Relief for sore eyes: Final rules on climate-related financial disclosure

If you are a sustainability professional your eyes are probably tired of two years of reading about climate disclosure rule-making by the U.S. Securities and Exchange Commission. What’s it going to be? Is it going to be at all? How should we prepare?

If you are peripherally engaged in the topic, you are probably tired of hearing about it too.

The wait is over. On March 6, 2024, the SEC published its “final” rule. Final is in quotations because there are lawsuits challenging the rule. In the meantime, here are my key takeaways. There are 886 pages in the rule! This is a 100,000 foot summary.

The rule

The SEC will require certain companies (based on size) to disclose certain climate-related information (qualitative and quantitative). These disclosures will enable investors to understand and act on the risks their investments are exposed to due to company-specific climate-related impacts.

Investors want to have transparency about company business models, and if and how climate-related impacts could reduce the value of their investments. To protect their assets, they may make different decisions about where to invest their money if a company has high risk and isn’t doing enough to mitigate the risk.

The 4 major buckets of the requirements

After reading many of the SEC’s documents, I have come up with this framework to summarize it. ?I split up the requirements into 4 big buckets.

Who does the rule apply to?

The SEC rule applies to publicly traded companies. They are grouped into classes based on their market capitalization (roughly, the # of shares outstanding times the price per share). The classes have legal names: Large Accelerated Filer (LAF), Accelerated Filer (AF), Non-Accelerated Filer (NAF), and Smaller Reporting Company (SRC) or Emerging Growth Company (EGC). ?

The timing of what applies when is shown in the table below. FYB means Fiscal Year Beginning. I inserted my own t-shirt size characterization… Small & Medium, Large and Extra Large. As a reference point, the XL companies have $700M or greater value in stock outstanding while L have $75M up to $700M.

The disclosures will have to appear in SEC filings starting with fiscal year 2025 (which get published in 2026), through fiscal year 2033… depending on the type of requirement and the type of filer.

Assurance

One last important point is assurance, which I put in bucket 1.? Previous to this rule, companies were not required to have their climate / sustainability-related data independently audited for accuracy.? Now they do. The term is assurance.? I wrote an article about assurance here .? This table from the Greenhouse Gas Protocol (GHG Protocol) summarizes the two different kinds of assurance which are now a component of what companies are required to do.

Bottom line

Nearly two years after initially proposing climate-related risk regulations for public companies, the SEC has finally issued rules.? While there are lawsuits challenging the rules, large companies are well down the path of implementing these best practices for risk management because their stakeholders are demanding it and because many of the practices contain sound risk management techniques. ?

Sources & further reading

4-page official fact sheet from the SEC, March 6, 2024: https://www.sec.gov/files/33-11275-fact-sheet.pdf

Final rule – March 6, 2024 - ?886 pages: https://www.sec.gov/news/press-release/2024-31

PWC podcast, SEC climate-related disclosure rules: what you need to know https://viewpoint.pwc.com/us/en/esg.html