Highlights of new SEC rules on climate-related disclosures

On March 6, 2024, the U.S. Securities and Exchange Commission adopted its highly anticipated rules requiring climate-related disclosures. The final rules represent a significantly less burdensome set of rules than those proposed by the SEC in 2022, but will still require a substantially increased level of legal and accounting disclosures. The SEC’s adopting release and fact sheet can be viewed here and here.

As described below, for domestic registrants, the rules will apply to Form 10-Ks starting with the 2025 Form 10-K (filed in 2026) for large accelerated filers (“LAFs”), the 2026 10-K (filed in 2027) for accelerated filers (“AFs”), and the 2027 Form 10-K (filed in 2028) for smaller reporting companies (“SRCs”), emerging growth companies (“EGCs”) and non-accelerated filers (“NAFs”). The Scope 1 and Scope 2 greenhouse gas emissions disclosures will first be required by the filing deadline for the Form 10-Q for second quarter 2027 for LAFs and by the filing deadline for the Form 10-Q for second quarter 2029 for AFs. Similar timing requirements based on the registrant’s status as a LAF, AF, NAF or EGC will apply to foreign private issuers (“FPIs”) not filing on domestic forms.

The new disclosures will also be required in Securities Act and Exchange Act registration statements.

Key changes from the proposed rules

The SEC significantly pared back a number of disclosure requirements presented in its proposed rules. Some of the key changes include:

• Adoption of a less prescriptive approach to certain topics (which would have required disclosure without regard to materiality) in favor of a principles-based approach governed by materiality determinations
• Elimination for all filers of requirement for Scope 3 greenhouse gas (“GHG”) emissions disclosures
• Limitation of Scope 1 and Scope 2 GHG emissions disclosure requirement to AFs and LAFs
• Requirement for Scope 1 and Scope 2 emissions disclosures only to the extent determined to be material by the registrant (rather than as a mandatory disclosure topic without regard to materiality)
• Longer phase-in period for Scope 1 and Scope 2 emissions disclosures and third-party attestation of those disclosures
• Deferral of Scope 1 and Scope 2 emissions disclosures by domestic registrants for any fiscal year until the filing deadline for the second quarter Form 10-Q of the following year (with a comparable deferral for disclosure by FPIs not filing on domestic forms, by amendment to the annual report on Form 20-F due no later than 225 days after the end of the fiscal year)
• Limitation of third-party attestation over GHG emissions disclosure for AFs to “limited assurance” level rather the “reasonable assurance” level that will apply to third-party attestation for LAFs after an initial transition period of limited-assurance attestation
• Movement out of the financial statements of certain financial disclosures (e.g., transition costs, costs of achieving climate goals)
• Elimination of requirement for disclosure of “severe weather events and other natural conditions” and transition activities with respect to each financial statement line item (instead, rules will require disaggregated financial information with respect to those events and conditions in a note to the financial statements)
• Elimination of requirement to update climate-related disclosures on a quarterly basis

In addition, the rules provide a safe harbor from private liability for climate-related disclosures (excluding historical facts) pertaining to transition plans, scenario analysis, the use of an internal carbon price, and climate-related targets and goals.

The SEC opted at this time to not permit registrants to rely on home-country disclosure frameworks or substituted compliance (i.e., the reporting or publication of climate-related disclosures under any other reporting regime) to satisfy the SEC disclosure requirements.

Overview of disclosure requirements

Once effective, new Regulation S-K and Regulation S-X items will set forth a comprehensive framework for climate-related disclosure in registration statements and annual reports filed by domestic registrants and FPIs.

Emissions disclosures

• GHG emissions metrics disclosure: LAFs and AFs will be required to disclose Scope 1 GHG emissions and/or Scope 2 GHG emissions to the extent material to investors. This requirement will cover aggregate carbon dioxide equivalent (“CO2e”) (excluding offsets), and will require non-aggregated disclosure only if an individual gas is also material. For domestic registrants, the deadline for emissions disclosures relating to a fiscal year will be the Form 10-Q filing deadline for the second quarter of the following year. The emissions disclosures may be incorporated into the Form 10-K from the second quarter Form 10-Q or may be included in a Form 10-K amendment filed by the due date. For FPIs not filing on domestic forms, the emissions disclosures are required in the annual report on Form 20-F or may be included in an amendment to the Form 20-F filed no later than 225 days after the end of the fiscal year. (SRCs, NAFs and EGCs are exempt from the emissions disclosure requirements.)
• Supporting disclosure: The methodology, significant inputs, and significant assumptions used to calculate the disclosed emissions will also need to be disclosed. The supporting disclosure must address the organizational and operational boundaries used in the calculation approach, which may differ from entities covered by the registrant’s consolidated financial statements.
• Third-party assurance of emissions data: Subject to phase-in periods discussed below, LAFs and AFs required to provide Scope 1 and/or Scope 2 emissions disclosures (because of an applicable materiality determination) will also need to have third-party attestations of their disclosures. For AFs, the applicable standard will be “limited assurance,” while the standard for LAFs will initially be “limited assurance,” but then increase to “reasonable assurance” starting in 2033. The rules include requirements related to the expertise and independence of the assurance provider and the applicable review standards. Providers of limited-assurance attestations will be carved out of “expert” status for liability purposes, but reasonable-assurance attestations will be treated as “expertized.”

