Two years after proposing a landmark climate disclosure rule for public companies, the Securities and Exchange Commission (SEC) on March 6, 2024, voted 3 to 2 to finalize narrowed requirements following threats of legal challenges and decisions by courts, including the Supreme Court, that cast doubt on the scope of the regulatory agency’s authority.
As widely expected, the SEC dropped Scope 3 greenhouse gas emission disclosure, which business groups said would be challenging to calculate as it covers other companies in the issuer’s value chain.
The commission also changed proposed Scope 1 and Scope 2 disclosures to require only larger companies to provide the emissions information if material. Scope 1 is direct emissions, and Scope 2 is indirect emissions from purchased energy.
The SEC kept the assurance requirement for companies that disclose Scope 1 and Scope 2 emissions. Both accelerated and large accelerated filers will be required to obtain limited assurance on those disclosures. But large accelerated filers will be required to transition to reasonable assurance. Limited assurance provides a lower level of assurance than reasonable assurance. Companies can get assurance from relevant specialists such as engineers, not just auditors as was proposed. These gatekeepers must be independent.
The securities regulator also narrowed its financial statement requirements by dropping the financial metrics disclosure. Under final rules, companies are required to disclose in the footnotes capitalized costs, expenditures, charges, and losses as a result of severe weather events, such as hurricanes, flooding, drought, wildfires, and rise in sea level, subject to applicable 1% and de minimis disclosure thresholds.
“These disclosures will give investors insight into the financial impact on companies today and provide important context for understanding companies’ forward-looking disclosures in Regulation S-K,” SEC Chair Gary Gensler said, adding that “companies already have to account for this [today in their books and records]; this is just a footnote to disaggregate some of these costs.”
The final rule also requires companies to disclose the capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates if a company uses them as a material component to achieve its climate targets or goals. This data must also be disclosed in the footnotes.
In addition, if the estimates and assumptions that a company used to come up with the financial statements were materially affected by risks and uncertainties associated with severe weather events or climate targets or transition plans, the company is required to provide a qualitative description of how the development of such estimates and assumptions was affected.
Dissent
Even though the final rules were narrowed, Republican Commissioners Hester Peirce and Mark Uyeda still voted against the rule release. They said the SEC failed to justify why prescriptive and granular climate disclosure rules are necessary. Peirce said that a flood of new disclosures will overwhelm investors while increasing compliance burdens for public companies.
Uyeda noted that this is more akin to a climate rule that responds to activists who are looking for social and political changes by inappropriately using the securities laws.
However, Commissioner Caroline Crenshaw said that she is disappointed that the SEC is only requiring “the bare minimum” by scaling back the requirements. Not only does the SEC have clear authority but also had robust public demand for the expansive proposed requirements, she said.
Mixed Reactions
The U.S. Chamber of Commerce, which had threatened a lawsuit especially if the final rule includes Scope 3 disclosure, said a legal challenge is still possible. In a statement, Executive Vice President Tom Quaadman said that the chamber is reviewing the details of the rule and its legal underpinnings.
“While it appears that some of the most onerous provisions of the initial proposed rule have been removed, this remains a novel and complicated rule that will likely have significant impact on businesses and their investors,” he said. “The Chamber will continue to use all the tools at our disposal, including litigation if necessary, to prevent government overreach and preserve a competitive capital market system.”
Ceres, which has been advocating for mandatory climate disclosure rules for over two decades, celebrated the long-awaited rule.
“Now the real work begins,” said Ceres President Mindy Lubber in a statement, because Scope 3 was dropped. This “often makes up the largest portion of a company’s footprint,” she said. “We will continue to advocate for voluntary and mandatory disclosures of a company’s full scope of emissions.”
In the meantime, KPMG LLP US ESG Audit Leader Maura Hodge said in a statement that the “connection of climate risk to the financial statements is incredibly important given the purpose of the rule is to provide decision-useful information to investors.”
“While the rule limits the 1% threshold relative to the proposal, the challenge for CFOs will continue to be defining severe weather events and the dollars attached to them,” she added. “Too little and a company is under-reporting risks, too much and companies will blur useful and non-useful information. Working through that ambiguity will be critical.”
This rulemaking has been the most closely-followed in the SEC’s modern history. The agency received more than 24,000 comment letters, including more than 4,500 unique letters in response to the March 2022 proposal. In particular, the commission received “a flurry of additional comments in the last 72 hours,” Gensler said.
The vast majority of form comment letters from investors back the proposed requirements.
The final rule is in Release No. 33-11275, The Enhancement and Standardization of Climate-Related Disclosures for Investors.
The rules become effective 60 days following publication in the Federal Register.
Compliance dates are phased in for all companies. The compliance date depends on the company’s filer status.
This article originally appeared in the March 7, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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