SEC Climate-Related Disclosure Rules: Your Questions Answered

Disclosing information about environmental, social, and governance (ESG) goals and efforts has long been a voluntary annual practice among leading organizations with 98% of the S&P 500 and 90% of the Russell 1000 issuing sustainability reports in 2022.

With the SEC’s climate-related risk disclosure rules, instead of sharing ESG information how and when they choose, registrants must disclose material climate-related risk information in registration statements and annual reports. 

The good news is that many organizations will already be familiar with many of the requirements of the SEC’s climate-related disclosure rules. The final rules build on widely used frameworks and standards, incorporating Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, the GHG Protocol Corporate Accounting and Reporting Standard, and the General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and Climate-related Disclosures (IFRS S2) issued by the IFRS Foundation’s International Sustainability Standards Board (ISSB). 

Still, regardless of any standards and frameworks already in place, every organization has work to do to mature its ESG program.  Read on for answers to frequently asked questions about the new SEC Climate-Related Disclosure Rules, and download our full guide for deeper dive into the subject including an action item checklist and more!

What Are the SEC Climate-Related Disclosure Rules? Who Is the Reporting Requirement Authority?

The final rules are called The Enhancement and Standardization of Climate-Related Disclosures for Investors, and they’re issued under the authority of the United States Securities and Exchange Commission (SEC).

Where Can Impacted Companies Find a Detailed Explanation of the Final SEC Climate Disclosure Rules?

The SEC Fact Sheet outlines key points. See the full rules on the SEC’s website.

What Do the SEC Climate-Related Disclosure Rules Require SEC Registrants to Disclose?

The new rules require SEC registrants to detail how they’re incorporating material climate-related risks into their enterprise risk management (ERM) strategy — including how they’re identifying, assessing, and managing these risks — and reflecting those processes in their financial reporting. Some registrants will also need to disclose Scope 1 and/or Scope 2 GHG emissions, as well as climate targets and goals. 

The SEC’s press release offers an excellent and thorough rundown of the required disclosures, and we have included exact wording from the SEC’s final rules in a more comprehensive checklist toward the end of the guide. 

At a high level, registrants will need to disclose the following outside of the financial statements (Regulation S-K):

• Climate-related risks and their actual or likely material impacts on the registrant’s business strategy, results of operations, financial condition, business model, and outlook.
• The registrant’s governance of climate-related risks and relevant risk management processes, as well as whether and how those processes are integrated into the registrant’s overall risk management system or processes.
• Certain information about climate-related targets and goals.
• For large accelerated filers (LAFs) and accelerated filers (AFs), Scope 1 and Scope 2 GHG emissions metrics (if deemed material), which will eventually be subject to assurance.
• Transition plans or scenario analysis (if any) to address climate-related risks.

Registrants will also need to disclose the following inside the financial statements (Regulation S-X):

• Certain climate-related disclosures in a note to the registrant’s audited financial statements. Disclosures include:
  • The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, subject to applicable 1% and de minimis disclosure thresholds.
  • The capitalized costs, expenditures expensed, or losses related to carbon offsets and renewable energy credits or certificates (RECs) if material to achieving climate-related targets and goals.
  • A qualitative description of how any estimates and assumptions used to produce the financial statements were materially impacted by the risks and uncertainties associated with severe weather events and other natural conditions.

How Do the Final SEC Climate-Related Disclosure Rules Align With ESG Regulations Globally?

The SEC’s rule-making action is part of a global transformation in the ESG risk disclosure landscape, with simultaneous implementation of the EU’s Corporate Sustainability Reporting Directive (CSRD) and associated European Sustainability Reporting Standards (ESRS), the UK’s Climate-related Financial Disclosure Regulations, and the ISSB’s inaugural S1 and S2 standards and 2024 takeover of TCFD monitoring responsibilities. 

Notably, like the SEC climate rule, the UK standards are based on TCFD recommendations, the ISSB’s S1 and S2 standards incorporate TCFD recommendations, and the EU standards closely align with ISSB’s standards. As a result, the goal of a global baseline for sustainability-related disclosures is coming into closer range — great news for SEC registrants operating internationally that may also be subject to EU or UK ESG regulations or ISSB standards. Learn more in AuditBoard’s ESG Regulations Guide.