Climate-related goals

• Duty to disclose climate-related goals: If a registrant has set a public or internal climate-related target or goal (not limited to emissions) that has materially affected or is reasonably likely to materially affect the registrant’s business, results of operations, or financial condition, it will be required to disclose the target or goal and any additional information or explanation necessary to understand the material impact or reasonably likely material impact of the target or goal including, as applicable, and without limitation, the scope of activities included in the target or goal, the unit measured, the defined time horizon for intended achievement and whether the time horizon is based on an externally imposed requirement (e.g., treaty, law, regulation, policy, organization), the baseline measurement date (if any) and the means by which progress will be tracked, and a qualitative description of how the registrant intends to meet the targets or goals. A registrant must also disclose any progress toward meeting the target or goal and how it was achieved.
• Financial impact of goals: The rules will also require quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions as a direct result of the target or goal, or actions taken to make progress toward meeting the target or goal.
• Offsets and RECs: If carbon offsets or renewable energy certificates or credits (“RECs”) are used as a material component of a registrant’s plan to achieve the climate-related targets or goals, the registrant will be required 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.

Financial statement disclosures

• Severe weather expenditures: The rules will require disclosure in a note to the financial statements of capitalized costs, expenditures expensed, charges, and losses (excluding recoveries) incurred where “severe weather events and other natural conditions” (e.g., hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise), subject to applicable 1% and de minimis thresholds (absolute value, with separate measurement for income statement and balance sheet impacts) were a “significant contributing factor” in the costs, expenses, charges or losses being incurred. Similar disclosure is required for any recoveries recognized. The registrant must also identify where in the income statement and balance sheet such costs, expenses, charges, losses or recoveries are presented. These requirements apply to severe weather events or other natural conditions regardless of whether they are related to climate change, and the reporting company will not be required to make any determination that the event was caused by or related to climate change.
• Offsets and REC expenditures: Disclosure in a note to the financial statements will be required of the capitalized costs, expenditures expensed, and the aggregate amount of losses related to carbon offsets and RECs, if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals. In such a case, the registrant must disclose beginning-of-year and end-of-year carbon offset and REC balances, the related accounting policy, and where these amounts are presented in the financial statements.
• Impact on financial statement estimates and assumptions: If the estimates and assumptions a registrant uses to produce the financial statements were materially affected by risks and uncertainties associated with, or known impacts from, severe weather events and other natural conditions, or any disclosed climate-related targets or transition plans, the registrant will be required to provide a qualitative description of how the development of such estimates and assumptions were affected.

