UPDATE: On April 4, 2024, the SEC announced a voluntary stay on the climate-related disclosure rule. This voluntary stay is intended to delay implementation of the rule while the legal challenges are unfolding.
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On March 6, 2024 the Securities and Exchange Commission (“SEC”) announced a final rule on climate-related disclosures for businesses. Established by the 1934 Securities Exchange Act the mission of the SEC is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” One way the SEC works to achieve this mission is by reviewing disclosures and financial statements of exchange listed companies. In 2022, the SEC released a newly proposed rule that would require companies to make disclosures related to their climate impacts and greenhouse gas emissions. After a long period of public review, during which the SEC received thousands of comments and letters, the SEC has released its final rule which is expected to go into effect sixty days after it is published in the Federal Register. Since the SEC first proposed its climate reporting requirements, a handful of states, including California, have adopted or proposed their own climate reporting requirements. Going forward, some companies may find themselves subject to both federal and state climate disclosure requirements.
Overview of the Final Rule
The purpose of the rule, as laid out by the SEC, is to “improve the consistency, comparability, and reliability of climate-related disclosures for investors.” The final rule requires registrants to disclose some climate-related information in their registration documents and annual reports. Registrant is defined in the SEC regulations as “an issuer of securities with respect to which a registration statement or report is to be filed.” Under the final rule, the majority of registrants will be required to disclose the following information:
- A description of the board of directors’ oversight of climate-related risks.
- A description of 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, or financial condition.
- A description of the actual and potential material impacts of any climate-related risk on the registrant’s strategy, business model, and outlook.
- A discussion of whether and how the registrant considers any impacts as part of its strategy, financial planning, and capital allocation.
- A discussion of how any climate-related risks have materially impacted or are reasonably likely to materially impact the registrant’s business, results of operations, or financial condition.
- A description of any processes the registrant has for identifying, assessing, and managing material climate risks.
- A disclosure of any climate-related target or goal if such target or goal has materially affected or is reasonably likely to materially affect the registrant’s business, results of operations, or financial condition.
- Disclosures related to severe weather events.
The Enhancement and Standardization of Climate-Related Disclosures for Investors (March 6, 2024) (adding 17 C.F.R. § 210.14-02 and 17 C.F.R. § 229.1500-1508).
Registrants may have additional reporting requirements depending on their operations. For example, registrants that meet the definition of an accelerated filer or large accelerated filer have additional reporting requirements on their scope one and two emissions that are material. An accelerated filer is defined as having an aggregate worldwide market value of between $75 million and $700 million, and a large accelerated filer has a worldwide market value of $700 million or more. Scope one emissions are “direct [greenhouse gas] emissions from operations that are owned or controlled by a registrant,” and scope two emissions are “indirect [greenhouse gas] emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by the registrant.” Scope one and two emissions must be reported separately. To determine if emissions are material, registrants should determine “whether a reasonable investor would consider the disclosure of the registrant’s Scope one emissions and/or its Scope two emissions important when making an investment or voting decision or such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available.” Along with a disclosure form, registrants will also be required to include an attestation report prepared and signed by a greenhouse gas attestation provider, starting in the third fiscal year after the first compliance date.
There are a few carve outs in the regulation regarding reporting scope one and two emissions. Registrants that meet the requirements for a smaller reporting company or emerging growth company do not have to report their scope one or two emissions. Additionally, the 2023 Consolidated Appropriations Act prohibited funds from being used to require mandatory reporting of emissions from manure management systems. So long as the restriction from the Consolidated Appropriations Act is in place or if Congress passes another restriction, scope one and two emissions from manure management systems will not have to be disclosed. 17 CFR § 229.1505(a)(3)(ii); The Enhancement and Standardization of Climate-Related Disclosures for Investors, P. 258 (March 6, 2024).
The final rule imposes a graduated compliance date schedule. The earliest compliance date is in 2026, for fiscal year 2025, for large accelerated filers.
Proposed Rule v. Final Rule
In the final rule, the SEC scaled back reporting requirements for many registrants. Under the proposed rule, all registrants would have been required to disclose scope one and scope two emissions, and scope three emissions would have been required to be disclosed in certain circumstances. The proposed rule defined scope three emissions as “all indirect [greenhouse gas] emissions not otherwise included in a registrant’s scope two emissions, which occur in the upstream and downstream activities of a registrant’s value chain.” Under the final rule, only those registrants that meet the requirements for accelerated filers and large accelerated filers, as discussed above, will be required to disclose scope one and two emissions. Additionally, registrants will not be required to disclose scope three emissions at all. The requirement to disclose scope three emissions was highly controversial, especially among farmers and agricultural groups. Under the final rule, most farmers would not have to disclose greenhouse gas emissions because SEC removed the requirement for businesses to disclose scope three emissions. Additionally, most farmers will not meet the definition of an “accelerated filer” or “large accelerated filer”, so they will not be required to report on scope one or two emissions. The SEC has stated that their decision to remove requirements for reporting on scope three emissions from the final rule was due to feedback they received during public comment on the burdens of reporting on scope three emissions to registrants and the reliability of the data. The Enhancement and Standardization of Climate-Related Disclosures for Investors, P. 256 (March 6, 2024). Lastly, the final rule provides an exemption for small reporting companies and emerging growth companies that was not present in the proposed rule.
