SEC Finalizes Climate-Related Disclosure Rules Ushering in a New Era of Public Company Climate Reporting

On March 6, 2024, the U.S. Securities and Exchange Commission (SEC) adopted final rules that will require domestic and foreign registrants to include extensive climate-related information in their registration statements and periodic reports.ⁱ These include disclosure of:

• Climate-Related Risks. 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.
• Impacts of Climate-Related Risks. The actual and potential material impacts of material climate-related risks on a registrant’s strategy, business model, and outlook, including certain material impacts, transition plans, and scenario analysis.
• Governance and Management. The manner in which a registrant’s board of directors oversees climate-related risks and management’s role in assessing and managing those risks.
• Risk Management. Processes for identifying, assessing, and managing material climate-related risks.
• Targets and Goals. Any climate-related target or goal that has materially affected or is reasonably likely to materially affect the registrant’s business, results of operations, or financial condition.
• Financial Statement Effects. Various financial statement effects resulting from severe weather events and other natural conditions and material expenditures directly related to climate-related activities as part of a registrant’s strategy, transition plan and/or targets and goals.
• GHG Emissions. Direct (Scope 1) and indirect (Scope 2) greenhouse gas (GHG) emissions data for large accelerated filers and accelerated filers, if material to the registrant, with an attestation report requirement at the limited assurance level and, following an additional transition period, at the reasonable assurance level for a large accelerated filer.

The final rules will thus impose substantial new mandatory disclosure requirements on public companies in their SEC filings. Whereas many registrants already publish voluntary climate-related disclosures in reports outside of SEC filings, the final rules will require registrants to now disclose such information in SEC filings according to rigorous methods and standards elaborated by the SEC, and certain of this information will be subject to attestation requirements. The need to produce new disclosures, possibly alongside disclosures required by legislation recently passed in California, the European Union (EU) and/or the United Kingdom (UK), will compel companies to apply added attentiveness to climate-related issues and may necessitate stepped-up engagement with external experts in climate change and carbon accounting. 

This Sidley Update summarizes the principal features of the final rules and provides practical guidance for companies considering next steps in light of the final rules. 

Overview 

In March 2022, the SEC proposed rules on the “Enhancement and Standardization of Climate-Related Disclosures for Investors” (the proposed rules).ⁱⁱ Based on broadly accepted disclosure frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol (GHG Protocol), the proposed rules sought to address concerns related to the consistency, comparability and reliability of climate-related information disclosed voluntarily by public companies. The final rules are one of the most anticipated and controversial rulemakings in the history of the SEC, with the SEC having received more than 24,000 comment letters submitted by individuals, companies, trade associations, and other organizations, each expressing their views and recommendations regarding the proposed rules.

The final rules apply to registrants with reporting obligations under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) and companies filing a registration statement pursuant to the Securities Act of 1933 (the Securities Act) or the Exchange Act. Registrants will need to include the disclosures in their registration statements, such as Securities Act Forms S-1, S-4, S-11, F-1, and F-4, Exchange Act Form 10, and Exchange Act periodic reports, such as Forms 10-K, 10-Q, and 20-F, as applicable. The final rules create a new subpart 1500 of Regulation S-K (Climate-Related Disclosure) and Article 14 of Regulation S-X (Disclosure of Severe Weather Events and Other Information).ⁱⁱⁱ

Longstanding Definition of Materiality Applies

The SEC clarified that where the final rules reference “materiality,” the application will be consistent with existing SEC disclosure rules and market practices and that materiality refers to the importance of information to investment and voting decisions about a particular company, not to the importance of the information to climate-related issues outside of those decisions. The final release notes that, in keeping with existing SEC rules and U.S. Supreme Court precedent, a matter is “material” if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote, or such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available.

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The following discussion summarizes the principal components of the final rules and Appendix A includes a chart highlighting key changes from the proposed rules.

1. Climate-Related Risks

Under Item 1502(a), a registrant must disclose 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. “Climate-related risks” means the actual or potential negative impacts of climate-related conditions and events on a registrant’s business, results of operations, or financial condition. In describing these material risks, a registrant must describe whether such risks are reasonably likely to manifest in the short-term (i.e., the next 12 months) and separately in the long-term (i.e., beyond the next 12 months).

