Aligning with SEC Climate Regulations: A Strategic Approach

Introduction

On March 6, 2024, The US Securities and Exchange Commission (SEC) voted through the definitive version of its groundbreaking SEC Climate Rule known as "The Enhancement and Standardization of Climate-Related Disclosures.” This regulation requires listed companies on a US stock exchange to report climate-related risks consistently, comparably, and reliably to investors.

With an effective reporting date that could come as soon as 2025 for some reporters, these regulations signal a shift towards greater corporate accountability around climate in the US.

The 800-plus-page document is a testament to how rigorous the final rule is. To save you from going through all 800 pages, we decoded the essentials for you in this article, from who is required to report and the nature of these disclosures to the phased-in reporting timeline and the potential ripple effects on the private sector. In addition, we will address the anticipated challenges and strategic approaches for businesses to ensure compliance.

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Understanding the SEC Climate Regulations

The SEC's Climate Regulations signify a progressive step toward integrating climate risk and emissions data into the mainstream financial reporting protocol for public entities. These are the disclosure necessities under the finalized rules:

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Mandatory Greenhouse Gas Emissions Reporting

• Large Accelerated and Accelerated Filers must include Scope 1 and 2 emissions data in their reports, provided this information is materially relevant. Smaller public companies are exempt from filing emissions reports. Scope 3 is also omitted.
• Both LAF and AF filers are required to obtain limited assurance three years after their first emissions report, with more demanding reasonable assurances set only for larger accelerated filers seven years after their initial emissions reporting.
• Accommodations are in place for emissions reporting entities, allowing for GHG emissions reporting in Q2 within their 10-Q or 20-F (for foreign filers) instead of Q1 10-K, easing the initial transition into reporting.

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Mastering SEC Climate Reporting: Understanding and Disclosing Risks

In accordance with SEC climate reporting requirements, companies must publicly disclose any climate risks material* to their operational, strategic, or financial frameworks.

• TCFD Alignment: SEC reporting aligns with the comprehensive climate risk reporting guidelines of the Taskforce on Climate-related Financial Disclosures. The final rule requires reporting of material climate risks, their anticipated financial repercussions, mitigative actions taken, and the governance overseeing these risks.
• Financial Goals in Climate Strategy: Corporations are required to delineate any climate-related goals with material financial implications.
• Carbon Offset Disclosures: If carbon offsets are a material part of achieving climate objectives, the related costs and spending must be disclosed.
• Costs from Climate Physical Risks: Reporting the costs, expenditures, and losses of direct physical climate challenges, such as extreme weather or other climate-induced disasters, is mandatory if they constitute more than 1% of turnover prior to taxes.

* Materiality definition from the SEC: “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”  A materiality assessment will be essential, given that all disclosures are dependent on being financially material for reporting purposes.

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Corporate Compliance with SEC Climate Regulations

The SEC Climate Regulations are a game-changer for public companies listed in the U.S. The compliance timeline varies based on a company’s financial and filing status.

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Responsibilities Across Registrant Categories

• Large Accelerated Filers (LAFs): The largest public companies, with public floats above $700M, will begin climate risk reporting in 2026 and emissions reporting in 2027. They will follow a tiered schedule for obtaining assurance, starting with limited assurance three years after their first emissions report and reasonable assurance seven years after it.
• Accelerated Filers (AFs): Firms in this $250M to $700M public float range will follow, starting their climate risk reporting in 2027 and emissions reporting two years later, with a limited assurance timeline three years after that.
• Non-Accelerated Filers (NAFs): Smaller companies below the $75M valuation mark will start their climate risk disclosures in 2028.
• Smaller Reporting Companies (SRCs): These entities share the same reporting requirements and timelines as NAFs.
• Emerging Growth Companies (EGCs): These recent market entrants with under $1.235B in revenue will report in line with SRCs and NAFs.

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The SEC Climate Regulations: A Structured Approach to Reporting

The SEC Climate Regulations stipulate a progressive schedule across ten years to reduce the burden of preparing and disclosing climate-related information, especially for smaller public companies. Here is a brief overview of the timeline:

• 2024: A pivotal 3-2 vote on March 6, 2024, set the SEC Climate Regulations in motion.
• 2025: LAFs embark on collecting pertinent climate data in 2025, with the first report due the following year.
• 2026: AFs begin their climate data collection, and LAFs make their first risk disclosures, along with starting emissions data collection.
• 2027: AFs release their first climate disclosures. LAFs will include emissions data, and other registrants will start their preparatory work.
• 2028: The first risk disclosures from NAFs, SRCs, EGCs, and AFs start on their emissions data collecting.
• 2029: AFs will make their first Scope 1 and 2 emissions data report in 2029.
• 2030-34: Limited assurance for LAFs is slated for 2030, AFs for 2032, and reasonable assurance for LAFs by 2034.

