SEC Final Rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors

Overview

Many investors are concerned about the potential effects of climate-related risks on individual businesses and industries. As a result, these investors actively seek out more information regarding environmental, social, and governance (“ESG”) related disclosures to inform their investment decision-making. While many companies already make these types of disclosures in their proxy statements, sustainability reports, and websites, the Securities and Exchange Commission (“SEC”) observed that these reports had varied widely in content and format and did not meet the existing, and growing, need for climate-risk related disclosures.

On March 6, 2024, the SEC adopted a new set of rules that require public companies to include climate-related disclosures in their registration statements and periodic SEC filings. These regulations are more prescriptive in nature than the principles-based approach used by many companies and industries in the past, and require integration with the registrant’s internal controls, audit, and oversight functions. Some large companies will be required to incorporate these new rules in their disclosures as soon as this year. A full breakdown of the phase-in periods is given later in this article.

While drafting this amendment, the SEC stated that the proposed rules would provide for “consistent, comparable, and decision-useful information for [investors, and] would provide consistent and clear reporting obligations for issuers.”1 The SEC further stated in the final ruling that “The importance of climate-related disclosures for investors has grown as investors, companies, and the markets have recognized that climate-related risks can affect a company’s business and its current and longer-term financial performance and position in numerous ways.”2

The Required Disclosures

The passed disclosures are modeled, in part, after frameworks that many companies were already using, such as the Task Force on Climate-Related Financial Disclosures (“TCFD”) and the Greenhouse Gas Protocol.3 The SEC’s final disclosure framework applies to both domestic registrants and foreign private issuers and requires the following:4

• Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition;
• The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook;
• If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities;
• Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices;
• Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
• Any processes the registrant has for identifying, assessing, and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes;
• Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition. Disclosures would include material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or actions taken to make progress toward meeting such target or goal;
• For large accelerated filers (LAFs”) and accelerated filers (“Afs”) that are not otherwise exempted, information about material Scope 1 emissions and/or Scope 2 emissions;  
• For those required to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level;
• The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds, disclosed in a note to the financial statements;  
• The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals, disclosed in a note to the financial statements; and
• If the estimates and assumptions a registrant uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted, disclosed in a note to the financial statements.

Presentation of the Proposed Disclosures

The finalized rules also require registrants, both foreign and domestic, to provide the climate-related disclosures, including financial metrics, in the following filings and documents with the SEC:5

• File the climate-related disclosure in its registration statements and Exchange Act annual reports;
• Include the climate-related disclosures required under Regulation S-K in a separate, appropriately captioned section of its filing or in another appropriate section of the filing, such as Risk Factors, Description of Business, or Management’s Discussion and Analysis of Financial Condition and Results of Operations, or, alternatively, by reference from another Commission filing as long as the disclosure meets the electronic tagging requirements of the final rules;
• Provide the financial statement disclosures required under Regulation S-X for the registrant’s most recently completed fiscal year, and to the extent previously disclosed or required to be disclosed, for the historical fiscal year(s) included in the filing, in a note to the registrant’s audited financial statements; and
• Electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL

Phase-In Periods

The final rules regarding the new climate-related disclosures include a phase-in period for all registrants, with the compliance date being dependent upon the individual registrant’s filing status. To address the concerns of the proposed compliance schedule being too aggressive, the SEC extended the phase-in period for each registrant which will allow filers to implement new policies, processes, and controls. The following table outlines the final schedule:6

‍

Accommodations

Due to the nature and extent of the final rule, the SEC has allowed for the following accommodations:7

• A safe harbor from private liability for climate-related disclosures (excluding historical facts) pertaining to transition plans, scenario analysis, the use of an internal carbon price, and targets and goals;
• An exemption from the GHG emissions disclosure requirement for SRCs and EGCs; and
• An accommodation that allows Scope 1 and/or Scope 2 emissions disclosure, if required, to be filed on a delayed basis if specified criteria are met.

Conclusion

The SEC's adoption of new climate-related disclosure rules represents a significant step toward enhancing transparency and consistency in reporting climate risks and their financial implications. By requiring registrants to integrate these disclosures into existing regulatory filings, the SEC aims to provide investors with useful information while also fostering accountability and comparability across industries.

While this article outlines the SEC’s final ruling regarding climate-related disclosures, stakeholders should be aware of the growing movement against the implementation of these rules. A changing political climate, challenges against the SEC’s ruling, and the Commission’s Acting Chairman Mark Uyeda’s sentiments towards this final rule may impede the implementation of these standards. On February 11, 2025, Acting Chairman Uyeda expressed his lack of support for the adopted climate standards and asked “the Commission staff to notify the Court of the changed circumstances and request that the Court not schedule the case for argument to provide time for the Commission to deliberate and determine the appropriate next steps in these cases.”8 As the SEC's climate-related disclosure rules take effect, their future remains uncertain amid legal and political challenges, making it essential for companies and investors to stay informed and adaptable in this evolving regulatory landscape.

Sources:

1. SEC Climate-Related Disclosure Proposal

2. SEC Climate Disclosure Final Ruling

3.  SEC Climate Disclosure Final Ruling

4. SEC Climate Disclosure Fact Sheet

5.  SEC Climate Disclosure Final Ruling

6. SEC Climate Disclosure Final Ruling

7. SEC Climate Disclosure Fact Sheet

8. SEC Acting Chairman Statement on Climate-Related Disclosure Rules

‍