The Compliance Guide on SEC’s Climate-Related Disclosures: 10 Steps to Mastery

On March 6, 2024, the U.S. Securities and Exchange Commission (SEC) made a pivotal moment in corporate disclosure requirements by adopting the final rule titled “The Enhancement and Standardization of Climate-Related Disclosures for Investors”. This long-awaited ruling marks a significant shift, demanding comprehensive climate-related information from registrants, including foreign private issuers (FPIs), in their registration statements and periodic reports. You might wonder what’s the aim? To provide investors with complete, reliable, and decision-useful insights into the impacts of climate-related risks on companies’ operations.

The Final Rule introduces multiple requirements, encompassing everything from Scope 1 and Scope 2 greenhouse gas emissions to detailed financial statement disclosures. The implications are extensive, requiring a thorough understanding and meticulous adherence to ensure compliance. Here, we present a definitive guide, breaking down the Final Rule into 9 key steps, guiding you towards mastery and compliance excellence.

1. Check If Your Organization Needs to Comply

Before delving into compliance, it’s crucial to identify which entities need to comply with the SEC's climate-related disclosure requirements. Generally, these regulations apply to publicly traded companies, including foreign private issuers, that meet certain thresholds. Check if your organization belongs to any of the categories below:

• Large Accelerated Filers (LAFs): To qualify as a Large Accelerated Filer, a company typically needs to have a public float (the market value of its outstanding common stock held by non-affiliates) of $700 million or more and have been subject to SEC reporting requirements for a certain period. These companies need to file their annual and quarterly reports within shorter deadlines compared to other filers.
• Accelerated Filers (AFs): Typically, Accelerated Filers have a public float between $75 million and $700 million and have been subject to SEC reporting requirements for a specified period. Similar to Large Accelerated Filers, Accelerated Filers have shorter deadlines for filing their annual and quarterly reports compared to Non-Accelerated Filers.
• Non-Accelerated Filers (NAFs): These companies usually have a public float below $75 million or have not been subject to SEC reporting requirements for a significant period. Non-Accelerated Filers have more relaxed filing deadlines compared to Accelerated Filers and Large Accelerated Filers.
• Smaller Reporting Companies (SRCs): SRCs have a public float of less than $250 million or less than $100 million in annual revenues and no public float, or a public float of less than $700 million, and meet certain revenue and filing requirements. SRCs are eligible for scaled disclosure accommodations, such as reduced financial reporting obligations and exemptions from certain regulatory requirements, to ease the compliance burden on smaller entities.
• Emerging Growth Companies (EGCs): Emerging Growth Companies are a specific category of companies defined by the Jumpstart Our Business Startups (JOBS) Act of 2012. EGCs are companies with less than $1.235 billion in annual gross revenues during their most recently completed fiscal year that went public after December 8, 2011. EGCs are eligible for various regulatory accommodations and exemptions to facilitate their access to capital markets, such as reduced financial reporting requirements and exemptions from certain corporate governance rules, to encourage growth and innovation.

2. Understand the Scope

The Final Rule broadens the disclosure landscape, requiring registrants to divulge Scope 1 and Scope 2 greenhouse gas (GHG) emissions, with phased compliance based on filer status. It’s crucial to understand the details of these emissions and their materiality thresholds, ensuring accurate and timely reporting.

• Scope 1 GHG Emissions: Direct emissions from sources owned or controlled by the reporting entity, such as combustion of fossil fuels in company-owned vehicles or manufacturing processes.
• Scope 2 GHG Emissions: Indirect emissions associated with purchased electricity, steam, heating, and cooling consumed by the reporting entity.
• Materiality Thresholds: Assess the significance of emissions to operations, environmental impact, and financial implications to determine disclosure requirements.
• Compliance Phases: Understand phased compliance deadlines based on filer status, allowing adaptation to new disclosure requirements.

3. Navigate the Compliance Dates

With phased compliance dates tailored to filer status, understanding when and how to comply is paramount. Be mindful of the initial phase-in requirements and subsequent obligations concerning GHG reporting and attestation. Here is an overview of the compliance dates under the Final Rule:

‍4. Master the Key Requirements

Delve deep into the details of the Final Rule’s requirements, from greenhouse gas emissions disclosure to financial statement disclosures. Familiarize yourself with the nuances of each mandate to ensure comprehensive compliance. Here is a list of the requirements of SEC’s:

• Scope 1 and Scope 2 GHG Emissions Disclosure: Large accelerated filers (LAFs) and accelerated filers (AFs) are mandated to disclose Scope 1 (direct emissions) and Scope 2 (indirect emissions) greenhouse gas (GHG) emissions if material. Disclosure must cover the most recent fiscal year and may be phased in based on filer status.
• Compliance Phases for GHG Emissions Disclosure: Compliance for GHG emissions disclosure is phased in based on filer status. LAFs and AFs must obtain attestation reports covering Scope 1 and Scope 2 emissions after a phase-in period, with different levels of assurance required over time.
• Exemption for [Scope 3](https://www.sec.gov/news/statement/gensler-statement-mandatory-climate-risk-disclosures-030624#:~:text=In the proposal%2C we took a layered approach to disclosure of Scope 3 greenhouse gas emissions. While many investors today are using Scope 3 information in their investment decision making%2C based upon public feedback%2C we are not requiring Scope 3 emissions disclosure at this time.) GHG Emissions: Registrants are not required to disclose Scope 3 GHG emissions, considering concerns regarding data availability and reliability.
• Financial Statement Disclosure: Registrants must disclose the impact of climate-related risks on their business and financial statements, including qualitative descriptions of how estimates and assumptions are impacted and disclosure of expenditures, costs, and losses related to climate-related events.
• Qualitative Disclosure of Climate-Related Risks: Registrants must describe identified climate-related risks and their potential impacts on strategy, operations, and financial condition, both in the short and long term.
• Risk-Management Disclosure: Registrants must disclose processes for identifying, assessing, and managing material climate-related risks, as well as how these processes are integrated into their overall risk management.
• Corporate Governance Disclosure: Oversight and governance of climate-related risks by the board and management must be described, including board committee responsibilities and management’s role in assessing and managing climate-related risks.
• Climate Policy-Specific Disclosures: Disclosure of climate-related targets, goals, scenario analyses, internal carbon pricing, and transition plans to the extent they are material. Registrants must also disclose information about using carbon offsets or renewable energy certificates.
• **PSLRA Safe Harbor Extension:** Forward-looking statements related to transition plans, scenario analysis, internal carbon pricing, and targets and goals are eligible for the PSLRA safe harbor, protecting certain disclosures.
• Legal Challenges: Legal challenges may affect the Final Rule's compliance dates, with a petition already filed in the United States Court of Appeals for the Eleventh Circuit.

