • For large accelerated filers and non-exempt accelerated filers, Scope 1 and Scope 2 GHG emissions, if material, (expressed in terms of carbon dioxide equivalent, or “CO2e”), and each material GHG type.
  • The methodology, significant inputs and assumptions, and protocol or standard used to compute the GHG emissions disclosures.
  • The organizational boundaries used to calculate Scope 1 and Scope 2 GHG emissions, and the method used to determine the boundaries.

  • The financial statement footnote disclosures would be subject to existing financial statement audit requirements
  • For large accelerated filers (LAFs) and accelerated filers (AFs), the disclosure of material Scope 1 and Scope 2 GHG emissions would be subject to limited assurance attestation requirements during a phase-in period
  • After an additional transition period, reasonable assurance will be required for LAFs

How to Begin Complying with the SEC Climate Disclosure Requirements

The SEC Climate-Related Disclosure rules help fill the gap in investors’ quest for more consistent and reliable reporting around the impacts of climate-related risks. The rules elevate climate considerations to join the broader enterprise risk conversation; one where the language of materiality is spoken consistently with existing disclosure rules and practices allowing investors to make informed decisions about risk and value.

Karen Baum
Managing Principal, Sustainability & ESG 

Your Role

Responsibilities may vary depending on your company’s filing status.

Top Anticipated Opportunities 

Resilient operational strategy with respect to climate risk  

Improved talent attraction, retention, and engagement

Quantitative data points to strengthen enterprise risk managemen  

Preferred vendor status or increased vendor rating with business customer 

Better employee understanding of business sustainability goals and values  

Top Anticipated Challenges

Identification of qualified technical resources 

Lack of awareness of ESG reporting requirements outside of sustainability and financial reporting teams 

Resource requirements for data collection, governance, and assurance

Management of stakeholder expectations, communication, and engagement

Litigation risk

Frequently Asked Questions

The SEC's climate disclosure rules apply to domestic and foreign registered companies in the U.S. that are subject to SEC regulations and are required to file periodic reports. The disclosure requirements apply to Securities Act Forms S-1, F-1, S-3, F-3, S-4, F-4, and S-11, and Exchange Act Forms 10-K and 20-F. Specific requirements and compliance timelines vary somewhat based on company size and filing history. 

The rule most impacts large accelerated filers (LAFs) and accelerated filers (AFs), SEC classifications tied to public float and revenues. Emerging growth companies (EGCs) and smaller reporting companies (SRCs), those that are newer to public markets and/or have lower revenues, are exempt from several requirements, including the greenhouse gas emissions disclosures and third-party limited assurance.

The SEC’s final rule differs significantly from its original proposal. Below are the most notable changes:

  • Adopted a less prescriptive approach to certain of the final rules, including, for example, the climate-related risk disclosure, board oversight disclosure, and risk management disclosure requirements.
  • Qualified the requirements to provide certain climate-related disclosures based on materiality, including, for example, disclosures regarding impacts of climate-related risks, use of scenario analysis, and maintained internal carbon price.
  • Eliminated the proposed requirement to describe board members’ climate expertise.
  • Eliminated the proposed requirement for all registrants to disclose Scope 1 and Scope 2 emissions and instead requiring such disclosure only for LAFs and AFs, on a phased in basis, and only when those emissions are material and with the option to provide the disclosure on a delayed basis.
  • Exempted SRCs and EGCs from the Scope 1 and Scope 2 emissions disclosure requirement.
  • Modified the proposed assurance requirement covering Scope 1 and Scope 2 emissions for AFs and LAFs by extending the reasonable assurance phase in period for LAFs and requiring only limited assurance for AFs.
  • Eliminated the proposed requirement to provide Scope 3 emissions disclosure (which the proposal would have required in certain circumstances).
  • Removed the requirement to disclose the impact of severe weather events and other natural conditions and transition activities on each line item of a registrant’s consolidated financial statements.
  • Focused the required disclosure of financial statement effects on capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions in the notes to the financial statements.
  • Required disclosure of material expenditures directly related to climate-related activities as part of a registrant’s strategy, transition plan and/or targets and goals disclosure requirements under subpart 1500 of Regulation S-K rather than under Article 14 of Regulation S-X.
  • Extended a safe harbor from private liability for certain disclosures, other than historic facts, pertaining to a registrant’s transition plan, scenario analysis, internal carbon pricing, and targets and goals.
  • Eliminated the proposal to require a private company that is a party to a business combination transaction, as defined by Securities Act Rule 165(f), registered on Form S-4 or F-4 to provide the subpart 1500 and Article 14 disclosures.
  • Eliminated the proposed requirement to disclose any material change to the climate-related disclosures provided in a registration statement or annual report in a Form 10-Q (or, in certain circumstances, Form 6-K for a registrant that is a foreign private issuer that does not report on domestic forms).
  • Extending certain phase-in periods for LAFs and AFs.