California’s Reporting Requirements
SB 253, also known as the Climate Corporate Data Accountability Act, was signed into law by Governor Newsom on October 7, 2023. The law requires the State Air Resources Board to develop and adopt regulations regarding scope one, two, and three emissions disclosures required for reporting entities. The new law defines a “reporting entity” as “a partnership, corporation, limited liability company, or other business entity formed under the laws of [California], the laws of any other state of the United States or the District of Columbia, or under an act of Congress of the United States with total annual revenues in excess of one billion dollars and that does business in California.” Cal. Health & Safety Code § 38532(b)(2) (2023).
Under the California law, scope one emissions are “direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including but not limited to, fuel combustion activities;” scope two emissions are “indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location;” and scope three emissions are “indirect upstream and downstream greenhouse gas emissions, other than scope two emissions, from sources that the reporting entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products.” Cal. Health & Safety Code § 38532 (2023). Unlike the final SEC rule discussed above, SB 253 may have a significant impact on farmers because of the requirement for businesses to disclose scope three emissions. Specifically, businesses that meet the definition of a “reporting entity” will be required to disclose the greenhouse gas emissions of purchased goods, many of which are provided by farmers.
Starting in 2026, reporting entities will be required to publicly disclose their scope one and two emissions for the prior fiscal year. Starting in 2027, entities will be required to publicly disclose their scope three emissions for the prior fiscal year. Reporting entities must disclose all three types of emissions annually and scope three emissions must be disclosed no later than 180 days after disclosure of scope one and two emissions. In the disclosure, reporting entities must include any fictitious names, trade names, assumed names, and logos associated with the company. Reporting entities must measure and report the emissions based on the Greenhouse Gas Protocol Standards. Reporting entities will also be required to include an assurance report with their public disclosure, performed by an independent third-party assurance provider. Lastly, the law directs the State Air Resources Board to impose penalties for nonfiling, late filing, or otherwise failing to meet the requirements related to the disclosures. However, between 2027 and 2033, for scope 3 emissions reporting, reporting entities may only be fined for nonfiling.
SB 261, was signed into law by Governor Newsom on October 7, 2023. The law requires “covered entities” to prepare a climate-related financial risk report. The new law defines “covered entity” as “a corporation, partnership, limited liability company, or other business entity formed under the laws of [California], the laws of any other state of the United States or District of Columbia, or under an act of the Congress of the United States with total annual revenues in excess of five hundred thousand dollars and that does business in California.” Cal. Health & Safety Code § 38533(a)(4) (2023). However, entities that are subject to regulation by the California Department of Insurance or that are in the business of insurance in another state are not subject to the requirements because there are separate reporting requirements for these entities.
Starting on or before January 1, 2026, covered entities will be required to prepare a report on its climate-related financial risk using the framework in the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures and measures that have been adopted to reduce or adapt to the climate-related financial risk disclosed. After the initial report is disclosed, covered entities will be required to prepare a report every two years. The reports must be posted publicly on the entity’s website. If the covered entity is required to prepare at least a biennial report that includes climate related financial risk information for another government entity, the covered entity has also met the requirements for this law. Entities that fail to report or provide an inadequate or insufficient report will be subject to administrative penalties assessed by the State Air Resources Board.
While the SEC rule only applies to those entities that meet the definition of registrant, as discussed above, the new California laws will apply to most businesses that meet the revenue thresholds and that do business in California. For entities that must comply with both the SEC and California reporting requirements, the California laws allow for entities to submit their SEC disclosures as long as the SEC disclosures meet the California reporting requirements.
Looking Forward
Under the SEC final rule, the majority of registrants will be required to begin filing climate related disclosures in 2028, for fiscal year 2027. Large accelerated filers will be required to file most climate related disclosures in 2026, for fiscal year 2025. Large accelerated filers will be required to disclose scope one and two emissions in 2027, for fiscal year 2026. Accelerated filers will be required to file most climate related disclosures in 2027, for fiscal year 2026. Accelerated filers will be required to disclose scope one and two emissions in 2029, for fiscal year 2028. The final rule outlines the full compliance calendar.
So far, California is the only state that has passed a state climate related disclosure law. Reporting in California will start in 2026 for scope one and two emissions, and 2027 for scope three emissions. Three other states have introduced bills similar to California’s law – Illinois (HB 4268), New York (S 7704, S 7705, and S 897), and Washington (SB 6092). Other states may follow California, Illinois, New York, and Washington in introducing reporting requirements for their state. Additionally, both the California laws and SEC final rule are being challenged in courts. It is unclear at this time the effect the lawsuits will have on the California laws and SEC rule.
To read the final SEC rule, click here.
For more NALC resources on Administrative Law, click here.