SEC Climate Disclosure Rule 01 October 2024

The reports published by companies significantly influence the decisions of consumers, clients, and investors. In the United States of America, many companies that are aware of this have been voluntarily reporting on greenhouse gas emissions and other climate factors. However, since these reports were not issued consistently, investors had limited opportunities for comparison.

To address investors' need for access to information and to make informed decisions, the "Climate Disclosure Rule" ("Rule") is adopted by the U.S. Securities and Exchange Commission ("Commission"). Before the final rule was published in the Federal Register on March 28, 2024, the Commission had evaluated comments and opinions on the regulation proposal it issued in March 2022 and made some changes to the proposal. Perhaps the most important of these changes, which will be further explained below, is that while disclosures regarding Scope 3 greenhouse gas emissions were mandatory in the proposed rule, this requirement has been removed in the final rule.
 

Pursuant to the Rule, companies are required to make certain disclosures regarding the material consequences of climatic factors in their annual reports and registration statements.  These disclosures can generally be categorized under three main headings;

Material Climate-Related Risks and Their Impacts on the Company
 

Under this heading, companies are expected to provide disclosures regarding climate-related risks that have materially impacted or are likely to have a material impact on the company. These risks should be examined under two subcategories "physical risks" and "transition risks."
 

1. Physical Risks
 

These are the risks that severe natural events, such as tsunamis or storms, may pose to or are likely to pose to the company's financial status. For instance, for a company engaged in overseas trade, a tsunami or rising sea levels may delay the supply of goods or cause the goods to be lost, leading to significant financial consequences for the company.

2. Transition Risks

Transaction risks include a decline in a company's market power or a fall in the value of its shares due to certain climatic factors. Today, this could include a decline in demand for products that are plastic-intensive or emit excessive carbon emissions. 

Severe Weather Financial Statement Disclosure

Companies subject to the rule are required to disclose information on how their financial estimations and assumptions are impacted by severe weather events or other natural conditions. More specifically, registrants must disclose how the estimates and assumptions used to prepare their consolidated financial statements are affected by risks, uncertainties, or known outcomes related to severe weather events such as hurricanes, tornadoes, and floods.

Greenhouse Gas Emissions
 

The rule bases its regulations regarding greenhouse gas emissions reporting on the Greenhouse Gas Protocol (also known as the Kyoto Protocol). The Greenhouse Gas Protocol classifies emissions into three scopes. Large companies must include the disclosures on Scope 1 and Scope 2 greenhouse gas emissions described below in their annual reports and registration statements.

A. Scope 1 (Direct Impact):

This scope refers to greenhouse gases directly emitted by the company. Scope 1 emissions stem directly from the company's activities. To exemplify, for a company in the textile sector, emissions from RAM and printing chimneys fall under Scope 1. Large companies are required to disclose their emissions under this scope.

B. Scope 2 (Indirect Impact):
 

These are the greenhouse gases that companies indirectly cause to be emitted. Emissions from electricity used in company buildings and from heating these buildings are examples of Scope 2 emissions.

C. Scope 3

All other indirect emissions not covered in the first two scopes fall under Scope 3. These emissions result from processes triggered by the company but not directly controlled by it. Examples of emissions that are included in this scope are the greenhouse gases emitted into the atmosphere by passenger cars used by company employees and the emissions released by vehicles used in the supply processes of goods produced by the company that are not under its control.  Reporting on Scope 3 emissions is not mandatory for any type of company.

Smaller Reporting Companies (SRCs) and Emerging Growth Companies (EGCs) are not required to disclose the above greenhouse gas emissions. However, all companies, including smaller reporting companies and emerging growth companies, are required to make the following disclosures in their registration statements and annual reports;

• Governance: The role of company management in assessing and managing climate-related risks, and the actions taken by the board of directors regarding these risks.

• Strategy: The expenses made and the impacts on company activities to mitigate or adapt to climate risks that have a material effect or are reasonably likely to have a material effect on the company.

• Risk Management: All processes undertaken by the company to identify, assess, or manage significant climate-related risks.

• Targets and Goals: Targets or goals that have a material impact on the company or are reasonably likely to have an impact on it.

• Severe Weather Financial Condition Disclosure: The effects of severe weather events and other natural conditions on financial statements.
   

The rule foresees a phased program for companies to comply with disclosures in annual reports and registration statements. The phased program is as follows:
 

• Large accelerated filers in filings containing disclosures for the fiscal year beginning in 2025,

• Accelerated Filers in filings containing disclosures for the fiscal year beginning in 2026,

• Smaller reporting companies (SRCs), non-accelerated filers, and emerging growth companies (EGCs) will need to start complying with disclosure filings for the fiscal year beginning in 2027.