Which Companies Do the SEC Climate-Related Disclosure Rules Apply to?

The new rules apply to all domestic and foreign SEC registrants, with different requirements and exceptions depending on issuer type across LAFs, AFs, SRCs, EGCs, and NAFs. Indirectly impacted parties include investors and other market participants that use the information in these registrants’ filings (e.g., financial analysts, investment advisors, asset managers, customers).

What Needs Do the SEC Climate-Related Disclosure Rules Aim to Meet?

The SEC’s efforts originated in the 1970s with the goal of providing investors with material information about environmental risks facing public companies. While many issuers proactively provided this information to meet investor demand, disclosure practices were fragmented and inconsistent. As outlined in the SEC’s fact sheet, the final rules intend to enhance and standardize climate-related risk disclosures in response to investors’ needs for:

• More consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant’s business, as well as information about how the registrant manages those risks.
• More information about the effects of climate-related risks on a registrant’s business and its current and longer-term financial performance and position to inform investment decision-making. 

What Are the Audit Requirements for the SEC Climate-Related Disclosure Rules?

Disclosed material Scope 1 and Scope 2 GHG emissions for LAFs and AFs will be subject to mandatory limited assurance followed by mandatory reasonable assurance for LAFs. See the phased-in compliance timeline below for more details.

Note that, consistent with the proposed rules, the final rules require registrants to present the disclosure of climate-related risks’ financial statement effects in a note to their financial statements. This means the disclosure will be subject to audit by an independent registered public accounting firm, and come within the scope of the registrant’s internal control over financial reporting (ICFR). As the final rules state, “subjecting the required disclosures to a financial statement audit and registrants’ ICFR will enhance the reliability of that information” as well as “its accessibility and usefulness for investors” (see pp. 543-544).

When Do the SEC Climate-Related Disclosure Rules Come Into Effect? What Phased-In Reliefs Apply?

The new rules will become effective 60 days after publication in the Federal Register. Compliance dates are phased in over a period of years based on issuer type, as shown below (see table). In summary:

• Large accelerated filers (LAFs) are required to begin providing all required disclosures except for GHG emissions starting in FYB 2025. Material Scope 1 and Scope 2 GHG emissions disclosures are required in FYB 2026 for LAFs, with limited assurance on GHG disclosures in FYB 2029 and reasonable assurance in FYB 2033.
• Accelerated filers (AFs) are delayed one year with all disclosures (except for GHG emissions) required for FYB 2026, with material Scope 1 and Scope 2 reporting required in FYB 2028. Limited assurance is required for AFs on GHG emissions starting FYB 2031.
• Climate Risk Disclosures for smaller reporting companies (SRCs), emerging growth companies (EGCs), and non-accelerated filers (NAFs) are delayed until FYB 2027, with no GHG reporting requirements. 
• Electronic tagging is required for LAFs and AFs starting in FYB 2026. SRCs, EGCs, and NAFs require electronic tagging a year later, in FYB 2027.

How Will the Climate-Related Risk Disclosure Process Work? 

The steps depicted in the graphic below — based on typical assurance processes for financial reporting — reflect our assumptions of the typical process organizations may follow to comply with the SEC’s final climate disclosure rules. 

As you begin to mature your organization’s process, remember: Sustainability is a team sport, with responsibility spanning the organization. Timely, accurate, and reliable disclosures will require effective cross-functional coordination across finance, audit, risk management, sustainability, operations, and more. Many roles will lack experience with risk assessments, audits, and controls design, so it’s important to focus on engaging, educating, and upskilling relevant stakeholders. It will also be critical to involve internal audit from day one, helping to ensure audit-ready ESG data and reporting, and to work closely with ERM teams to identify, assess, mitigate, and monitor any material climate-related risks.

Download our full guide, SEC Climate-Related Disclosure Rules: What You Need to Do Now, for a deeper dive into the subject including an action item checklist and more!