The final climate disclosure rule will become effective 60 days after it is published in the Federal Register. The compliance dates, which vary depending on company size, filing status, and other factors, are reflected below: 

Exact compliance date and required disclosures depend on company size and filer status. SRCs and EGCs will be expected to disclose certain information about their fiscal years beginning (FYB) in 2027, whereas AFs and LAFs have compliance dates as early as FYB 2026 and 2025, respectively.

For AFs and LAFs, there will be a phase-in period for the assurance requirement, material expenditures, and the level of assurance required (see Compliance Dates table above). 

To better understand what this rule means for your organization, as well as to refine your ESG data collection processes, get in touch with BDO’s Sustainability & ESG leaders.  

Compliance with the new rule hinges on procurement and disclosure of high-quality, accurate data. Particularly for AFs and LAFs, of which the rule will require third-party attestation, data quality controls will be imperative. 

Our insight, Looking for an Advantage? Focus on Internal Controls for ESG, describes the critical need for robust controls over ESG data and how companies can think strategically about developing their capabilities in this area. Additionally, BDO’s ESG software selection leaders can help you identify the right processes, quality controls, and technologies to obtain necessary ESG data most efficiently and cost-effectively.

In the final rule, the SEC mandates that an organization disclose any material climate-related risks that have materially impacted or are reasonably likely to have a material impact on its business strategy, results of operations, or financial condition. This includes both quantitative and qualitative considerations.

Citing its consistency with MD&A standards of materiality, the Commission defined “material” as a “substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote or such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available.” 

The new rule mandates the disclosure of any material climate-related risks that have materially impacted or are reasonably likely to have a material impact on its business strategy, results of operations, or financial condition.

While a variety of complex topics make up the ESG landscape, not every environmental, social and governance issue will be of equal importance to your organization. To ensure compliance with the disclosures, we advise companies to conduct an ESG materiality assessment, which is an iterative process that requires continuous evaluation and adaptation. To help you plan your ESG materiality assessment please refer to our insight, Materiality Assessment: Identify the ESG Issues Most Critical to Your Company, or get in touch with a BDO ESG leader.

The European Union’s Corporate Sustainability Reporting Directive (CSRD) and the new SEC climate rule both aim to ensure investors and other stakeholders have access to the information they need to assess investment risks arising from climate change and other sustainability issues. However, the CSRD requirements extend beyond the reporting scope in the SEC climate rule, including the area of materiality and Scope 3 emissions disclosure. The SEC rule focuses only on material climate risks, whereas the CSRD mandates disclosure of corporate governance structures as well as companies’ impacts on workers, communities, and consumers.

The CSRD’s broad disclosure rules include social and environmental information that companies, including some U.S. companies with significant EU operations, must report. The SEC’s climate rule only applies to companies that are publicly listed on U.S. exchanges.

Like the SEC’s rule, the CSRD focuses on disclosure of risks deemed material to investors. However, the CSRD also considers impact materiality, which requires companies to disclose how its performance affects people and the environment. 

For U.S. companies that are within scope of both rules, keep in mind that compliance with the SEC rule may not satisfy the requirements for the CSRD.

Use this checklist a guide to understanding the CSRD reporting requirements. 

The assurance requirements apply only to AFs and LAFs. There are two levels of ESG assurance that align with established financial reporting terminology. The higher levels are referred to as reasonable assurance in Europe and examination in the United States. The lesser levels of assurance are limited assurance in Europe and review in the United States. Our insight, Which Level of Assurance is Best for Your ESG Reporting?, provides a detailed explanation of limited vs. reasonable assurance, and BDO’s ESG assurance leaders can help you determine your organization’s readiness for ESG assurance.

The disclosures in the notes to the financial statements would be subject to audit as part of the audit of the financial statements. Companies can obtain ESG data assurance either from accounting firms or non-accounting firms.

Outside of the financial statements, companies are required to include quantitative and qualitative disclosures in a separate climate-related disclosure section that precedes the MD&A. These disclosures are subject to management’s evaluation of disclosure controls procedures and require management certifications.

The Greenhouse Gas Protocol follows certain accounting and reporting principles that serve as a guide for sustainability teams, finance professionals, accountants and third parties who help with reporting, as well as those on the other end who will be reading the reports. We’ve prepared a visual guide to the Greenhouse Gas Protocol. It breaks down the most important parts into simple charts, and it can help those who just need an organized reference.  

*Of note, while the SEC rules are facing legal challenges, regulation is only one of the many drivers for sustainable business practices. It positions companies to anticipate, adapt to, and thrive amidst an increasingly complex risk landscape and helps to position businesses to achieve long-term viability and competitive advantage. Accordingly, we recommend companies continue to prepare for this and other climate disclosure-related regulations, particularly if they meet the criteria for other climate-related disclosure requirements in California and the EU.

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