The registrant must also specify whether an identified climate-related risk is a “physical” or “transition” risk so that investors can better understand the nature of the risk presented and the extent of the registrant’s exposure to the risk. Climate-related conditions and events can present risks related to the physical impacts of the climate — that is, “physical risks” — and to a potential transition to a lower carbon economy — that is, “transition risks.” Defined key terms are critical for appreciating the scope of these disclosures: 

• “Physical risks” include both acute and chronic risks to a registrant’s business operations.
  • “Acute risks” are event-driven risks and may relate to shorter-term severe weather events, such as hurricanes, floods, tornadoes, and wildfires, among other events. 
  • “Chronic risks” are risks that relate to longer-term weather patterns, such as sustained higher temperatures, sea level rise, and drought, as well as related effects such as decreased arability of farmland, decreased habitability of land, and decreased availability of fresh water.
• “Transition risks” are actual or potential negative impacts on a registrant’s business, results of operations, or financial condition attributable to regulatory, technological, and market changes to address the mitigation of, or adaptation to, climate-related risks, including such non-exclusive examples as increased costs attributable to changes in law or policy, reduced market demand for carbon-intensive products leading to decreased prices or profits for such products, the devaluation or abandonment of assets, risk of legal liability and litigation defense costs, competitive pressures associated with the adoption of new technologies, and reputational impacts (including those stemming from a registrant’s customers or business counterparties) that might trigger changes to market behavior, consumer preferences or behavior, and registrant behavior. 

Item 1502(a) also requires a registrant to describe any physical risk, including whether the risk may be categorized as an acute or chronic risk, and the geographic location and nature of the properties, processes, or operations subject to the physical risk and “the nature” of any transition risk(s), including whether it relates to regulatory, technological, market (e.g., changing consumer, business counterparty, and investor preferences), or other transition-related factors, and how those factors impact the registrant. 

2. Impacts of Climate-Related Risks on Strategy, Business Model, and Outlook

a. Disclosure of material impacts

Item 1502(b) will require a registrant to describe the “actual and potential material impacts” of the registrant’s identified material climate-related risks on its strategy, business model, and outlook, including, as applicable, any material impacts on products or services, suppliers, purchasers, or counterparties to material contracts (to the extent known or reasonably available), activities to mitigate or adapt to climate-related risks, and expenditure for research and development.  

Item 1502(c) will then require a registrant to discuss whether and how it considers any such impacts as part of its “strategy, financial planning, and capital allocation,” including, as applicable, whether the identified impacts have been integrated in the registrant’s business model or strategy (including whether and how resources are being used to mitigate climate-related risks), and how any targets, goals, or transition plans required to be disclosed relate to its business model or strategy.

Item 1502(d)(1) will require a discussion of how any identified material “climate-related risks have materially impacted or are reasonably likely to materially impact” a registrant’s business, results of operations, or financial condition.

Item 1502(d)(2) will require a quantitative and qualitative description of “the material expenditures incurred and material impacts on financial estimates and assumptions” that, in management’s assessment, directly result from activities to mitigate or adapt to climate-related risks. 

b. Transition plan

If a registrant has adopted a transition plan to manage a material transition risk, Item 1502(e)(1) will require the registrant to:

• describe the plan; and
• update its annual report disclosure about the transition plan each fiscal year by describing any actions taken during the year under the plan, including how such actions have impacted the registrant’s business, results of operations, or financial condition, to allow for an understanding of the registrant’s progress under the plan over time. 

Item 1502(e)(2) will further require quantitative and qualitative disclosure of material expenditures incurred and material impacts on financial estimates and assumptions as a direct result of the disclosed transition plan.

A “transition plan” means a registrant’s strategy and implementation plan to reduce climate-related risks, which may include a plan to reduce its GHG emissions in line with its own commitments or commitments of jurisdictions within which it has significant operations.

c. Scenario analysis and internal carbon price

Under Item 1502(f), if a registrant uses scenario analysis to assess the impact of climate-related risks on its business, results of operations, or financial condition, and if, based on the results of such analysis, the registrant determines that a climate-related risk is reasonably likely to have a material impact on its business, results of operations, or financial condition, then the registrant will also be required to describe each such scenario, including a brief description of the parameters, assumptions, and analytical choices used, and the expected material impacts on the registrant under each such scenario.

Further, Item 1502(g) requires that if a registrant’s use of an internal carbon price — that is, an estimated cost of carbon emissions used internally within an organization — is material to how it evaluates and manages a material climate-related risk, the registrant will be required to disclose:

• the price per metric ton of carbon dioxide equivalent (CO2e); and
• the total price, including how the total price is estimated to change over short- and long-term periods. 

