SEC climate disclosure rules: Key considerations for public companies

Update: On April 4, 2024, the SEC voluntarily stayed implementation of the Climate Rules pending completion of judicial review of the consolidated Eighth Circuit petitions described in this client alert. This stay may impact the compliance timelines cited below. While the status of the Climate Rules remains uncertain, public companies are encouraged to understand the rules and consider how to prepare for compliance.

In a 3-to-2 vote on March 6, 2024, the Securities and Exchange Commission (SEC) adopted landmark final rules intended to enhance and standardize climate-related disclosures for publicly listed companies (Climate Rules).

The Climate Rules will require that all domestic and foreign publicly traded companies make significant new disclosures related to climate-related risks, risk management, oversight, and strategy, and will compel large accelerated filers and certain non-exempt accelerated filers to report and obtain independent attestation of material greenhouse gas emissions.

The rules were published in the Federal Register on March 28, 2024 and will go into effect on May 28, 2024.

In this first publication of our client alert series on the Climate Rules, we discuss the status of the rules, provide a brief summary, and share perspectives on what public companies can do as they prepare for compliance.

Litigation surrounding the Climate Rules

Although initial compliance is scheduled for annual reports that will be filed in early 2026, the SEC is already facing numerous lawsuits challenging the Climate Rules on various grounds. As of the date of this alert, 11 such lawsuits have been filed, and the Judicial Panel on Multidistrict Litigation selected the US Court of Appeals for the Eighth Circuit as the venue for hearing a case seeking consolidation. While an administrative stay granted by the Fifth Circuit has now been dissolved in connection with the transfer of the petition to the Eighth Circuit, the Eighth Circuit may reinstitute an administrative stay that, if granted, could delay effectiveness of the rules.

While the future of the Climate Rules remains uncertain, publicly traded companies are encouraged to understand the Climate Rules and consider how to prepare for compliance. Prudent companies will also understand how such compliance may fit within the broader climate-related regulatory regime under the European Union’s Corporate Sustainability Reporting Directive, California’s Climate Corporate Data Accountability Act, or other similar regulations.

Compliance timeline

Once effective, the Climate Rules will apply on a phased-in basis depending on filer status and disclosure topic. The first of these disclosures (not to include greenhouse gas, or GHG, emissions disclosure and related limited assurances, or financial information disclosure under Article 14 of Regulation S-X and Regulation S-K) will be required for large accelerated filers (LAFs) for the fiscal year beginning in 2025 (for calendar year-end registrants, in the Form 10-K filed in 2026). See our compliance date calendar for more information.

Significant changes from proposed rules

The Climate Rules create significant new disclosure obligations; however, the SEC scaled back some of the more controversial aspects of its proposed rules, which we described in this prior DLA Piper client alert. For example, the Climate Rules:

• Only require disclosure of GHG emissions for LAFs and non-exempt accelerated filers (ACFs) that have material GHG emissions. LAFs and ACFs with immaterial emissions would not be required to disclose emissions data


• Exempt emerging growth companies (EGCs), smaller reporting companies (SRCs), and non-accelerated filers (NAFs) from GHG emissions disclosure requirements


• Do not require disclosure of Scope 3 GHG emissions (indirect emissions from upstream and downstream activities in a registrant’s value chain) for any filers


• Provide a safe harbor from private liability for forward-looking climate-related disclosures connected to transition plans, scenario analysis, targets and goals, and the use of an internal carbon price


• Eliminate the proposed requirement to disclose climate-related board of directors’ expertise


• Replace the requirement to provide zip codes for each location where the registrant has a material physical climate risk with a more flexible requirement to disclose the geographic location


• Scale back financial statement requirements, including by:
  
  • Adding 1-percent and de minimis disclosure thresholds for expenses related to severe weather events and “other natural conditions”
  • Eliminating the need for “line item level” analysis of impact of climate-related events and climate transition activities

Requirements at a glance

The final Climate Rules require disclosure of climate-related information under a new, separately captioned “Climate-Related Disclosure” section in annual reports and registration statements. These requirements include the following, which will be discussed in further detail in our other alerts within our client alert series.