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Table 1. Timetable for SEC Climate Rule Disclosure

Final Rule – Compliance DatesRegistrant TypeDisclosure and Financial Statement Effects AuditGHG Emissions & AssuranceElectronic Tagging Climate-related risk, governance and supporting information (for climate targets)Climate-related material expenditures and impacts on financial estimates Scopes 1 and 2 GHG emissionsLimited AssuranceReasonable AssuranceItem 1508 - Inline XBRL tagging for subpart 15002LAFs (over $700 million float)FYB 2025FYB 2026FYB 2026FYB 2029FYB 2033FYB 2026AFs (other than SRCs and EGCs) ($70-700 million float)FYB 2026FYB 2027FYB 2028FYB 2031N/AFYB 2026SRCs, EGCs, and NAFsFYB 2027FYB 2028N/AN/AN/AFYB 2027 1 As used in this chart, “FYB” refers to any fiscal year beginning in the calendar year listed. 2 Financial statement disclosures under Article 14 will be required to be tagged in accordance with existing rules pertaining to the tagging of financial statements. See Rule 405(b)(1)(i) of Regulation S-T.

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Compliance with SEC Climate Regulations: Attestation Expectations

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Compulsory Attestation Timeline

In line with SEC Climate Regulations, there are stipulated timelines for attestation: LAFs and AFs must implement limited assurance verification for their emissions reporting by 2030 and 2032, respectively. Furthermore, a reasonable level of assurance is expected of LAFs beginning in 2034.

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Guidelines for Voluntary Attestation

The SEC has also stated requirements for voluntary assurance endeavors, with filers needing to disclose extensive information about their assurance process. This includes the assurer’s details, the employed standards, a synopsis of the assurance results, the level of assurance, and any conflicts of interest. This points to an anticipation of widespread voluntary assurance.

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How SEC Climate Regulations Affect the Private Sector

SEC Climate Regulations will not only transform public company disclosures but will also indirectly shape the practices of private companies across the United States and further afield. Here are five ways non-public companies could be implicated:

1. Downstream Disclosure Demands: Despite there being no need for Scope 3 value chain emissions disclosures, the rule still has a focus on material value chain climate risks; private companies in the supply chains of registrants might need to provide corresponding climate disclosures.
2. Shifting Stakeholder Preferences: As public companies begin to adhere to these new disclosure standards enforced by the SEC, private companies will experience a shift in what stakeholders expect in terms of ESG transparency.
3. Advantages for Future IPO: Early alignment with SEC Climate Regulations could benefit private companies eyeing an initial public offering (IPO).
4. Sustainability as a Business Imperative: Embracing elements of the SEC's climate reporting guidelines can help private companies attract investors and drive a competitive edge.
5. Local and International Regulations: California's legislation will impact both public and private companies, requiring much more rigorous climate disclosure, including Scope 3. From an EU perspective, some private companies may be impacted by the Corporate Sustainability Reporting Directive.

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Navigating SEC Climate Regulations: A Guide for Companies

Under the SEC Climate Regulations, public companies—including many within the S&P 500 and Russell 1000, which 98% and 90%, respectively, already report some climate information—are anticipated to disclose climate information in a more expansive and detailed manner than before.

Key steps in preparing for the SEC Climate Regulations include:

1. Decipher the Rules: Gain a comprehensive understanding of the new SEC climate regulations, especially the reporting requirements for the specific size of your company and type of filer.
2. Audit Existing Practices: Compare current climate reporting processes with the upcoming requirements to identify necessary extensions or new processes.
3. Comprehensive Risk Management: Assess and identify both the physical and transitional climate-related risks that could materially affect business operations, strategy, and value chain.
4. Conduct a Materiality Assessment: Ensure all relevant financially material climate risks and emissions are identified and ready to be disclosed through a rigorous materiality assessment.
5. Data Collection Framework: Update or implement new systems capable of gathering detailed GHG emissions data and other required climate information. This can be both for LAFs and AFs that need to share emissions and for other reporters to assess climate risk.
6. Attestation Preparedness: For LAFs and AFs, it is vital to initiate early preparation for the upcoming attestation requirements to ensure GHG emissions reporting is verified and up to standard. Reaching out to a CPA to help will be essential.

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Starting early can make all the difference in complying with SEC Climate Regulations. Even for those not reporting until 2027, the time to begin is now. By preparing your climate disclosure processes ahead of time, you can ensure compliance readiness. It is also worth considering expert assistance to ensure you mitigate the reputational and legal risks of non-compliance.

The Elliott Davis team is well-versed in SEC reporting, climate risk evaluation, emissions measurements, and assurance reviews. Contact us for assistance in meeting the SEC Climate Regulations and securing your company’s compliance.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.