If the registrant uses more than one internal carbon price to evaluate and manage a material climate-related risk, such registrant must provide the disclosures listed above for each internal carbon price and also disclose the reasons for using different prices. Furthermore, if the scope of entities and operations involved in the use of an internal carbon price is materially different from the organizational boundaries used for purposes of calculating the registrant’s GHG emissions disclosure under Item 1505 (see “7. GHG Emissions: Scope 1 and Scope 2” below), the registrant must also include a brief description of such difference.

3. Governance of Climate-Related Risk

Item 1501 will require a registrant to disclose certain information concerning its board of directors’ oversight of climate-related risks and management’s role in assessing and managing those risks.

As to board oversight, the final rules require disclosure regarding:

• the identity of any board committee or subcommittee responsible for the oversight of climate-related risks;
• the processes by which the board or board committee or subcommittee becomes informed about climate-related risks; and
• whether and how the board oversees progress of the registrant against any climate-related target or goal or transition plan, if the registrant has disclosed any such targets, goals or plans pursuant to the final rules.

As to management’s role in assessing and managing a registrant’s material climate-related risks, the final rules require disclosure regarding the following non-exclusive list of matters:

• whether and which management positions or committees are responsible for assessing and managing climate-related risks and the relevant expertise of such position holders or committee members in such detail to fully describe the nature of the expertise;
• the processes by which such positions or committees assess and manage climate-related risks; and
• whether such positions or committees report information about such risks to the board of directors or a board committee or subcommittee.

The instructions to the final rules also clarify that examples of “relevant expertise” of management may include prior work experience in climate-related matters, any relevant degrees and/or certifications, and any knowledge, skills, or other background in climate-related matters.

4. Risk Management 

Item 1503 will require a registrant to describe any processes it has for identifying, assessing, and managing material climate-related risks. The registrant will be required to make disclosures on a range of topics, including the following non-exclusive list of disclosure items regarding how the registrant:

• identifies whether it has incurred or is reasonably likely to incur a material physical or transition risk;
• decides whether to mitigate, accept, or adapt to the particular risk; and
• prioritizes whether to address the climate-related risk.

Additionally, if the registrant is managing a material climate-related risk, it must disclose whether and how any of the processes disclosed pursuant to Item 1503 have been integrated into its overall risk management system or processes.

5. Targets and Goals 

Under Item 1504, a registrant must disclose any climate-related target or goal that has materially affected or is reasonably likely to materially affect the registrant’s business, results of operations, or financial condition, as well as additional information  or explanation necessary to understand the material impact or reasonably likely material impact of the target or goal, including, as applicable, but not limited to, a description of:

• the scope of activities included in the target;
• the unit of measurement;
• the defined time horizon by which the target is intended to be achieved, and whether the time horizon is based on one or more goals established by a climate-related treaty, law, regulation, policy, or organization;
• if the registrant has established a baseline for the target or goal, the defined baseline time period and the means by which progress will be tracked; and
• a qualitative description of how the registrant intends to meet its climate-related targets or goals.

A registrant will also be required to update this disclosure each fiscal year by describing the actions taken during the year to achieve its targets or goals, including a description of:

• any progress made toward meeting the target or goal and how any such progress has been achieved;
• any material impacts to the registrant’s business, results of operations, or financial condition as a direct result of the target or goal or the actions taken to make progress toward meeting the target or goal; and
• any material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or the actions taken to make progress toward meeting the target or goal (expressed both quantitatively and qualitatively).

If the registrant has used carbon offsets or renewable energy credits or certificates (RECs) as a material component of the registrant’s plan to achieve its climate-related targets or goals, then in addition to any financial information required to be disclosed about the carbon offset or REC required under the new Article 14 of Regulation S-X, the registrant will also need to separately disclose:

• the amount of carbon avoidance, reduction or removal represented by the offsets or the amount of generated renewable energy represented by the RECs;
• the nature and source of the offsets or RECs;
• a description and location of the underlying projects;
• any registries or other authentication of the offsets or RECs; and
• the cost of the offsets or RECs.

