After receiving and reviewing more than 24,000 comments on the proposed rule, the SEC last month adopted a long-awaited and controversial final rule regarding the disclosure of certain climate-related information in registration statements and annual reports.
However, even though the SEC has scaled back requirements in many areas (including Scope 3 reporting) that it originally intended to include when it first issued this guidance more than two years ago, the SEC has now implemented this rule. Enforcement of this rule faces further delays as it prepares to defend itself. A series of legal challenges. This has led many organizations and CFOs to shelve reviews of their rules until after the courts have heard them. That would be a huge mistake and a potential missed opportunity.
Many (large) companies already provide climate-related information on a voluntary basis upon request from investors. The SEC's new rules are aimed at responding to investor demands for more comprehensive and complete data on emissions and risks than what companies currently include in their sustainability reports. These data are often difficult to verify. Additionally, given that other jurisdictions, such as Europe and California, are likely to have more stringent environmental laws, financial leaders should be prepared to implement the requirements even if the SEC rule does not take effect as originally planned. It is ideal for evaluating and measuring the sophistication of regulations. Strengthen your reporting capabilities in advance of what you may face in the future from regulations from the SEC and other jurisdictions in which your organization operates.
Here are some key aspects of current SEC rules that companies should be aware of as they assess their current climate reporting status and outlook.
Summary of new disclosure requirements
Non-financial statement disclosures (new subpart 1500 of the SK Regulations)
- Governance and oversight of material climate-related risks.
- The material impact of climate risks on companies' strategies, business models and prospects.
- Risk management processes for significant climate-related risks.
- Key climate goals and targets.
- Material Scope 1 and Scope 2 greenhouse gas (GHG) emissions. Subject to phased in assurance requirements. Required for large scale acceleration filters (LAF) and acceleration filters (AF).
Disclosures in footnotes to financial statements (new Article 14 of Regulation SX)
- Aggregation of capitalized costs and expenses, expenditures incurred, and losses incurred as a result of severe weather events or other natural conditions. Applicable 1 percent and minimum disclosure standards apply.
- Related to carbon offsets and renewable energy credits or certificates (RECs), including roll-forwards, when used as a key element of the registrant's plan to achieve publicly disclosed climate-related goals or targets. Capitalized costs and charges, expenses incurred and losses incurred. The final rule also requires registrants to state their accounting policies.
- The estimates and assumptions used by the registrant to prepare its financial statements are materially affected by risks and uncertainties related to severe weather events or other natural conditions, or to disclosed climate-related goals or transition plans. If received, qualitative descriptions and assumptions regarding how such estimates were developed were affected. Examples of financial statement estimates may include the residual value of an asset, the useful life of an asset, projected financial information used in impairment calculations, loss contingencies, reserves, estimated credit risk, or fair value measurements.
5 key points
The SEC's final rules are now more relaxed than the proposed rules, giving companies more clarity on reporting requirements. If CFOs take nothing else from the recently finalized climate-related disclosure rules, they should consider these details to prepare their businesses and understand the reporting obligations set forth.
The rules apply to all SEC-registered companies, including small reporting companies (SRCs) and emerging growth companies (EGCs). This includes domestic and foreign filers under U.S. GAAP or International Financial Reporting Standards governance. SRC and EGC are not required to disclose their GHG emissions.
The final rule significantly reduces GHG emissions disclosure requirements, with the most obvious difference being that no company is required to disclose Scope 3 emissions. LAFs and AFs are required to provide disclosures and assurances regarding scope 1 and scope 2 emissions if determined to be material to the company. The term “material” is important and is a recurring theme throughout the final rule.
The definition of materiality is: “a security that a reasonable investor would likely consider to be important in deciding whether to buy or sell or how to vote; This is consistent with the traditional concept of whether the home is likely to attach importance to the omission of disclosure. The overall mix of available information has changed significantly. ” The determination of materiality is fact-specific and requires both quantitative and qualitative considerations.
All climate-related disclosures must meet Sarbanes-Oxley compliance requirements. Financial and non-financial disclosures must be certified by the Chief Executive Officer and Chief Financial Officer regarding the maintenance and effectiveness of disclosure controls and procedures (DCPs). Financial statement disclosures are controlled under the registrant's internal control over financial reporting.
The SEC's final rules differ from rules recently adopted in Europe (Corporate Sustainability Reporting Directive) and California (Senate Bills 253 and 261), as well as rules currently being considered in other jurisdictions. The biggest differences are the reporting requirements for Scope 3 emissions, the risks associated with a company's value chain, and the definition of materiality.
Next steps for CFOs
Now that the rules are in place, companies, and more specifically CFOs, should take this opportunity to read and understand the rules and how they impact them. Certainly, this rule faces legal and political opposition, but it is important to focus on the rule's potential impact on business.
Implementing procedures to capture and properly report relevant data will take time, and ignoring these final rules could result in significant setbacks. Many companies will be subject to multiple sustainability reporting requirements from different regulatory authorities. Whether it's an acronym like SEC, CSRD, ISSB, or California, understanding the differences and overlap between governing bodies can help ensure compliance.
Understanding the rules will allow CFOs to look within their organizations to assess internal controls around sustainability reporting and identify what data can easily be produced. Data from different departments may be required, and new technology solutions may be required to aggregate certain data. Additional resources may also be required to identify climate-related risks and prepare required disclosures. Disclosure controls and procedures should be outlined and finalized so that they can be implemented quickly when the rules become effective.
Start planning as soon as possible. CFOs need to establish cross-functional teams, requiring input from functions outside of finance. Guidance may be needed regarding what disclosures are considered material and how they should be included in SEC filings and, if applicable, reports required by other jurisdictions. there is. This will require expertise from legal counsel, external auditors, compliance departments, or other external consultants, as appropriate.
