Key insights on the the Enhancement and Standardization of Climate-Related Disclosures: Final Rules.
On Wednesday, March 6th, the SEC voted 3-2 along party lines to adopt the climate-related disclosure rules that were originally proposed back in 2022. The final rules will require public registrants to disclose material climate-related financial risks, Scope 1 and 2 GHG emissions if deemed material, and the financial statement impacts of severe weather events, amongst other items.
What’s Included in the Adopted Climate-related Disclosure Rules?
Material Climate-related Financial Risks – Companies will need to disclose risks that are material and reasonably likely to have impacts on the company’s strategy, operational results, or financial disclosures. If companies have undertaken mitigation measures related to these risks, they will need to disclose material expenditures and material impacts on financial estimates and assumptions resulting from those mitigation efforts. Furthermore, companies will need to describe their overall process for identifying, assessing, and managing material climate-related financial risks and the degree to which this process is embedded in the company’s overall risk management efforts.
Scope 1 and 2 GHG Emissions – Large accelerated filers and accelerated filers will need to disclose material Scope 1 and 2 emissions. Additionally, these companies subject to disclosure will need to have limited assurance performed initially, with reasonable assurance thereafter for large accelerated filers.
Financial Statement Impacts of Severe Weather Events – Companies will need to disclose expenditures, charges, and losses incurred as a result of severe weather events and other natural conditions subject to a 1% threshold and de minimis considerations. Additionally, companies will need to disclose capitalized costs, expenditures, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if those instruments are materially used to meet net zero goals.
What is the Timeline for the Adopted Climate-related Disclosure Rules?
Material Climate-related Financial Risks –Â Fiscal year 2026 for large accelerated filers, 2027 for accelerated filers, 2028 for EGCs, SRCs, and NAFs.
Scope 1 and 2 GHG Emissions –Â Fiscal year 2026 for large accelerated filers, 2027 for accelerated filers. Limited assurance in fiscal year 2029 for large accelerated filers and 2031 for accelerated filers. Reasonable assurance in fiscal year 2033 for large accelerated filers.
Financial Statement Impacts of Severe Weather Events – Fiscal year 2025 for large accelerated filers, fiscal year 2026 for accelerated filers, fiscal year 2027 for EGCs, SRCs, and NAFs.
What Proposed Legislation was Not Included in the Final Climate-related Disclosure Rules?
Many items were modified or removed completely from the final climate-related disclosure rules with the most substantial items changed or removed including:
- Scope 3 GHG emissions
- Mandated board expertise for oversight of climate-related risks, opportunities, and ambitions
- Scope 1 and 2 emissions disclosure for EGCs, SRCs, and NAFs.
- Removal of references to negative impacts of a company’s value chain related to material climate-related financial risks.
- No requirements around specific disclosure of physical risks associated with high or extremely high water stress.
What Frameworks are Referenced in the final Climate-related Disclosure Rules?
The material climate-related financial risks are largely aligned to the TCFD. The greenhouse gas emissions part is aligned to the GHG Protocol.
What Should Companies Focus on Right Now?
Performing a gap analysis of the finalized ruling relative to what was initially proposed back in 2022 and understanding the implications of any changes on data collection processes, internal climate-related governance, and disclosure strategy.
Related Links
- Schneider Downs ESG Consulting
- Schneider Downs ‘Our Thoughts On’ ESG Articles
- SEC Fact Sheet: The Enhancement and Standardization of Climate-Related Disclosures: Final Rules
About the Author
Tony Ielase leads the firm’s Risk Advisory Services (RAS) practice for the Columbus market and has over 25 years of experience providing risk advisory and compliance services to a diversified number of retail, manufacturing, higher education, healthcare, technology, utilities and financial services clients. His areas of expertise include internal audit strategic planning, internal audit co-sourcing, enterprise risk management, compliance assessments, fraud risk assessments, business process improvement and SOX program implementation and optimization, among others. Tony can be reached at [email protected]
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