6. Financial Statement Effects

New Article 14 to Regulation S-X will require a registrant to disclose in a note to the financial statements, for the most recently completed fiscal year (and to the extent previously disclosed or required to be disclosed, for the historical fiscal year(s), for which audited consolidated financial statements are included in the filing), certain specified climate-related financial statement effects of severe weather events and other natural conditions and related information. 

a. Severe weather events and other natural conditions 

The final rules provide a prescriptive method for disclosing climate-related financial effects. Registrants will be required to disclose if either of the following thresholds are met or exceeded:

• Expenditures expensed as incurred and losses resulting from severe weather events and other natural conditions. Registrants are required to disclose the aggregate amount of expenditures expensed as incurred and losses, excluding recoveries, incurred during the fiscal year resulting from severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, if the aggregate amount of expenditures expensed as incurred and losses equals or exceeds 1% of the absolute value of income or loss before income tax expense or benefit for the relevant fiscal year. The registrant is not required to disclose this information, however, if the aggregate amount of expenditures expensed as incurred and losses is less than $100,000 for the relevant fiscal year.
• Capitalized costs and charges resulting from severe weather events and other natural conditions. Registrants are also required to disclose the aggregate amount of capitalized costs and charges, excluding recoveries, incurred during the fiscal year as a result of severe weather events and other natural conditions, if the aggregate amount of the absolute value of capitalized costs and charges equals or exceeds 1% of the absolute value of stockholders’ equity or deficit at the end of the relevant fiscal year. The registrant is not required to disclose this information, however, if the aggregate amount of the absolute value of capitalized costs and charges is less than $500,000 for the relevant fiscal year.

For purposes of making these disclosures, a capitalized cost, expenditure expensed, charge, loss, or recovery is deemed to result from a severe weather event or other natural condition when the event or condition in question is a “significant contributing factor” in incurring the capitalized cost, expenditure expensed, charge, loss, or recovery, which also must be disclosed under the final rules. If a registrant makes these disclosures, it must also state separately the aggregate amount of any recoveries recognized during the fiscal year as a result of severe weather events and other natural conditions for which capitalized costs, expenditures expensed, charges, or losses are disclosed, and it must identify where the recoveries are presented in the income statement and the balance sheet.

b. Carbon offsets and RECs

The new Article 14 of Regulation S-X also requires financial disclosures related to carbon offsets and RECs used by registrants to achieve their climate-related targets or goals. If carbon offsets or RECs have been used as “a material component” of a registrant’s plans to achieve its climate-related targets or goals, the registrant must disclose the aggregate amount of carbon offsets and RECs expensed, the aggregate amount of capitalized carbon offsets and RECs recognized, and the aggregate amount of losses incurred on the capitalized carbon offsets and RECs during the relevant fiscal year. The registrant must identify where the expenditures expensed, capitalized costs, and losses are presented in the income statement and the balance sheet. The registrant must also include the beginning and ending balances of the capitalized carbon offsets and RECs for the fiscal year and the registrant’s accounting policy for carbon offsets and RECs.

c. Effects of severe weather and other natural conditions on financial estimates and assumptions

Registrants will be required to disclose whether the estimates and assumptions the registrant used to produce its consolidated financial statements were materially impacted by exposures to risks and uncertainties associated with, or known impacts from, severe weather events and other natural conditions, or any climate-related targets or transition plans disclosed by the registrant. If the registrant makes such a disclosure, it must provide a qualitative description of how the development of such estimates and assumptions were impacted by such events, conditions, targets, or transition plans.

d. Contextual information

For each of the above disclosures, the registrant must also provide contextual information, including disclosure on significant inputs and assumptions used, significant judgments made, other information that is important to understand the financial statement effect and, if applicable, policy decisions made by the registrant to calculate the specified disclosures.

7. GHG Emissions: Scope 1 and Scope 2

The final rules require only large accelerated filers and accelerated filers to disclose Scopes 1 and 2 GHG emissions, and a registrant must do so only if such emissions are material to the registrant. Smaller reporting companies (SRCs) and emerging growth companies (EGCs) are exempt from this requirement. Under Item 1505, if a registrant determines that its Scope 1 emissions and/or  Scope 2 emissions are material, the registrant must disclose such emissions for its most recently completed fiscal year and, to the extent previously disclosed in an SEC filing, for the historical fiscal year(s) included in the registrant’s consolidated financial statements in the filing. Similar to the corresponding definitions under the GHG Protocol and the proposed rules, the final rules define Scope 1 emissions as direct GHG emissions from operations that are owned or controlled by a registrant and define Scope 2 emissions as indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a registrant.

