SEC Adopts Final, Comprehensive Climate Disclosure Rules (Newsflash)

On March 6, 2024, the U.S. Securities and Exchange Commission (the “SEC”) adopted on a 3-2 vote its long-awaited, comprehensive rules for enhancing and standardizing climate-related disclosures by public companies in periodic disclosure reports and in registration statements for public offerings (the “Final Rules”). The Final Rules were first proposed on March 21, 2022, and generated over 4,500 unique comment letters and over 18,000 form letters in response to the proposing release.

This Dechert Newsflash provides a brief overview of the disclosure requirements, compliance periods and expected compliance costs under the Final Rules. A more detailed description will follow in a future Dechert OnPoint.

The SEC maintains in the adopting release for the Final Rules that investors are seeking more information both to assess how climate-related risks affect a registrant’s business and financial condition—and thus the price of the registrant’s securities—and to assess a registrant’s management and board oversight of climate-related risks so as to inform investment and voting decisions. In light of those needs, the SEC adopted the Final Rules to require disclosure about the material climate-related risks that registrants face and how registrants manage those risks.

Although the Final Rules reflect modifications from the proposed rules that are likely to be viewed at least somewhat favorably by public companies—including, in particular, the elimination of Greenhouse Gas Protocol (“GHG”) Scope 3 emissions-disclosure requirements—the Final Rules do not exempt business development companies (“BDCs”) and will likely impose significant costs on registrants. The Final Rules will also likely impact both the timing and the substance of the SEC’s proposed rulemaking on environmental, social and governance (“ESG”) investment practices and disclosures for registered investment advisers and registered investment companies.  

New Mandated Disclosures

In general terms, the Final Rules create a new subpart 1500 of Regulation S-K and Article 14 of Regulation S-X. These new provisions require registrants to disclose information about the following items:

• Any climate-related risks that have materially impacted or are reasonably likely to have a material impact on the registrant, including on its strategy, results of operations, and financial condition, as well as the actual or potential material impacts of those same risks on its strategy, business model, and outlook.
• Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk or use of transition plans, scenario analysis or internal carbon prices to manage a material climate-related risk.
• Any oversight by the registrant’s board of directors of climate-related risks and any role by management in assessing and managing material climate-related risks.
• A description of any processes the registrant uses to assess or manage material climate-related risks.
• Any targets or goals that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition.
• If a registrant is a large accelerated filer (“LAF”) or an accelerated filer (“AF”) that is not otherwise exempted, and its GHG Scope 1 emissions and/or its Scope 2 emissions metrics are material, certain disclosure about those emissions.
• The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds.

In addition, under the Final Rules, a registrant that is required to disclose Scopes 1 and/or 2 emissions and is a LAF or an AF must file an attestation report in respect of those emissions subject to phased-in compliance dates. An AF must file an attestation report at the limited-assurance level beginning the third fiscal year after the compliance date for disclosure of GHG emissions. A LAF must file an attestation report at the limited-assurance level beginning the third fiscal year after the compliance date for disclosure of GHG emissions, and then file an attestation report at the reasonable-assurance level beginning the seventh fiscal year after the compliance date for disclosure of GHG emissions.

Modifications to the Proposed Rules

The Final Rules reflect several modifications to the proposed rules based on the comments received by the SEC—most prominently, the elimination of Scope 3 emissions disclosures. Other modifications include:

• Qualifying the requirements to provide certain climate-related disclosures based on materiality, including, for example, disclosures regarding impacts of climate-related risks, use of scenario analysis, and maintained internal carbon price.
• Eliminating the proposed requirement to describe board members’ climate expertise.
• Eliminating the proposed requirement for all registrants to disclose Scope 1 and Scope 2 emissions and instead requiring such disclosure only for LAFs and AFs, on a phased-in basis, and only when those emissions are material and with the option to provide the disclosure on a delayed basis.
• Exempting smaller reporting companies (“SRCs”) and emerging growth companies (“EGCs”) from the Scope 1 and Scope 2 emissions-disclosure requirement.
• Modifying the proposed assurance requirement covering Scope 1 and Scope 2 emissions for AFs and LAFs by extending the reasonable assurance phase-in period for LAFs and requiring only limited assurance for AFs.
• Eliminating the proposed requirement to disclose the impact of severe weather events and other natural conditions and transition activities on each line item of a registrant’s consolidated financial statements.
• Focusing the required disclosure of financial statement effects on capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions in the notes to the financial statements.

As noted above, the SEC did not exempt BDCs from the Final Rules. The SEC had solicited comments on whether the rules should apply to BDCs, but ultimately maintained that BDCs (and other non-exempt registrants such as REITs and issuers of registered non-variable insurance contracts) may face material climate-related risks that would impact an investment or voting decision. The SEC added that BDCs will have only limited disclosure obligations to the extent climate-related risks are not material in a given case. The SEC nonetheless acknowledged that BDCs could end up being subject to both the Final Rules as well as the SEC’s proposed rules relating to ESG investment practices and disclosures.

Estimated Costs of Compliance

The SEC in the adopting release devotes substantial discussion to its estimates of the cost of compliance with the Final Rules:

• With respect to the Regulation S-K amendments pertaining to: governance disclosure; disclosure regarding the impacts of climate-related risks on strategy, business model, and outlook; and risk management disclosure, the SEC estimates that compliance costs will be $327,000 in the first year of compliance and $183,000 annually in subsequent years.
• Registrants have the option of conducting a scenario analysis describing the resilience of their business strategy in light of potential future changes in climate-related risks; those that do so must provide attendant disclosures. The SEC estimates the reporting costs for scenario analysis and attendant disclosures will be $12,000 in the first year and $6,000 in subsequent years.
• For registrants required to disclose GHG Scopes 1 and 2 emissions after a specified phase-in period (see table below), the SEC estimates compliance costs for these disclosures of $151,000 in the first year of compliance and $67,000 annually in subsequent years.
• Limited assurance for emissions disclosures (required after an additional phase-in period; see table below) is estimated to cost $50,000, while reasonable assurance is estimated to cost $150,000. For registrants that voluntarily establish targets or goals and are required to provide attendant disclosures, the SEC estimates the reporting costs will be $10,000 in the first year of establishing the target and $5,000 in subsequent years.
• With respect to amendments to Regulation S-X, the SEC estimates an upper bound of $500,000 in the first year of compliance, with an upper bound of $375,000 in subsequent years.
• Incremental audit fees are estimated to have an upper bound of $23,000 for all years.

Effectiveness and Compliance Dates

The Final Rules will become effective 60 days following publication of the adopting release in the Federal Register, though compliance will be phased in for all registrants based on filer status, as follows: