How does the 2024 SEC Climate Disclosure Rule impact your board?

Key takeaways for board directors:

• The SEC climate disclosure rule responds to investor demands for robust and comparable climate reporting by SEC registrants. However, the requirements are not as extensive as those of other international standards as they do not include scope 3 emissions disclosures (indirect emissions from within the organisation’s value chain).
• Board directors should be aware of two key requirements of the SEC ruling relating to corporate board oversight:
  1. Identify any board committee or subcommittee responsible for the oversight of climate-related risks, if applicable, and describe the processes by which the board or any such committee or subcommittee is informed about such risk plans.  
  2. If the company has adopted a climate-related target, goal or transition plan, disclose whether and how the board oversees process against any climate target, goal or transition plan the company has adopted.
• As investor demand continues to rise for robust climate disclosures, and increasingly for nature-related disclosures, board directors should ensure their organisations have the appropriate structures and processes in place to provide this information. See our climate disclosure navigator to learn more.

Outcomes of the rule

The rule standardises how SEC registrants (generally speaking, public companies) will disclose climate risks that materially impact financial and operational performance, and how companies integrate management of these risks into their broader strategy and governance.  The rule responds to investors’ longstanding need and overwhelming demand for clear, consistent, and comparable climate reporting from companies by requiring these disclosures in financial filings.  The SEC requirements will significantly improve the quality and reliability of these disclosures compared to the current patchwork of voluntary reporting frameworks that companies may or may not choose to use. 

The SEC received and reviewed more than 24,000 public comments and was extremely responsive to concerns expressed in the comment file. The agency carefully calibrated the rule’s cost to companies with its anticipated benefit to investors, seeking to reduce compliance burdens for reporting companies wherever possible. 

Climate-related disclosures are a critically important topic for company directors. The final rule lays out two key requirements for companies related to board oversight as shared in the key takeaways above.
 
These disclosures are not required for registrants that do not exercise board oversight of climate-related risks, since the SEC is solely interested in transparency and agnostic as to whether or how a registrant is managing its climate risks. Registrants will have sufficient flexibility to determine how much detail to provide about the board’s oversight of climate risks.

The rule also requires companies to disclose material climate-related financial risks that are necessary to help inform shareholders’ investment and voting decisions, including:

• Greenhouse gas emissions metrics (Scopes 1 and 2) and third-party verification
• Data on expenditures related to severe weather events, carbon offsets, and renewable energy credits in the notes to the audited financial statements
• Climate risks facing the company and disclosure of transition plans, scenario analysis and use of an internal carbon price. 

The rule includes relevant safety from legal liability for forward-looking disclosures related to climate transition plans, scenario analyses, internal carbon pricing, and targets and goals. It also allows for generous phase-in timelines based on the reporting company’s filer status and reduced requirements for smaller and newly public registrants.The final rule eliminated many previously proposed governance requirements i including disclosure of whether any board directors have expertise in, and responsibility for managing, climate-related risks, how frequently the board is informed of such risks, and whether and how the board sets climate-related targets or goals.

For a more detailed summary of the rule, we encourage you to read Ceres’ overview of the final rule as well as this comparison of the final rule to the proposal.

Benefits of disclosing climate-related risks

There are several benefits for companies of climate disclosure outside of, or beyond, regulatory compliance.  These can be summarised as follows:     

• Improving risk management by ensuring appropriate oversight and systems are in place to assess and manage climate risks and opportunities
• Leading your sector and demonstrating ambition on climate transition readiness
• Meeting current demands from your investors 
• Attracting investors and deepening your shareholder base
• Differentiating your business through innovation 
• Demonstrating readiness to report on climate risks for M&A transactions, which could be a particularly salient factor for cross-border M&A transactions since a buyer in Europe    or another international jurisdiction would have much more rigorous expectations for climate-related transparency.

Comparing the SEC Rule to international and U.S. state disclosure requirements  

Aspects of the climate disclosure standards issued by the International Sustainability Standards Board (ISSB) are more robust than the SEC’s rule (most notably, it requires the disclosure of Scope 3 emissions), although there is good interoperability between the two. To date, at least 20 countries representing over half of the world’s GDP, have m oved to adopt or align with the ISSB standards, including Australia, Brazil, Canada, China, Hong Kong, Japan, and the UK.   

The European Union’s Corporate Sustainability Reporting Directive (CSRD) goes much further than the ISSB standards and the SEC rule. The CSRD employs a unique “double materiality” test, meaning companies will report not only on how their business is affected by sustainability issues (“financial materiality”), but also on how their activities impact society and the environment (“impact materiality”). Any large company meeting the CRSD eligibility criteria will be required to report 2025 data (reporting in 2026), including European subsidiaries of U.S. parent companies. Many EU parent companies will have already started reporting on 2024 data (reporting in 2025).

Furthermore, the CSRD is a more complex sustainability disclosure regime than pure climate disclosure regulations such as the SEC rule. The CSRD requires companies to disclose information on dozens of key performance indicators that encompass biodiversity, resource use, pollution, workforce, and other topics. Sector-specific standards for the CSRD are also under development. Readers can learn more on the CSRD here.

There is significant overlap between California’s recently enacted climate disclosure laws, SB 253 and SB 261, and the SEC’s climate disclosure rule, but there are some differences. For example, the SEC rule requires disclosure of climate-related financial statement metrics, going beyond the California requirements. However, California’s emissions disclosure law includes Scope 3 emissions, which the SEC rule does not.  

Implementation status of the U.S. disclosure requirements

The SEC’s final climate risk disclosure rule was set to take effect on May 28 2024. However, SEC commissioners voluntarily stayed the rule on April 4 pending completion of proceedings in the U.S. Court of Appeals for the Eighth Circuit, where numerous lawsuits challenging the rule were consolidated. The stay was simply a procedural decision related to the litigation. The SEC indicated that it will vigorously defend the rule’s validity in court and noted that the stay will facilitate the orderly judicial resolution  of the challenges and allow the court to focus on deciding the case on its merits.

The California laws are also being challenged in the Central District of California. In addition, the 2024-2025 California state budget, which includes full funding for the two disclosure laws, has officially been signed into law. The California Air Resources Board, later in 2024, will hire to fill open positions and begin drafting regulations to implement SB 253 and SB 261.

Recommendations for board directors  

Board directors should learn about the requirements impacting the companies they oversee and create a plan to meet these disclosure requirements that includes: 

• The board should oversee the securing the financial and human resources needed to produce high-quality disclosures.  
• Ensuring appropriate team members from key departments including risk management, financial, accounting, legal and sustainability to lead an internal task force on climate disclosure that report into the appropriate board committees.
• The board should ensure the executives are reviewing the TCFD recommendations and the GHG Protocol emissions disclosure standards.
• Instructing company leadership to engage trade groups on why and how measuring and disclosing climate risks is good for business, so that those trade associations can effectively represent the company’s interest in these matters. For more information, read our corporate climate policy engagement briefing.

Conclusion

Given that investor demand for better disclosures and transparency will only increase, and that most large companies will be subject to more robust disclosure requirements in the EU, California, and other jurisdictions across the world, it is strongly recommended that board directors take concrete steps to ensure that the companies they represent are ready to provide their investors with more robust disclosures on climate risk. 

For more information on this topic, visit www.ceres.org/sec.

This briefing was created in collaboration with Ceres, with thanks to Randi Mail, Ceres Accelerator for Sustainable Capital Markets.