Understanding these key requirements is essential for registrants to ensure compliance with SEC regulations and provide investors with transparent and decision-useful information regarding climate-related risks and impacts.

5. Understand GHG Emissions Disclosure

Grasp the intricacies of disclosing Scope 1 and Scope 2 GHG emissions, understanding when and how to incorporate these disclosures into annual and periodic reports. Understanding the intricacies of disclosing Scope 1 and Scope 2 GHG emissions involves several key steps. Begin by identifying emission sources and assessing their significance to your organization. Determine materiality thresholds and incorporate accurate and comprehensive disclosures into annual and periodic reports, aligning with regulatory requirements. Stay informed about compliance deadlines and provide context and analysis alongside raw emission data. Consider obtaining third-party assurance for credibility and continuously review and update disclosure practices for ongoing improvement. Here is an example of how you can disclose the GHG emissions:

6. Prepare for the Attestation Requirements

Prepare for the attestation requirements by recognizing the phased approach and minimum levels of assurance demanded for GHG emissions disclosure. Follow these steps to prepare:

• Understand phased compliance based on company status.
• Recognize minimum assurance levels (initially “limited” for LAFs and AFs).
• Engage with qualified attestation service providers such as the Helpline Group.
• Gather accurate emission data.
• Establish robust internal controls.
• Stay updated on regulatory changes.

7. Navigate the Risk Management and Governance Disclosure

Navigate the landscape of climate-related risk management and governance disclosures, understanding the obligations surrounding qualitative disclosures, risk management processes, and corporate governance oversight. Here's a summary of the steps for navigating climate-related risk management and governance disclosures:

• Conduct a thorough assessment to identify climate-related risks affecting your organization, including physical and transition risks.
• Evaluate the significance of identified risks on your organization's strategy, operations, and finances.
• Establish robust processes for identifying, assessing, and managing climate-related risks, integrating them into your existing risk management framework.
• Ensure active oversight of climate-related risks by the board and management, defining clear roles and responsibilities.
• Improve disclosure practices to provide transparent and informative disclosures about identified risks and management strategies.
• Foster dialogue with stakeholders to communicate your organization's approach to climate-related risk management and address concerns.
• Continuously monitor and review your organization's practices, staying informed about emerging risks and regulatory developments, and updating your approach accordingly.

8. Unpack Climate Policy-Specific Disclosures

Climate policy-specific disclosures include climate-related targets and goals, scenario analyses, internal carbon pricing, and transition plans. Ensure materiality thresholds are met and comprehensive disclosures are provided. To effectively handle climate policy-specific disclosures, begin by identifying relevant policies and regulations affecting your organization. Establish clear targets and goals for climate action, conduct scenario analyses to assess risks and opportunities, and consider implementing internal carbon pricing mechanisms. Develop transition plans outlining strategies for adaptation and mitigation. Evaluate the materiality of each disclosure and provide transparent, engaging stakeholders for feedback. By following these steps, organizations can navigate the complexities of climate policy-specific disclosures and demonstrate their commitment to climate action.

9. Look at the Safe Harbor Provisions

Understand the implications of the Private Securities Litigation Reform Act (PSLRA) Safe Harbor provisions, ensuring forward-looking statements about climate-related disclosures benefit from statutory protections. Safe harbor provisions, established under the Private Securities Litigation Reform Act (PSLRA), offer legal protections to companies making forward-looking statements, including those related to climate disclosures. These provisions aim to shield companies from certain lawsuits alleging securities fraud based on such statements. They encourage companies to provide investors with accurate forecasts without fear of legal repercussions if results differ from expectations. In the context of climate disclosures, adherence to safe harbor provisions is crucial when making projections about environmental impacts or mitigation strategies. However, companies must ensure their statements are made in good faith and accompanied by cautionary language. This helps mitigate legal risks associated with forward-looking statements in climate-related matters.

10. Acknowledge the Legal Landscape and Future Challenges

Acknowledge the legal landscape and future challenges by staying vigilant about potential legal challenges on administrative and constitutional grounds, ensuring readiness for evolving compliance timelines and obligations. This entails staying informed about regulatory updates and legal changes affecting climate reporting requirements, understanding specific disclosure requirements mandated by regulatory authorities, and identifying potential legal risks associated with climate-related disclosures. Implementing robust internal controls and governance mechanisms is crucial to mitigate legal risks and ensure compliance. Seeking guidance from legal experts specializing in environmental law and securities regulation can provide invaluable insights. Additionally, staying abreast of emerging trends, regulatory initiatives, and industry standards impacting climate reporting enables proactive adaptation of internal policies and procedures to align with new regulatory requirements and industry norms.

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