Preparing for the Proposed SEC Climate Disclosure Rule

What is the new proposed climate disclosure rule, and why is it important?

In March 2022, the United States Securities and Exchange Commission (SEC) released a proposal for a landmark new rule that would mandate disclosure of companies’ sustainability targets, material climate risks and impacts, and associated risk management strategies. The rule will apply directly to companies listed on U.S. exchanges, but private enterprises in their supply chains will also be expected to procure and disclose sustainability data.

Understanding the Proposed SEC Requirements

What do I need to know now?

The proposed regulation has several important components that companies should begin to consider and prepare for now.  
Notable disclosure highlights include:

  • Board members or committees responsible for the oversight of climate-related risk and their relevant expertise 

  • Board processes and frequency for identifying climate-related risks and the effects on business strategy, risk management, and financial oversight 

  • 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 

  • Targets or goals related to the reduction of Green House Gas (GHG) emissions, or any other climate-related target or goal 

  • For each target or goal, the nature, scope and calculation of the goal, transition plans for achieving the goal, progress to date and any use of carbon offsets and Renewable Energy Credits (RECs) 

  • Results of climate modeling (especially data that identifies potential risks and opportunities associated with climate change) 

  • Line-item impact on financial statements related to severe weather events, other natural conditions and transition activities 

  • Expenditures related to mitigating the risk of severe weather events and other natural conditions and transition activities 

  • Effects on estimates and assumptions reflected in the financial statements of severe weather events, other natural conditions and transition activities 

  • Climate-related risks, which may manifest over the short, medium, and long term that have: (1) had or are likely to have a material impact on the business and financial statements and (2) affected or are likely to affect strategy, business model, and outlook 

  • Scope 1, Scope 2 and, in some cases, Scope 3 GHG emissions on a gross basis (before consideration of any offsets) and relative to intensity (e.g., tons of carbon dioxide per dollar of revenue) 

  • Disclosures would be for the most recently completed fiscal year, and for the historical fiscal years included in the consolidated financial statements in the filing 

  • The financial statement footnote disclosures would be subject to existing financial statement audit requirements  

  • The Scope 1 and Scope 2 GHG emission disclosures would be subject to limited assurance attestation requirements during a phase-in period, followed by reasonable assurance, depending on the size of the filer

How to Prepare for the SEC Climate Disclosure Requirements

The proposed regulation, once finalized, will mark a major inflection point for climate mitigation, corporate transparency, and stakeholder advocacy. History will remember this development as a major milestone toward climate accountability, empowering investors with information needed to make more informed decisions. For businesses, the rule represents the tightening bond between corporate transparency and stakeholder expectations.

Karen Baum
Managing Principal, Sustainability & ESG 

Your Role

Expected responsibilities for the proposed SEC climate disclosure rule by role:

Top Anticipated Opportunities 

Resilient operational strategy with respect to climate risk  

Improved talent attraction & retention  

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

A climate-related risk refers to any potential adverse impact or harm that arises from climate change or variability. The proposed SEC climate disclosure rule identifies two categories of climate-related risks.  

  1. Transition Risks: These risks arise from the transition to a low-carbon and sustainable economy. They include: 

  • Policy and Legal Risks: Changes in regulations, laws, or policies that aim to reduce greenhouse gas emissions can impact industries and businesses. For example, the introduction of carbon pricing or stricter emission standards. 
  • Market Risks: Shifts in consumer preferences, technological advancements, or changes in investor sentiment can affect the demand for certain products or services. This can lead to financial losses for companies that fail to adapt to these changes. 
  • Reputation Risks: Companies that are perceived as not taking sufficient action to address climate change may face reputational damage, which can impact their brand value and customer loyalty. 
  • Financial Risks: These include stranded assets (e.g., fossil fuel reserves that become economically unviable), devaluation of high-carbon assets, and changes in insurance coverage or premiums due to climate-related factors. 
  1. Physical Risks: These risks result from the physical impacts of climate change. They include: 

  • Extreme Weather Events: More frequent and intense events like hurricanes, floods, heatwaves, and droughts can damage infrastructure, disrupt supply chains, and impact agriculture and food security. 

  • Sea-Level Rise: Rising sea levels can lead to coastal erosion, increased flooding, and saltwater intrusion into freshwater sources, affecting coastal communities, infrastructure, and ecosystems. 

  • Changing Temperature and Precipitation Patterns: Shifts in temperature and rainfall patterns can impact agriculture, water availability, and ecosystems, leading to reduced crop yields, water scarcity, and biodiversity loss. 

  • Health Risks: Climate change can exacerbate health issues, such as heat-related illnesses, respiratory problems from air pollution, and the spread of vector-borne diseases like malaria and dengue fever. 

As of the Commission’s updated rulemaking agenda, made public in early December 2023, the agency will consider finalizing the rule in April 2024. 

The proposed SEC rules include a phase-in period for all companies, with the compliance date dependent on the filer status, an additional phase-in period for Scope 3 emissions disclosure, and a phase-in period for the assurance requirement and the level of assurance required for accelerated filers and large accelerated filers (see table under "What are the anticipated compliance deadlines?") 

Identifying material ESG risk involves assessing the significant and potential impact of ESG factors on a company's financial performance and long-term sustainability. 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 proposed 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.

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. 

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 get assurance on ESG data either from accounting firms or non-accounting firms. 

The SEC's proposed climate disclosure rules are applicable to domestic and foreign registered companies in the U.S. who are subject to SEC regulations and are required to file periodic reports. The proposed disclosure requirements would 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.

The proposal issued by the SEC has yet to be finalized, and the effective dates are subject to change, including the scope of the proposal both in terms of which entities may be required to apply them and the information to be disclosedThe original proposal dates are reflected below:  

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 help you navigate the Protocol Greenhouse Gas Protocol: Measuring Scope 1, 2 & 3 Emissions. It can help those just getting started by breaking down the most important parts into simple charts, and it can help those who just need an organized reference. 

Given the increasing importance of ESG data and its potential as a competitive differentiator, companies can benefit from establishing a rigorous control environment, particular as they move towards seeking third party attestation of this data. 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. 

  • CSRD and the proposed SEC 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, CSRD requirements extend beyond the reporting scope in the proposed SEC rule, including the area of materiality. The SEC rule focuses only on climate, whereas 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 US companies with significant EU operations, must report. 

  • The SEC proposal is rooted in financial materiality and requires companies to disclose how sustainability risks and opportunities impact financial performance. The CSRD also employs a financial materiality approach, as well impact materiality, which requires companies to disclose how its performance affects people and the environment.  

  • For US companies that are within scope of both rules, it is possible that compliance with the SEC rule, when finalized, might not be satisfy the requirements for CSRD. 

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. 

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