Complying with the Final SEC Climate Disclosure Rule

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: 

Source

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.