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In March 2024, the U.S. Securities and Exchange Commission (SEC) approved a final rule on corporate climate disclosure that companies have been anticipating for several years. Below is a breakdown of what鈥檚 involved, who it affects, and how this new requirement fits into the ever-evolving context of ESG reporting regulations in the U.S. and abroad.

What does the new SEC rule require?

The  will require thousands of U.S. public companies to include climate risk data in their annual reports and/or financial statements. By mandating more consistent, comparable, and reliable data, the rule aims to help investors make better-informed decisions. Under the rule, public companies will now have to report on the following:

• The climate risks that have had (or are likely to have) an impact on business strategy, results of operations, or financial outlook (e.g., costs involved in moving away from fossil fuels)
• Strategy-related activities a company has used to mitigate or adapt to a material climate related risk
• Costs and losses incurred as a result of climate change or severe weather events (e.g., hurricanes, wildfires, flooding, drought, extreme temperature, and sea level rise)
• Oversight by the company鈥檚 board of directors regarding climate-related risks, as well as management鈥檚 role in assessing and managing the company鈥檚 material climate-related risks
• Climate-related targets or goals that have (or are likely to have) an impact on business, results of operations, or financial condition. Costs and losses incurred as a result of carbon offsets and renewable energy credits or certificates (RECs)

What's the scoop on Scopes?

Disclosure of Scope 1 and Scope 2 emissions will be mandatory only for certain entities. Under the final rule, large accelerated filers and accelerated filers will be required to report material Scope 1 and/or Scope 2 emissions.

• Scope 1 Emissions (Company Controlled)鈥揈missions from corporate offices, manufacturing plants, fleets, etc.
• Scope 2 Emissions (Indirectly Caused)鈥擯ower plant emissions for purchased energy

What does the final SEC rule omit?

A complete document on  summarizes all the comments, reasoning, and amendments between the SEC鈥檚 proposed draft and final rules. The most striking omissions and alterations include. Scope 3 emissions. Scope 3 was originally included in the initial proposal but has been dropped from the final rule. This means companies will not be required to gather and report data on GHG emissions from their suppliers and product end-users.

The final rule also leaves it to companies鈥� discretion to determine whether Scope 1 (direct) and Scope 2 (indirect) emissions data is material鈥�(that is, whether the data is  necessary for investors to make informed decisions. If Scope 1 and 2 data is not deemed material, it will not need to be reported. Small and emerging growth companies are exempt from this requirement altogether. It should be noted that many of the companies covered by the SEC rule will also be subject to the EU鈥檚 ESRS requirements and Scope 3 is required by this rule and may become by default an expectation and common practice.

What determines if Scope 1 or Scope 2 climate data is 鈥渕aterial鈥� or not?

Companies will have to conduct  to determine for themselves. The determination comes down to whether a reasonable investor would consider the disclosure important when making an investment or voting decision, or whether they would view an omission of the disclosure as having significantly altered the total mix of information available. Getting it wrong may mean reissuing a financial statement.

Why did the final rule change from what was initially proposed?

The final rule is the result of a two-year process and more than 24,000 comment letters鈥攆rom companies, auditors, legislators, etc.鈥攎any arguing the costs involved in more extensive (Scope 3) reporting, as well as questions over the consistency or reliability of such data points. Even despite the slackening, the rule is likely to be challenged in courts.  along with various  have already filed petitions or threated lawsuits. Criticism is coming from anti-ESG factions that the rule goes too far, and from activist organizations that it has not gone far enough.

How does the SEC rule compare with other ESG reporting regulations, including the EU鈥檚 CSRD and California鈥檚 SB253 and SB261?

Compared to both of the above, the SEC final rule is less stringent.

Companies operating globally鈥攇enerating more than 鈧�150 million in the EU鈥� are already preparing to comply with Europe鈥檚 , which requires Scope 3 disclosures. These firms will not have any additional requirements to address.

, passed in October 2023鈥攚hich affect both private and public companies鈥攁re also more demanding. They require firms operating in the state with more than $1 billion in revenue to report direct and indirect emissions, including Scope 3.

Which companies will be affected by the new SEC rule?

The final rule will affect publicly traded companies in the U.S., but only larger firms will have to address the Scope 1 and Scope 2 emissions requirements鈥攁nd even then, only if material.

According to , roughly 2,800 U.S. companies will have to make the disclosures and about 540 foreign companies with business in the U.S. will have to report information related to their emissions. This is many fewer U.S. companies than are expected to be subject to the EU鈥檚 ESRS requirement.

When does the new SEC rule take affect?

The final rules will become effective 60 days after publication and phased in depending on a company鈥檚 filing status鈥攁ccelerated filer, large accelerated filer, non-accelerated filer, smaller reporting company, etc.鈥攚ith  ranging from FYB 2025 to FYB 2033.

U.S. Securities and Exchange Commission.

How should companies prepare for the SEC鈥檚 new climate disclosure rules?

Many companies already issue听听and ESG metrics, which is a useful starting point. But as climate risk reporting moves from voluntary to required, stakeholders will have a much clearer view of how companies compare with others in their sector. Forward-thinking companies will want to:

• Bring more teams into the climate conversation, so that strategies and opportunities can be explored to the fullest
• Ensure all company leaders are fluent in
• Develop a transition plan鈥攅ven though not required by the SEC鈥攖o remain competitive where others are forging ahead

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