• Governance Disclosures (Regulation S-K, Item 1501)
  
  • New Item 1501 requires disclosure of information concerning the role of a registrant’s board in oversight of climate-related risks and any role management plays in assessing and managing material climate-related risks, as well as the registrant’s processes for identifying, assessing, and managing material climate-related risks and whether and how any such processes are integrated into the registrant’s overall risk management program


• Risks and Strategy and Risk Management Disclosures (Regulation S-K, Items 1502-1503)
  
  • Registrants will be required to disclose material climate-related risks that have had or are reasonably likely to have a material impact on a registrant’s business strategy, results of operations, or financial condition, and describe the actual and potential material impact of any identified climate-related risks on the registrant’s strategy, business model, and outlook
  
  
  • For identified physical or transition risks, registrants must provide information necessary to understand the nature of the risk and the extent of the registrant’s exposure to such risk, as well as describe the activities taken to mitigate or adapt to material climate related risks, including the use of transition plans, scenario analysis, or internal carbon prices, including certain details and financial information related to such activities


• Targets and Goals Disclosures (Regulation S-K, Item 1504)
  
  • Registrants must provide a description of any climate-related target or goal that has materially affected or is reasonably likely to materially affect the registrant’s business, results of operations, or financial condition, and describe how the registrant intends to meet its climate related targets or goals, including any progress made toward them
  
  
  • If a registrant uses carbon offsets or renewable energy credits or certificates (RECs) as a material component to achieving its climate-related target or goals, the registrant must provide disclosure of the source and nature of the offsets or use of RECs
  
  
• GHG Emissions Disclosures (Regulation S-K, Items 1505-1506)
  
  • LAFs and ACFs will be required to disclose material scope 1 and scope 2 GHG emissions, including at a later time an independent assurance report at the limited assurance level which, for LAFs only, will increase to a reasonable assurance level following an additional transition period
  
  
• Financial Information (Regulation S-X, Article 14; Regulation S-K, Items 1502 and 1504)
  
  • Registrants, regardless of reporting status, will be required to include in the notes section of the audited financial statements within their annual reports and registration statements, disclosure of capitalized cost and expenditures expensed, charges and losses incurred as a result of any severe weather event, and other natural condition that was a “significant contributing factor” in incurring such cost
  
  
  • However, no disclosure is required if (i) expenditures expensed and losses (net of recoveries) are less than 1 percent of the absolute value of pre-tax income or loss, or if they do not exceed a $100,000 de minimis threshold, or (ii) capitalized costs and charges (net of recoveries) are less than 1 percent of the absolute value of shareholders’ equity or deficit at the end of the relevant fiscal year or do not exceed a $500,000 de minimis threshold
  
  
  • Moreover, registrants must provide quantitative and qualitative descriptions of material expenditures incurred and material impacts on financial estimates directly resulting from activities to mitigate climate-related risks, including the use of any transition plans, scenario analysis, or internal carbon prices
  
  
  • Registrants must disclose the aggregate amount of any recoveries for which they have disclosed capitalized costs, expenditures, charges or losses
  
  
  • Registrants that purchase carbons offsets or RECs representing a material component of their plans to achieve their climate-related target or goals must disclose capitalized costs, expenditures expensed, and losses related to such purchases. No de minimis threshold exemption applies

What constitutes “material” GHG emissions?

A key component of the Climate Rules (and, as noted above, a primary difference from the proposed rules) is that registrants will only need to disclose material GHG emissions data. Registrants that do not have material emissions will not have a corresponding disclosure (and attestation) obligation. The materiality threshold also applies to a number of other disclosures contemplated by the Climate Rules. However, the materiality determination itself may prove challenging to registrants for a number of reasons, as the materiality analysis may be complex – and this complexity varies depending on the industry and the nature of activities and operations of a given registrant’s business. To help registrants with this analysis, below is an overview of various considerations relevant to a materiality determination for SEC disclosure purposes.

Traditional SEC materiality

The SEC’s adopting release makes clear that “traditional notions” of materiality applicable to other SEC disclosures should be applied to assess the materiality of GHG emissions.

Under the federal securities laws, a fact is material if there is a substantial likelihood that a reasonable investor would:

• Consider the disclosure important when making an investment or voting decision and/or
• View omission of the disclosure as having significantly altered the total mix of information available

New Item 1502(a) of Regulation S-K requires that registrants disclose any climate-related risks that have materially impacted or are reasonably likely to have a material impact on the registrant. These include acute and chronic physical risks, such as risks related to extreme weather events and changing weather patterns, and transition risks, such as costs related to increased regulation of GHG emissions. This materiality assessment would be conducted in a similar manner to materiality assessments for other risks disclosed in annual reports on Form 10-K or 20-F.

GHG emissions materiality

Determining whether GHG emissions are material under the federal securities laws can be a challenging undertaking, especially for registrants in industries in which there is no direct correlation between their operations and climate impact, such as software-as-a-service or early-stage pharmaceutical companies. In the adopting release, the SEC provided several considerations registrants should be aware of when determining whether their GHG emissions are material.