Registrants will be required to disclose their total Scope 1 emissions separately from their total Scope 2 emissions, each of which will be expressed in the aggregate, in terms of gross CO2e, excluding any purchased or generated offsets. In addition, if any constituent gas of the disclosed emissions is individually material, the registrant must disclose such constituent gas disaggregated from the other gases. GHG gases are defined in the final rules as carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), nitrogen trifluoride (NF3), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6).

A registrant will need to describe the methodology, significant inputs, and significant assumptions used by the registrant to calculate its disclosed GHG emissions. The description of the registrant’s methodology must include (and be in sufficient detail for a reasonable investor to understand):

• the organizational boundaries used when calculating the registrant’s disclosed GHG emissions, including the method used to determine those boundaries; provided, however, that if the organizational boundaries materially differ from the scope of entities and operations included in the registrant’s consolidated financial statements, the registrant will need to provide a brief explanation of this difference;
• a brief discussion of the operational boundaries used by the registrant, including the approach to categorization of emissions and emissions sources; and
• a brief description of the protocol or standard used to report the GHG emissions, including the calculation approach, the type and source of any emissions factors used, and any calculation tools used to calculate the GHG emissions.

The final rules also provide that a registrant may use reasonable estimates when disclosing its GHG emissions, so long as the registrant describes the underlying assumptions and its reasons for using such estimates.

While such GHG emissions disclosures will be required in annual reports filed with the SEC, the final rules will allow registrants to provide such disclosures on a delayed basis no later than the due date of the second quarter Form 10-Q or, for foreign private issuers, no later than 225 days after the end of the fiscal year to which the GHG emissions metrics disclosure relates. In either case, the registrant must include an express statement in its annual report indicating its intention to incorporate by reference this information from either a quarterly report on Form 10-Q or amend its annual report on Form 10-K or Form 20-F to provide this information by the due date specified.

8. Attestation of Scope 1 and Scope 2 Emissions Disclosures

Under Item 1506, a registrant that is required to disclose Scope 1 and/or Scope 2 emissions will be required to include in the same filing an attestation report covering the disclosure of such emissions and provide certain related disclosures about the service provider. The final rules also establish minimum standards for the experience, expertise, and independence for a GHG emissions attestation provider.

The final rules recognize two assurance levels of “limited” and “reasonable,” although the SEC did not define such terms in the final rules. As noted in the proposing release, the objective of a limited assurance engagement is for the service provider to express a conclusion about whether it is aware of any material modifications that should be made to the Scope 1 emissions and/or Scope 2 emissions disclosure for it to be fairly stated and in accordance with the relevant criteria. In such engagements, the conclusion is expressed in the form of negative assurance regarding whether any material misstatements have been identified. In contrast, the objective of a reasonable assurance engagement, which is the same level of assurance provided in an audit of a registrant’s consolidated financial statements, is to express an opinion on whether the subject matter is in accordance with the relevant criteria in all material respects. A reasonable assurance opinion provides positive assurance that the subject matter is free from material misstatement.

The final rules require both large accelerated filers and accelerated filers to obtain limited assurance beginning the third fiscal year after the Scopes 1 and 2 emissions disclosure compliance date. However, the final rules only require large accelerated filers to further transition to reasonable assurance, as shown below:

Notably, during the transition period, if a registrant obtains voluntary assurance over its GHG disclosures prior to the first required fiscal year, such registrant must disclose:

• the identity of the service provider of such assurance;
• a description of the assurance standard used;
• the level and scope of assurance services provided;
• briefly describe the results of the assurance service; 
• whether the service provide has any material business relationships with or has provided any material professional services to the registrant; and
• whether the service provider is subject to any oversight inspection program, and if so, which program (or programs) and whether the assurance services over GHG emissions are included within the scope of authority of such oversight inspection programs. 

The final rules only prescribe the minimum assurance level that such filers must attain by certain time frames. A large accelerated filer, during the transition period when limited assurance is required, may, at its option, obtain a higher level of assurance, such as obtaining reasonable assurance of its Scopes 1 and 2 emissions disclosure.

The attestation report must be provided pursuant to standards that are publicly available at no cost or that are widely used for GHG emissions assurance, and established by a body or group that has followed due process procedures, including the broad distribution of the framework for public comment. In the adopting release, the SEC observes that attestation standards of the Public Company Accounting Oversight Board (PCAOB), the American Institute of Certified Public Accountants (AICPA), the International Auditing and Assurance Standards Board (IAASB), and the International Organization for Standardization (ISO) would meet this due process requirement. The final rules do not include any requirement for a registrant to obtain an attestation report covering the effectiveness of internal control over GHG emissions disclosure, and therefore such a report will not be required even when the GHG emissions attestation engagement is performed at a reasonable assurance level. The final rules do not prescribe minimum report requirements. Instead, they require that the form and content of the attestation report follow the requirements set forth by the attestation standards used by the attestation provider. The SEC has also adopted additional attestation report requirements where registrants must disclose whether the attestation provider is subject to any oversight inspection and must disclose certain information when there is a change in, and disagreement with, the attestation provider.

