SEC final climate disclosure rules: a landmark set of climate reporting requirements

The final SEC rule is far less stringent in comparison to the SEC's initial proposal. Most notably, the SEC will not require Scope 3 emissions reporting, and the Commission has decided to limit Scope 1 and 2 emissions reporting to only material emissions, those which significantly contribute to the company's bottom line, and carved out small and medium sized reporting companies from this requirement. These disclosure requirements are not comprehensive when compared to other climate reporting frameworks in the U.S. such as the newly enacted California Bill Senate Bill 253, which will require phased-in Scope 3 reporting and limited assurance. Looking further afield, other global reporting frameworks such as EU's Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB) International Financial Reporting Standards (IFRS) S1 and S2 both require Scope 3 GHG emissions reporting.

The finalized rules additionally include material climate-related risk disclosures. Most notably, financial statement impact metrics from climate-related risks and opportunities disclosure requirements have been cut from the initial proposal. This would have required companies to disclose climate-related impact on revenues and costs, impairments to assets, cash flows, and insurance losses within a registrant's consolidated financial statements during the reporting, where the impact exceeded 1% of the line item's value. The requirements will still include financial statement metrics disclosure. However, these requirements are now limited to financial impact as a result of severe weather events and other natural conditions on only capitalized costs, expenditures expensed, and losses while retaining the 1% impact threshold.

In an interesting move, the final rules completely remove financial statement disclosures regarding transition risks and opportunities. The rule circumnavigates this change by moving the requirement to disclose capitalized costs, expenditures expensed, and losses related to the purchase and use of carbon offsets and RECs to registrant's audited financial statements if carbon offsets or RECs have been used as a material component of a registrant's plan to achieve disclosed climate-related targets or goals. Other notable reporting requirement changes regarding the disclosure of climate-related risks and their impact include removing the requirement to disclose on climate-related opportunities and limiting the definition of climate risk identified in one's value chain.

Understanding the materiality of climate-related risks identified will be an important step for companies preparing to comply as many of the final rule disclosures are now prescribed based on materiality. Additional disclosures on actual and potential impact from climate risks on business strategy, management oversight over climate risks, and risk management processes for identifying, assessing, and managing material climate-related risks are now only required if the registrant has identified a material climate risk. The final rules are not prescriptive regarding determining materiality, defining it as 'if an investor would consider the impact important when making decisions'.

Companies should continue to rely on climate scenario analysis as an important tool for determining materiality even though disclosure is required if used. Climate scenario analysis can support companies in assessing their exposure, understanding their vulnerability, and quantifying their actual and potential business impact from climate-related risks.

The overall reception for the final rules has been relatively positive, where progressive lawmakers criticize the weakened rules and conservatives are concerned about overburdening corporations. There is significant pushback from 10 States: West Virginia, Alaska, Alabama, Wyoming, Indiana, Oklahoma, New Hampshire, South Carolina, Georgia and Virginia, who, within hours, sought a review by the US Court of Appeals for the Eleventh Circuit, claiming the rule is an overreach where the SEC is attempting to regulate beyond its power. There was another in the Fifth Circuit of the US Court of Appeals which issued a stay, halting the implementation. Overall, there have been at least nine lawsuits held against the SEC's climate disclosure ruling across the country from both sides of the political divide. Republican-led states, businesses within the energy industry, and the US Chamber of Commerce have filed appeals. This ruling also drew attention from the left-leaning organizations National Resources Defense Council (NRDC) and the Sierra Club, who filed separate challenges arguing the SEC rules had been scaled back too much. The SEC has said it is prepared to "vigorously" defend the rules' legality through the court process.

Though the initial stay from the Court of Appeals paused implementation, the SEC successfully argued the pause was unnecessary as deadlines were already extended from the initial proposed ruling. The timelines for large accelerated filers to begin reporting have been pushed back to the 2026 fiscal year on 2025 FY data with a phased-in approach. Accelerated filers will be required to start reporting in 2027 and smaller reporting companies (SRCs), Emerging Growth Companies (EGCs), and non-accelerated filers in 2028 on the previous fiscal year's data. Despite the delay companies should start by assessing their climate risks and completing GHG accounting with no delay. South Pole can help your organization determine the materiality of climate-related risks and GHG emissions in order to avoid reporting immaterial information to investors.