No quantitative threshold for materiality

The Climate Rules do not specify a quantitative threshold for GHG emissions that would rise to the level of materiality. On the contrary, the SEC specifically advises that “materiality is not determined merely by the amount” of GHG emissions. Accordingly, registrants will need to undertake an analysis of whether their scope 1 and scope 2 GHG emissions are material, focusing not on the size of the emissions themselves but whether this information meets traditional notions of materiality.

Analyze scope 1 and scope 2 separately

The materiality of scope 1 and scope 2 emissions should be evaluated separately. If only one category of GHG emissions (either scope 1 or scope 2) is considered by the registrant to be material, while the other category is determined to be immaterial, then only the material category must be disclosed.

Material transition risks and GHG materiality

The SEC highlighted that a registrant’s exposure to a material transition risk does not automatically mean that its GHG emissions are material. Registrants could reasonably determine that they are subject to material transition risks, such as risks related to restrictions on certain types of technology, and such conclusion would not necessarily require a determination that GHG emissions are material to the registrant.

However, the SEC urged registrants to consider whether their GHG emissions are material, especially where a registrant faces a material transition risk that has manifested as a result of a requirement to report GHG emissions under foreign or state law, because these emissions are currently or are reasonably likely to be subject to additional regulatory burdens through increased taxes or financial penalties.

Targets and goals disclosure and GHG materiality

Certain registrants would be required to disclose climate-related targets and goals under new Item 1504 of Regulation S-K. In connection with these disclosures, registrants should consider whether the calculation and disclosure of their GHG emissions will be necessary for enabling investors to understand the amount and character of any progress a registrant has made toward achieving the relevant target or goal. The SEC characterizes this as one of the “primary benefits of GHG emissions disclosure,” so registrants are encouraged to consider the disclosure requirements under Items 1504 and 1505 simultaneously when making disclosure determinations.

Initial considerations for public companies

Although the fate of the Climate Rules remains subject to the outcome of pending litigation, registrants can begin assessing the potential impact of the Climate Rules on their business and prepare for compliance by considering different factors based on their specific facts and circumstances, including the following:

• Assemble appropriate cross-functional internal and external teams. Depending on the nature of the registrant and its operations, registrants may consider establishing a cross-functional compliance working group composed of individuals in legal, finance, sustainability, risk management, operations, investor relations, and other teams implicated by the Climate Rules. Registrants may also consider engaging outside professionals, such as environmental engineering firms, climate strategy and modeling consultants, sustainability reporting consultants, outside counsel, and assurance providers, to assist with preparation for compliance with the rules.


• Review and assess oversight of climate-related risks and climate competency. Once the cross-functional internal and external teams are established, registrants may choose to review reporting lines and consider how resources, authority, accountability, and responsibility related to climate change and climate transition are allocated within the organization at the management and board levels. For some registrants, it may be appropriate to appoint an individual, such as a chief sustainability officer, or a dedicated management team, with primary responsibility for managing the execution and reporting of the registrant’s climate-related strategy, targets, and goals, the collection and verification of relevant data and compliance with the Climate Rules and similar regulations. Registrants who have previously delegated general ESG oversight to a committee of its board of directors may consider whether or not to modify existing committee charters to specifically incorporate oversight of physical and climate transition-related risks, procedures related to how boards and committees are keeping informed of material developments, and board education materials in light of the final Climate Rules.


• Start the materiality assessments. As noted above, materiality is a key determining factor in assessing the potential reporting obligations for registrants, and the analysis can be challenging for a number of reasons. Registrants are encouraged to evaluate what materiality would look like for their own unique circumstances, consider the types of information and resources (both internal and external) they would need to conduct a materiality assessment, and embark on a full materiality analysis sooner rather than later.


• Review and update disclosure controls and procedures. Registrants should consider reviewing and updating their disclosure controls and procedures to ensure that data regarding climate-related governance, risks, strategy, goals, GHG emissions, and other required information is identified, collected, and verified at the standard necessary for all disclosures required to be made pursuant to the SEC rules and forms. GHG emissions data and other climate-related information published in voluntary ESG reports or in response to foreign or state regulations and related data collection and verification procedures may not meet the new disclosure standards under the Climate Rules. This is particularly important for LAFs and non-exempt ACFs who will eventually be required to obtain independent attestation of their GHG emissions data.


• Understand compliance timelines. As detailed in our Climate Rule compliance calendar, compliance dates vary depending on a registrant’s filer status and disclosure topic, and the compliance dates may further change due to ongoing litigation challenging the rules. It is recommended that registrants track the timeline for their particular filing status and stay abreast of the status of ongoing Climate Rule-related litigation.

For more information on the final rules or how registrants can prepare for compliance, please contact any of the authors of this article or your DLA Piper relationship attorney.