Lastly, Item 1506 also requires registrants to provide the attestation report in the same filing that contains the GHG emissions disclosure to which the report relates. In practice, this means that many registrants will likely provide the attestation report in its second quarter fiscal year filing. However, registrants that elect to do so are required to include in their annual report an express statement indicating the registrant’s intention to incorporate by reference the attestation report from either a quarterly report on Form 10-Q or an amendment to its annual repot on Form 10-K or Form 20-F.

The SEC also revised Securities Act Rule 436 to clarify that an attestation report will not be considered “expert” disclosure within the meaning of Sections 7 and 11 of the Securities Act. Item 601(b)(27) will require the filing as an exhibit to certain registration statements (or periodic reports incorporated into such registration statements) of a letter from the attestation provider that acknowledges its awareness of the use in a registration statement of a GHG emissions attestation report.

Treatment for Purposes of the Securities Act and Exchange Act

The final rules treat the required climate-related disclosures as “filed” and therefore subject to potential liability under Section 18 of the Exchange Act. Such climate-related disclosures will also be subject to potential liability under Section 11 of the Securities Act if included in or incorporated by reference into a Securities Act registration statement. This treatment will apply to disclosures in response to both Subpart 1500 of Regulation S-K and Article 14 of Regulation S-X. The final rules should prompt companies to take additional care in disclosing climate-related information, given the potential for SEC enforcement actions and federal securities law claims arising out of such disclosures.

PSLRA Safe Harbor

Under Item 1507, certain climate-related disclosures will constitute “forward-looking statements” and fall under the protections of the Private Securities Litigation Reform Act of 1995 (PSLRA) safe harbor. The final rules extend the PSLRA safe harbor to forward-looking statements (excluding historical facts) in the disclosures pertaining to transition plans (Item 1502(e)), scenario analysis (Item 1502(f)), use of internal carbon pricing (Item 1502(g)), and targets and goals (Item 1504). The final rules also make clear that these statements, even if made in connection with certain transactions and disclosures currently excluded from the PSLRA safe harbor (e.g., registrants conducting an initial public offering), will nevertheless still be eligible for protection under the PSLRA safe harbor.

Compliance Dates

The final rules will take effect 60 days after their publication in the Federal Register, and the table below summarizes the phased in compliance dates. The table assumes, for illustrative purposes, that the registrant has a December 31 fiscal year-end. As noted above, the final rules permit registrants to provide GHG emissions and assurance information on Form 10-Q for the second fiscal quarter or, for foreign private issuers, 225 days after the end of the registrant’s fiscal year in an amendment to Form 20-F.

Congressional Review Act Considerations

The timing of the SEC’s release of the final rules has likely shielded the rules from repeal under the Congressional Review Act (CRA). The CRA provides the U.S. Congress oversight authority to rescind certain federal agency rules — with just a simple majority vote — within specific timetables. Notably, final rules published in the Federal Register and officially received by Congress with less than 60 days left in the legislative session trigger a special lookback mechanism for Congress to potentially repeal those rules during the first 60 legislative days of the following year. This lookback mechanism provides an opportunity for an incoming president to rescind rules issued under the prior administration. For instance, three rules issued under the Trump administration were rescinded after President Biden took office and 16 rules issued under the Obama administration were rescinded after President Trump took office. 

Based on the current legislative calendar, it is expected that rules finalized in May or later would be vulnerable to potential repeal under the CRA in early 2025 if the presidential administration changes or if enough new members of Congress are elected to overcome a presidential veto. However, absent a significant shortening of the 2024 legislative calendar, the CRA lookback scenario does not appear to be a threat to the SEC final rules as they are expected to publish in the Federal Register before May. 

Next Steps for Public Companies 

The following practical guidance is provided for consideration by public companies.

