Client alert: Final US SEC climate disclosure rule adopted – what you should know

There are four main takeaways from this new regulation:

1. No scope 3 emissions disclosure requirement

The proposed rule in 2022 included disclosure of scope 3 (indirect) emissions if material. This requirement was entirely cut from the final ruling (in contrast to the new California legislation that includes annual disclosure of scope 3 emissions for both public and private companies without any materiality threshold). The SEC removed these requirements in response to public comments about the cost and effort it would take to calculate these emissions.

2. Companies must disclose material scope 1 and scope 2 emissions

Although scope 3 emissions aren’t required, companies (specifically large accelerated filers and accelerated filers) must still calculate and disclose their material scope 1 and 2 emissions, aligned with the GHG protocol. Emission disclosures are not required for smaller companies, a change from mandatory in the proposed draft rule.

3. The final rule still requires disclosure of material physical and transition risks, but required disclosures of impacts on financial statements are greatly reduced with a focus on expenditures incurred

• Companies must still disclose physical and transition risks that have had or are reasonably likely to have a material impact on the business strategy, results of operations, or financial condition.
• However, the requirement to quantify and disclose future climate-related risks has been softened. Instead, the new rule makes it necessary for companies to disclose material capitalized costs, expenses, charges, and losses incurred as a result of severe weather events and other natural conditions. This includes significant expenses and impacts on financial estimates and assumptions directly related to efforts to address or adapt to climate-related challenges.
• Finally, disclosure of transition activities is focused on incurred capitalized costs, expenditures, and losses from the acquisition and use of carbon offsets and renewable energy credits.

4. SEC requires phased-in assurance of climate-related disclosures.

Assurance, or independent verification, of scope 1 and 2 emissions is required for accelerated and large accelerated filers. This assurance requirement takes effect one year after initial disclosure requirements and for large, accelerated filers will shift from “limited” to “reasonable” assurance over time.