UPDATE [4/5/2024]:  The Commission has determined to exercise its discretion to stay the Final Rules pending the completion of judicial review of the consolidated Eighth Circuit petitions.  Click here for more information.

The U.S. Securities and Exchange Commission (SEC or Commission) finalized its climate change disclosure rule on March 6, 2024, reducing the final disclosure obligations from the initial proposal after thousands of comments from stakeholders. The final rule requires comprehensive and standardized climate-related disclosures, including disclosure on governance, business strategy, targets and goals, GHG emissions, risk management, and the effects of climate change on financial metrics. This additional disclosure is intended to help investors assess material risks in climate-related reporting and facilitate comparisons across firms and over time with respect to climate-related metrics. 

For issuers subject to the new disclosure requirements, compliance with the final rule will present practical challenges, such as coordination among internal and external subject matter experts in the legal, accounting, science, and environmental, social, and governance (ESG) fields; data tracking, collection, and verification; reconciliation of data reported to satisfy mandatory disclosure requirements and voluntary reporting commitments, like those covered by sustainability reports; and oversight to ensure disclosures satisfy both the new SEC rules and the increasing non-regulatory scrutiny from investors and watchdogs, like International Shareholder Services (ISS). These challenges will necessitate significant additional costs to prepare compliant disclosures.

Beyond compliance, issuers may also derive benefits from the new rule, such as operationalizing risk mitigation and unlocking value to achieve sustainability objectives.  For entities seeking to differentiate based upon ESG factors, transitioning to a low-carbon economy and to sustainable business strategies can transform operations, accelerate innovation, retain talent and attract capital investment. Along with the rigorous risk assessments prompted by the new disclosure requirements, opportunities to mitigate risk and create value also emerge.

Data summarized by the Commission (from 2016-2022) in the preamble to the final rule lists the industries with the highest percentage of annual reports containing voluntary climate-related disclosures. At the top of the list are electric services, maritime transportation, steel manufacturing, paper and forest products, and oil and gas. The most robust climate-related disclosures are filed by the electric services and oil and gas industries. The Commission observes the number of companies setting carbon reduction targets or goals is increasing, as is the number of companies adopting transition plans.

In addition, research referenced in the preamble to the final rule points to the impacts of climate-related disclosures on investor expectations of returns, as well as on asset pricing, and valuation. The Commission cites studies showing a well-established link between climate-related risks and firm fundamentals and cites studies documenting the effects of climate-related risk assessment on a firm’s innovation, employment, and investment policies.

Collectively, the Commission relies on this body of research to support the relevance of climate-related disclosures to investment decision making. This research also signals that the new SEC disclosure requirements will inevitably force non-regulatory initiatives to mitigate climate-related risks and create value from climate-related opportunities. Consider, for example, work to reassess and align ESG and sustainability commitments with future filings that report climate-related risks and financial impacts.

Forward facing ESG and sustainability commitments that promote the durability of a business address risks and opportunities that reveal either vulnerability (risks) or value (opportunities), identified through stakeholder engagement. For a robust ESG and sustainability program to succeed, transparent monitoring and reporting systems, plus active Board-level oversight, are essential. Marrying the new and enforceable SEC climate-related disclosures with non-regulatory sustainability work could enhance monitoring, reporting, and oversight, while reducing greenwashing – further mitigating risk, creating value, and potentially securing the sustainability of those issuers who are adept at harnessing the opportunities of this moment.

While the new disclosure requirements will provide investors greater line of sight to climate-related risks and will standardize the scope and quality of information on the financial impacts of those risks, the new obligations will also inevitably prompt company leaders, risk managers, and investors to pursue opportunities for risk mitigation and value creation. In the final rule, the Commission jettisoned portions of the proposed rule that invited disclosure of financial impacts and expenditures arising from climate-related opportunities.

Nonetheless, required disclosures of actual costs, charges, losses, and material impacts will certainly accelerate initiatives to mitigate such costs and losses, thus creating value for issuers and investors. Similarly, mandatory disclosure of Board-level engagement, targets and goals, and GHG Scope 1 and 2 emissions data (if material) will absolutely accelerate initiatives to show improvement on these items – again mitigating risk and creating value. Issuers can expect investors and other relevant stakeholders to demand progress.

A final benefit to surface from the new rule is further consolidation of reporting standards. The Task Force on Climate-related Financial Disclosure (TCFD) framework, frequently used by registrants for voluntary disclosures has informed the new SEC disclosure requirements. With many different frameworks in use by companies, mandatory requirements taking effect globally (e.g., the European Union), nationally (e.g., the UK and Australia) and at the state level (most notably in California), the Commission explains its choice as follows:

The TCFD framework focuses on matters that are material to an investment or voting decision and is grounded in concepts that tie climate-related risk disclosure considerations to matters that may affect the results of operations, financial condition, or business strategy of a registrant.  Because the TCFD framework is intended to elicit disclosure of climate-related risks that have materially affected or are reasonably likely to materially affect the business, results of operations, or financial condition of a company, it served as an appropriate model for the Commission’s proposed climate-related disclosure rules.

The Financial Stability Board (FSB) disbanded the TCFD in late 2023, handing over performance tracking for the TCFD framework to the International Financial Reporting Standards Foundation (IFRS Foundation). The IFRS Foundation created the International Sustainable Standards Board (ISSB) and published disclosure standards (IFRS S1 and S2, aka the ISSB Standards) in 2023. For issuers, investors, and the growing community of reviewers, the incorporation of the TCFD recommendations into the IFRS Foundation simplified the ‘alphabet soup’ of disclosure initiatives. Now the SEC rule links to this chain, although reporting via another standard does not substitute for compliance with the SEC’s final rule.

The rule is effective 60 days after publication in the Federal Register, and while compliance dates and scope of reporting obligations depend on registrant status, some disclosures will be required as soon as fiscal year 2025. Expect the Commission’s regulatory scheme to drive positive non-regulatory changes.

A summary of the rule changes is available on sec.gov; the adopting release, which contains the full text of the rule as adopted, is available here.

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Photo of Krista McIntyre Krista McIntyre

Krista K. McIntyre is an environmental lawyer and enforcement defense partner based in Stoel Rives’ Boise office.  Krista served as the practice group leader for the firm’s environment, natural resources, and land use practices from 2011 to 2020.

Click here to read Krista’s…

Krista K. McIntyre is an environmental lawyer and enforcement defense partner based in Stoel Rives’ Boise office.  Krista served as the practice group leader for the firm’s environment, natural resources, and land use practices from 2011 to 2020.

Click here to read Krista’s full bio.

Photo of Justin Sedor Justin Sedor

Justin Sedor is an associate in Stoel Rives’ Corporate group. Justin has represented large public and private companies, investment banks, and private equity sponsors in a variety of sophisticated equity and debt securities transactions, including IPOs, convertible debt offerings, de-SPAC mergers, private placements…

Justin Sedor is an associate in Stoel Rives’ Corporate group. Justin has represented large public and private companies, investment banks, and private equity sponsors in a variety of sophisticated equity and debt securities transactions, including IPOs, convertible debt offerings, de-SPAC mergers, private placements, securitizations, at-the-market equity programs, medium-term note programs, and high-yield bond offerings.

Click here to read Justin’s full bio.