• Evaluate how the final rules impact your future disclosures in SEC filings. Public companies should begin assessing the gaps between climate-related information they currently disclose, inside and outside of SEC filings, and what will be required under the final rules. These gaps could be significant for many companies. In addition, many companies that have, to date, been partially compliant with TCFD (now replaced by the International Sustainability Standards Board) in climate-related disclosures may need to rework their approach or disclose more information to satisfy the disclosure requirements in the final rules.
• The SEC’s 2010 climate guidance still applies. Even after adoption of the final rules, the 2010 Guidance will still be relevant because it applies to existing SEC rules, such as those pertaining to a registrant’s description of its business and certain legal proceedings, which require disclosure regarding, among other things, compliance with environmental laws and regulations that are only tangentially mentioned in this rulemaking. Registrants should continue to consider the 2010 Guidance as they evaluate their disclosure obligations in their description of business, risk factors, legal proceedings, and management’s discussion and analysis. 
• Evaluate how the final rules impact your operations. While the final rules pertain only to disclosure, they may impact corporate behaviors, as companies may be encouraged or compelled to take actions, to the extent they are not doing so already, to have monitoring, accounting, planning, operational and governance practices in place so that required disclosures could be made. 
• Identify the disclosure obligations that will be challenging for your enterprise to meet. Many of the disclosure requirements will create new challenges for public companies that have not made these disclosures in the past, including the attestation requirements applicable to disclosures of Scope 1 and Scope 2 emissions. 
• Plan for attestation firms and advisers as needed. As the final rules require attestation of climate-related information, companies may need to evaluate the capabilities of their current service providers to supply these services and, if necessary, retain providers to fill gaps and needs. Changes in operations and disclosures may necessitate the engagement of new expertise, both inside and outside of the company, related to management, operations, and legal ramifications related to the new disclosures and any new initiatives designed to support them. Companies may additionally wish to assess the expected costs of increased engagement with outside advisers.
• Review existing climate-related goals. Public companies should begin to carefully review their climate-related goals, such as net-zero emissions pledges, including a comprehensive understanding and review of all internal processes and assumptions that go into these goals. This includes having a comprehensive assessment and inventory of all previously disclosed climate-related goals, whether disclosed in an SEC filing or in a voluntary report. If your company is anticipating releasing new climate-related goals or revising and/or eliminating its current climate-related goals, it may be advisable to engage counsel with the necessary expertise to review such goals and decisions. 
• Prepare for alignment with related California legislation. Public companies subject to the SEC’s new climate-related rules should consider how their compliance with these rules should also be pursued alongside of potential future compliance with related California legislation. In 2023, the State of California enacted a package of three bills, collectively termed the California Climate Corporate Accountability Package, that, among other things, require companies “doing business in California” and generating more than $1 billion in annual revenues to publicly disclose Scopes 1 and 2 GHG emissions, annually beginning in 2026, and Scope 3 emissions, annually beginning in 2027.^iv As “doing business in California” is a low threshold, the new California reporting rules will be applicable to most public companies that will be subject to the SEC’s new climate-related disclosure requirements. The regulations to implement the California reporting requirements have not yet been drafted, but definitions of “materiality” and other key terms could potentially align more closely with European Union (EU) definitions than the SEC definitions. Additionally, Scope 3 emissions disclosures may be made mandatory. California may also require a more robust third-party verification of reported emissions than the “limited assurance” or “reasonable assurance” required by the SEC.
• Align reporting with applicable EU and UK disclosure requirements. The EU and the United Kingdom (UK) have also adopted mandatory disclosure requirements for corporations. In the EU, the disclosure requirements under the Corporate Sustainability Reporting Directive (CSRD) will apply to the EU subsidiaries of many US companies subject to the SEC’s final rules (based on financial thresholds).^v In most of these cases, CSRD reporting will begin in 2026 for 2025 activities, with reporting in respect of non-EU parent companies to follow in 2029.  Disclosures will be subject to limited assurance, moving to reasonable assurance over time. CSRD is much broader than the SEC final rules: it covers 10 distinct sustainability topics, of which climate is just one, and it requires disclosure not just of material financial risk, like the SEC’s final rules, but also material financial opportunities and material impacts on people and the environment. With respect to climate change, CSRD requires broader and more detailed disclosures, including Scope 3 emissions; energy consumption, mix, and intensity; separate disclosure of emission reduction and net-zero targets; board expertise on climate change; and the relevance of climate considerations to board remuneration. In 2022, the UK adopted disclosure requirements on climate-change-related risks and opportunities for certain companies and limited liability partnerships with more than 500 employees and £500 million turnover. The required disclosures include how climate change is addressed in corporate governance, performance measures, and targets applied in managing climate change-related risks. Companies should begin assessing whether they are subject to these requirements and, if so, planning compliance, which can be challenging. Companies should consider cross-jurisdictional requirements holistically, to ensure appropriate coherence and consistency. 
• Continue to monitor global greenwashing litigation. The global trend toward increased environmental, social, and governance (ESG) disclosures comes with a growing global trend in ESG-related litigation. Cases are being brought around the world by government authorities, investors, consumers, and civil society, and in many parts of the world, plaintiffs are enjoying considerable success, including in challenging elements of a company’s business model as misaligned with corporate sustainability statements. New sustainability disclosures will provide an additional source of public information that will likely drive a further increase in ESG-related litigation. Companies must weigh these risks as they meet their new disclosure requirements. These risks are more pronounced when companies are subject to disclosures across jurisdictions, placing a premium on coherence and consistency, wherever appropriate.
• Keep an eye on legal challenges to the final rules. The final rules raise several legal issues and some litigation challenges have already been filed in court, with additional lawsuits likely to come. Given the breadth of the rules, their expected economic impact, and the level of controversy involved, the most obvious legal challenge is one under the “major questions” doctrine. That doctrine assumes that Congress does not quietly delegate to an agency the authority to make major policy decisions. Instead, the doctrine expects Congress to speak clearly on those points. In 2022, the U.S. Supreme Court endorsed the major questions doctrine and expressed its concern with the “particular and recurring problem” of “agencies asserting highly consequential power beyond what Congress could reasonably be understood to have granted.” West Virginia v. EPA, 142 S. Ct. 2587, 2609 (2022).  Here, the SEC is promulgating the final rules under a broad delegation that empowers the agency to act in the public interest for the protection of investors. Challengers will likely argue that such a generalized investor-protection mandate cannot be construed to allow the agency to impose such groundbreaking climate-related requirements. Similarly, challengers may claim that the rules simply exceed the SEC’s statutory authority. Although the SEC claims that its rules will protect investors, many commenters see it as a masquerading environmental regulation. Because the SEC is not the agency charged with protecting the environment, its rules must remain tethered to its financial regulatory authority. Additionally, the final rules may face a First Amendment compelled speech challenge. Any time the government requires private speech, including disclosures, the First Amendment is implicated. Courts often tolerate compelled speech in the form of financial disclosures to the SEC, but the controversial nature of the climate-related disclosures, along with the SEC’s arguably tenuous need for the information, may expose the disclosures to a colorable First Amendment challenge.

