PKF O'Connor Davies Accountants and Advisors
PKF O'Connor Davies Accountants and Advisors
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SEC Climate-Related Disclosures − Key Takeaways from the Final Rules

By Emily M. Berger, CFA, Director of Investment Risk Advisory

On March 6, 2024, the U.S. Securities and Exchange Commission (SEC) adopted the final rules relating to required climate-related disclosures for domestic registrants and foreign private issuers to provide in their Securities Act or Exchange Act registration statements and annual reports. While the final rules are streamlined relative to the original proposal in March 2022, they represent a significant change in required disclosures by companies.

Additionally, registrants should not overlook state climate-related reporting requirements (such as California State Bill 253) and those anticipated from New York and other states.

This article discusses key observations and risk considerations of the SEC’s recently issued rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors.  

Substantial Changes Adopted

The most substantial changes in the SEC final rules relative to the proposed rules include the following:

  1. Disclosure of only material Scope 1 and Scope 2 emissions by Large Accelerated Filers (LAFs) and Accelerated Filers (AFs) and no requirement for disclosure by a Smaller Reporting Company or Emerging Growth Company registrants. Reporting of any material individual constituent gases as well as in the aggregate.

  2. Flexibility to report greenhouse gas emissions under various frameworks, including the GHG Protocol, EPA regulation, applicable ISO standard or other standard, as well as disclosure of the selected methodology.

  3. Extended phase-in timelines to report material Scope 1 and Scope 2 greenhouse gas disclosures and for assurance over those disclosures. Limited assurance will be required starting with the 4th fiscal year of required emissions reporting for both LAFs and AFs. Reasonable assurance, starting with the 8th fiscal year of required emissions reporting, is only required for LAFs.

  4. No requirement to disclose Scope 3 emissions by any registrant.

  5. Limitation on many qualitative and quantitative management oversight disclosures to only material items.

  6. Disclosure of certain detailed information regarding carbon offsets or renewable energy certificates only when their use represents a material part of a company’s plan to achieve its climate-related targets or goals.

  7. Streamlined climate-related disclosures related to the impact of severe weather events in the footnotes of annual financial statements.

Background of Climate-Related Disclosures Framework

Rationale for New Disclosures

The required disclosures seek to provide a step toward bridging the wide disparity between the various existing climate disclosure frameworks under which some companies currently provide climate-related financial information in an effort to provide investors with consistent, comparable and reliable information.

The disclosures are based on two main industry-accepted frameworks: Task Force for Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol (GHG Protocol).  While there is a discussion regarding interoperability with other reporting frameworks, we note that the final SEC reporting requirements are not as extensive as other international rules (such as EU Corporate Sustainability Reporting Directive) and state regulations (such as CA Senate Bill 253), particularly regarding required greenhouse gas disclosures.

New Subpart 1500 of Regulation S-K and Article 14 of Regulation S-X 

Under the final rules, a registrant must disclose any “climate-related risks” reasonably likely to have a material impact on the registrant’s strategy, results of operations and financial condition. The disclosures also require a description of management and Board oversight of these risks, activities to mitigate or adapt to these risks and a description of material climate-related goals and targets. The governing idea is that the required disclosures are fundamental to investors’ understanding of the nature of a registrant’s business and its operational prospects as well as financial performance and, therefore, should be presented together with other disclosures of the registrant’s business and financial condition.

Compliance Timeline

Compliance Dates under the Final Rules¹
Registrant TypeDisclosure and Financial Statement Effects AuditGHG Emissions/AssuranceElectronic Tagging
All Reg. S-K and S-X disclosures, other than as noted in this tableItem 1502(d)(2), Item 1502 (e)(2) and Item 1504(c)(2)Item 1505 (Scopes 1 and 2 GHG emissions)Item 1506 – Limited AssuranceItem 1506 – Reasonable AssuranceItem 1508 – Inline XBRL tagging for subpart 1500²
LAFsFYB 2025FYB 2026FYB 2026FYB 2029FYB 2033FYB 2026
AFs (other than SRCs and EGCs)FYB 2026FYB 2027FYB 2028FYB 2031N/AFYB 2026
SRCs, EGCs, and NAFsFYB 2027FYB 2028N/AN/AN/AFYB 2027

¹ As used in this chart, “FYB” refers to any fiscal year beginning in the calendar year listed.
² Financial statement disclosures under Article 14 will be required to be tagged in accordance with existing rules pertaining to the tagging of financial statements. See Rule 405(b)(1)(i) of Regulation S-T.
Source: SEC Final Rules Fact Sheet

Information on the compliance timeline, as well as other related material, can be found in the SEC Final Rules.

Governance Disclosures

The following disclosures are required to the extent that the registrant’s Board of Directors exercises oversight of climate-related risks:

  • Identification of any Board committees or subcommittees responsible for the oversight of climate-related risks, and the process by which they are informed of such risks.

  • If the registrant sets climate-related targets, goals or transition plans which they are required to disclose pursuant to the rules, they must describe whether and how the Board oversees progress against them.

Management’s oversight role in assessing and managing climate-related risks includes the following disclosures:

  • Whether and which positions or committees are responsible for assessing and managing climate-related risks, and the relevant expertise of those position holders or committee members.

  • Processes by which such positions or committees assess and manage climate-related risks.

  • Whether such positions or committees report information about such risks to the Board (or Board committee).