Climate-related risks and impact on business and strategy

• Climate risks: Disclosure will be required of any climate-related risks that have had or are reasonably likely to have a material impact on the registrant, including on its strategy, results of operations, or financial condition in the short-term (i.e., the next 12 months) and in the long-term (i.e., beyond the next 12 months).  Risks must be identified as physical or transition risks, and the registrant must provide information necessary to an understanding of the nature of the risk presented and the extent of the registrant’s exposure to the risk, including: (i) if a physical risk, whether it 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 (ii) if a transition risk, whether it relates to regulatory factors, technological factors, market factors (including changing consumer, business counterparty, and investor preferences), or other transition-related factors, and how those factors impact the registrant.
• Impact on strategy: Disclosure will be required of the actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook. Examples of such impacts include material impacts on: (i) business operations, including the types and locations of its operations; (ii) products or services offered; (iii) suppliers, purchasers, or counterparties to material contracts, to the extent known or reasonably available; (iv) activities to mitigate or adapt to climate-related risks, including adoption of new technologies or processes; and (v) expenditures for research and development. This disclosure will have to address specifically (x) whether the impacts of the climate-related risks have been integrated into the registrant’s business model or strategy, including whether and how resources are being used to mitigate climate-related risks, and (y) how any of the disclosed climate targets or goals or disclosed transition plans relate to the registrant’s business model or strategy.
• Costs of mitigating climate risk: If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description will be required of material expenditures incurred and material impacts on financial estimates and assumptions that, in management’s assessment, directly result from such mitigation or adaptation activities.
• Transition plan and cost disclosure: If a registrant has adopted a transition plan to manage a material transition risk (i.e., a strategy and implementation plan to reduce climate-related risks, such as a plan to reduce emissions), it will be required to describe the transition plan, actions taken during the year under the plan, and how the actions have affected the registrant’s business, results of operations, or financial condition.  If a plan is disclosed, the registrant must also provide quantitative and qualitative disclosure of material expenditures incurred and material impacts on financial estimates and assumptions as a direct result of the disclosed actions.
• Scenario analysis disclosure: If a registrant uses a scenario analysis to assess the impact of climate-related risks on its business, results of operations, or financial condition and, in doing so, determines that a climate-related risk is reasonably likely to have a material impact on its business, results of operations, or financial condition, it will be required to include a brief description of the parameters, assumptions, and analytical choices used, as well as the expected material impacts, including financial impacts, on the registrant under each such scenario.
• Internal carbon price disclosure: If a registrant’s use of an internal carbon price is material to how it evaluates and manages a material climate-related risk, it must disclose in its reporting currency the price per metric ton of CO₂e and total price (including how the total price is estimated to change).

Climate-risk governance

• Board oversight: Companies will be required to disclose any oversight by the board of directors of climate-related risks, including any board committee or subcommittee responsible for the oversight of climate-related risks, and the processes by which the board or such committee or subcommittee is informed about the risks. If there is a climate-related target or goal or transition plan disclosed pursuant to the rules, registrants must also disclose whether and how the board oversees progress against the target or goal or transition plan.
• Management role: Disclosure will be required regarding the role of management in assessing and managing the registrant’s material climate-related risks, including: (i) whether and which management positions or committees are responsible for assessing and managing climate-related risks, and the relevant expertise of those position holders or committee members; (ii) the processes by which those positions or committees assess and manage climate-related risks; and (iii) whether those positions or committees report information about the risks to the board or an applicable board committee.
• Company processes: Disclosure will also be required of any processes the registrant has for identifying, assessing, and managing material climate-related risks, and address, as applicable, how the registrant (i) identifies whether it has incurred or is reasonably likely to incur a material physical or transition risk; (ii) decides whether to mitigate, accept, or adapt to the particular risk; and (iii) prioritizes whether to address the climate-related risk. If the registrant is managing such a material climate-related risk, it must further disclose whether and how any such processes are integrated into the registrant’s overall risk management system or processes.

Phased-in compliance

The rules have phase-in periods for compliance tied to the registrant’s filer status. For domestic registrants with a December 31 fiscal year-end, the key dates are:

Legal challenges

As of the time of publication of this summary, nine legal challenges to the new climate-related disclosure rules have been filed. The parties challenging the rules include 23 states or state entities, energy companies, the U.S. Chamber of Commerce, and other trade associations, as well as the Natural Resources Defense Council and the Sierra Club. Because challenges were filed in six federal judicial circuits, the SEC requested that the Judicial Panel on Multidistrict Litigation select in a lottery one federal circuit court to hear the legal challenges in a consolidated proceeding. That lottery took place on March 21, resulting in the selection of the U.S. Court of Appeals for the Eighth Circuit as the venue for the challenges. A spokesperson for the SEC has stated that the agency will vigorously defend the rules in court. Among other matters, we expect challengers to assert that the rules are an invalid overuse of statutory authority pursuant to the “major questions” doctrine that has recently gained support at the U.S. Supreme Court. It is too soon to predict the outcome or timing of the legal challenges. Whether or not the SEC rules survive judicial scrutiny in the long run, the ongoing global regulatory shift toward requiring more climate-related disclosures by public companies, driven by investor and stakeholder demand, seems likely to continue.

Upcoming commentary

We will provide a more detailed overview of the rules and disclosure implications in a Hogan Lovells SEC Update publication.

Authored by: Michael McTiernan, John Beckman, Rupa Briggs, David Foster, William Intner, Brian O’Fahey, Richard Parrino, Liz Banks, and Leia Scott.