Summary
Cut through the green tape
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Details
Deep dive
Background
The United States Securities and Exchange Commission's (SEC) climate disclosure rules require registrants (i.e. companies making initial public offerings or those that submit periodic reports to the Commission) to disclose a series of climate-related information in their filings to the Commission. This information, along with disclosures on other business risks, will help investors make informed decisions about buying, holding, selling, or voting on securities in their portfolios. As evidenced by surveys and studies cited in the official documentation of the SEC's rules, many companies already disclose some information about climate-related risks to other public or private organizations. However, these disclosures are often inconsistent and challenging for investors to locate or compare across different companies. Consequently, investors have emphasized the need for more detailed, reliable, and standardized climate-related risk disclosures. The requirements introduced by the SEC address the need by ensuring more comprehensive and actionable information about the effects of climate-related risks on registrants, enhancing the consistency and reliability of such information for investors. While registrants have been required by the SEC to report on certain climate issues for the past 50 years, the SEC's last guidance on climate disclosures was published in 2010.
What is required?
On emissions disclosures, the rules require certain larger registrants to disclose material Scope 1 and/or Scope 2 emissions in their filings to the SEC. There is no requirement to disclose Scope 3 emissions. The definitions of GHG emissions are similar to those used in the Greenhouse Gas (GHG) Protocol and include carbon dioxide, hydrofluorocarbons, methane, nitrous oxide, nitrogen trifluoride, perfluorocarbons, and sulfur hexafluoride. Registrants must separately disclose Scope 1 and Scope 2 GHG emissions, reporting each in aggregate as metric tons of carbon dioxide equivalent. Moreover, if any individual greenhouse gas within the total emissions is materially significant, it must be disclosed separately from the other gases. Registrants are also required to include an attestation report on their emissions including information about the attestation service provider which must be an experienced and independent expert in measuring and attesting to GHG emissions.
Beyond the requirement for GHG emissions disclosure, registrants are also required to supply other climate-related information such as climate risks that have had, or are likely to have, a material impact on their business strategy, financial condition, or operational results. Additionally, registrants must report on the governance and management of the above risks, as well as the financial statement effects of severe weather events and other natural conditions.
Which companies are affected?
The requirement for emissions disclosures is to be implemented in phases affecting two categories of registrants:
Large Accelerated Filers (LAFs): A Large Accelerated Filer is a reporting company that has a public float of $700 million or more. LAFs are scheduled to start making emissions disclosures from the fiscal year beginning in 2026.
Accelerated Filers (AFs): An Accelerated Filer (AF) is a reporting company that has a public float of at least $75 million but less than $700 million. AFs are scheduled to start making emissions disclosures from the fiscal year beginning in 2028.
Other categories of registrants such as Non-Accelerated Filers (NAFs), Smaller Reporting Companies (SRCs), or Emerging Growth Companies (EGCs) are not required to make emissions disclosures.
Penalties for non-compliance
Failure to comply with the SEC's emissions disclosure rules could lead to enforcement actions by the SEC. According to a report by Debevoise & Plimpton, a Law firm, the requirement to submit climate-related disclosures as part of reports and registration statements filed with the SEC creates potential liability for registrants. Registrants are subject to the broad anti-fraud laws that prohibit deceptive practices, including false statements or exclusion of material facts, made in connection with securities. Moreover, the liability may extend beyond documents submitted to the SEC to include public statements and press releases.