Risk Management Disclosures

A central focus of the SEC’s final rule is the identification and disclosure of a registrant’s material climate-related risks, defined as actual or potential negative impacts of climate-related conditions on the registrant’s business, results of operations or financial condition.

The definition of materiality in this context would be consistent with Supreme Court precedent and include the likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote their shares. However, given the technical nature of many of the required climate-related disclosures, there is no clear guidance regarding how materiality should be defined, and it appears left to management judgment.

Registrants would be required to distinguish material climate-related risks as either physical risks (and whether it is “acute” or “chronic”) or transition risks and disclose the nature of the identified risk and the registrant’s exposure to that risk.

Other required risk management disclosures include:

  • Materiality Assessment Across Various Time Periods. Disclosure of climate-related risks that have materially impacted or are reasonably likely to have a material impact over the short-term (within the next 12 months) and separately in the long-term (beyond the next 12 months).

  • Use of Internal Carbon Price. Required if a company’s use of an internal carbon price is material to the process by which the registrant evaluates and manages an identified material climate-related risk. This disclosure would require the internal carbon price used by the registrant and an estimate of how the internal carbon price could change over the risk period assessed.

  • Disclosure of Scenario Analysis. Required to be disclosed only when the registrant already uses scenario analysis and, on the basis of the results of this analysis, determines that a climate-related risk could have a material impact on its business, results of operations or financial condition. In these cases, registrants would need to provide a “brief” description of the assumptions and parameters used in each scenario and the expected material impacts (including financial impacts) under each scenario.

  • Safe Harbor. The final rule provides for a safe harbor for all information (except historical facts) required by climate-related disclosures relating to transition plans, scenario analysis, use of an internal carbon price and targets and goals. Due to the difficulty in forecasting the aforementioned climate-related disclosures, a safe harbor for forward-looking statement disclosures pursuant to the Private Securities Litigation Reform Act (PSLRA) would apply.

GHG Emissions Metrics Disclosure

The final rules only require LAFs and AFs to disclose their material Scope 1 and Scope 2 emissions, both by any material individual greenhouse gas and, in the aggregate, in metric tons of carbon dioxide. These disclosures are required on a phased in-basis, with the first reporting period delayed until the fiscal year beginning in 2026 (to be reported in 2027) for LAFs. There is no requirement for a Smaller Reporting Company or Emerging Growth Company to disclose this information. Reporting may be provided on a delayed basis, such as by the required reporting date for the second quarter Form 10-Q after the relevant fiscal year-end for a U.S. registrant. For foreign private issuers, greenhouse gas metrics may be disclosed as an amendment to their annual report on Form 20-F no later than 225 days after the fiscal year-end, which relates to those relevant GHG emissions disclosures.

Scope 1 and Scope 2 emissions disclosure requires a description of the organization boundaries used and any material difference from the scope and entities presented in the financial statements. In addition, the disclosure must include a brief description regarding the methodology, significant inputs and significant assumptions in calculating the relevant emissions. We expect that the GHG Protocol will generally be used by registrants, but the final rules provide flexibility to use an EPA regulation, applicable ISO standard or another standard, provided it is disclosed.

According to the SEC, the concept of materiality for GHG emissions that would govern is not simply the calculated amount of Scope 1 and Scope 2 emissions but whether a reasonable investor might consider the amount of calculated emissions to pose a transition risk to the registrant that is reasonably likely to materially impact their business, results of operations or financial condition in the short-term or long-term.

Limited assurance over greenhouse gas disclosures would be required on an extended phase-in schedule. (Please see chart above for details).

Although the reporting of emissions seems straightforward, a prudent company should ensure that effective internal controls and systems infrastructure are in place to support the collection, analysis and review of this information. For many companies, this involves internal departments not typically accustomed to sharing data with one another and a reliance on external data and data providers.

Under the final rule, there is no requirement to report the more complex Scope 3 emissions for any registrant. Scope 3 emissions refer to all other indirect emissions (both upstream and downstream activities in the value chain) not included in Scope 2 emissions.

Renewable Energy Certificates and Carbon Offsets – Item 1504(d)

Reporting companies would be required to disclose certain information regarding the use of renewable energy certificates (RECs) and carbon offsets (such as investment in a carbon capture project) only if their use is a material component of the company’s transition plan to achieve climate-related targets or goals.

If deemed material to the transition plan, required disclosures regarding RECs and carbon offsets include the following:

  1. Amount of carbon avoidance.
  2. Reduction or removal represented by the carbon offsets or amount of generated renewable energy represented by the RECs.
  3. Nature and source of the carbon offsets and RECs.
  4. Description and location of the underlying projects.
  5. Any registries or authentication of the carbon offset projects or RECs.
  6. Cost of the carbon offsets or RECs.
  7. Amounts expensed and recognized, and any losses incurred on them (in notes to audited financial statements).

Additional Required Audited Financial Statement Disclosures

  • Capitalized costs, expenditures expensed, charges and losses due to severe weather events or other natural conditions (such as hurricanes, tornadoes, flooding, extreme temperatures and wildfires) subject to applicable 1% of various minimum thresholds.

  • If estimates and assumptions used to produce the registrant’s financial statements were materially impacted due to risks and uncertainties associated with severe weather events and other natural conditions or any climate-related targets or transition plans, the registrant must provide a qualitative explanation of how these weather conditions impacted the development of them.

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We continue to monitor the potential implications of the quickly evolving climate risk and carbon measurement disclosures required by global regulatory and state entities. For further information, contact your account team or any of the following:

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