Appendix A

Changes From the Proposed Rules

ⁱ The Securities and Exchange Commission, The Enhancement and Standardization of Climate-Related Disclosures for Investors (2024), Release Nos. 33-11275; 34-99678; File No. S7-10-22, https://www.sec.gov/files/rules/final/2024/33-11275.pdf.

ⁱⁱ The Securities and Exchange Commission, The Enhancement and Standardization of Climate-Related Disclosures for Investors (2022), Release Nos. 33-11042; 34-94478; File No. S7-10-22, https://www.sec.gov/rules/proposed/2022/33-11042.pdf.

ⁱⁱⁱ A registrant may choose to place most of the subpart 1500 disclosures in a separately captioned “Climate-Related Disclosure” section or may instead elect to include such disclosures in applicable existing parts of the registration statement or annual report (e.g., Risk Factors, Description of Business, or MD&A). The SEC urges registrants that choose the latter alternative to consider whether cross-referencing the other disclosures in the separately captioned section would enhance the presentation of the climate-related disclosures for investors.

^iv Environmental Update, California Enacts Novel Disclosure Requirements for the Voluntary Carbon Market and Green Claims (Oct. 17, 2023), https://www.sidley.com/en/insights/newsupdates/2023/10/california-enacts-novel-disclosure-requirements-for-the-voluntary-carbon-market-and-green-claims; see also Environmental Update, California Enacts Landmark Climate Accountability Package Requiring Expansive Disclosure of Climate-Related Risks (Oct. 10, 2023), https://www.sidley.com/en/insights/newsupdates/2023/10/california-enacts-landmark-climate-accountability-package.

^v Environmental Social Governance Update, EU Adopts First Set of European Sustainability Reporting Standards — Critical Considerations for Companies in Scope of CSRD (Aug. 30, 2023), https://www.sidley.com/en/insights/newsupdates/2023/08/eu-adopts-first-set-of-european-sustainability-reporting-standards.