Last week, by a vote of three to two, the SEC adopted final rules “to enhance and standardize climate-related disclosures by public companies and in public offerings.” The disclosure, which will be included in registration statements and annual reports, will draw, in part, on disclosures provided for under the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. The new rules will require public companies to disclose information about the material climate-related risks, companies’ governance, risk management and any material climate-related targets or goals, as well as disclosure of the financial statement effects, such as costs and losses, of severe weather events and other natural conditions. Importantly, as widely rumored, in response to public feedback, the SEC has jettisoned the mandate for Scope 3 GHG emissions reporting; the final rules require disclosure of Scope 1 and/or Scope 2 GHG emissions on a phased-in basis only by accelerated and large accelerated filers when those emissions are material. Companies will also be allowed more time to file their emissions disclosures. The final rules provide for several phase-ins, as well as for some safe harbors. Although, in response to comments, the SEC made a serious effort to add materiality qualifiers—there are at least 1,003 references to “material” or “materiality,” but then, the release is 886 pages—and to eliminate many of the prescriptive granular requirements, don’t fear or celebrate (depending on your point of view) yet: there are still plenty of prescriptive granular requirements. The SEC insists that, in adopting the rules, its intent was not to effect a specific climate result or to shift governance behaviors—the word “agnostic” appears at least five times in the adopting release. Law 360 reports that three lawsuits have been filed against the rulemaking and at least two have been threatened—by the Chamber of Commerce and the Sierra Club.
This post is Part I of a revision and update of my earlier post on this topic, which described the background of these rules, various changes from the proposal in the final rules that were identified in the adopting release, and the statements at the open meeting at which the rules were adopted. This post covers various aspects of the proposal other than the sections on GHG emissions disclosure and attestation and financial statement information, which will hopefully be covered in separate subsequent posts or possibly in separate Cooley Alerts. Here are the final rules—an intimidating 886 pages!—the fact sheet and the press release.
Purpose
As the release indicates—and as SEC representatives have asserted many times in the past—many companies, especially larger companies, provide climate-related information, but often, it is fragmented, selective, contained in separate sustainability reports and “is inconsistent and often difficult for investors to find and/or compare across companies. As a result, investors have expressed the need for more detailed, reliable, and comparable disclosure of information regarding climate-related risks.” The rule attempts to address that issue “by providing more complete and decision-useful information about the impacts of climate-related risks on registrants, improving the consistency, comparability, and reliability of climate-related information for investors.”
In crafting the final rules, the SEC took into account public comments “that were supportive as well as those that were critical of aspects of the proposed rules.” In the release, the SEC insists—contrary to accusations in remarks by some of the Commissioners at the meeting—that it is agnostic about how companies actually consider or manage climate; the rules are intended to advance investor protection, consistent with the SEC’s statutory authority, but not to address climate-related issues more generally. In that vein, the numerous references in the rules to “material” and “materiality” refer “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.” (I.e., no “double materiality” here—see this PubCo post.)
Statutory authority
The SEC asserts, contrary to the contentions of the rule’s opponents, that the rules are “within the statutory authority conferred by Congress through the Securities Act and the Exchange Act.” In a lengthy discussion of its authority, the SEC argues that Congress authorized the SEC to require not only enumerated disclosures but also “to update and build on that framework by requiring additional disclosures of information that the Commission finds ‘necessary or appropriate in the public interest or for the protection of investors.’… Such disclosure facilitates the securities laws’ core objectives of protecting investors, facilitating capital formation, and promoting market efficiency. Both courts and the Commission have long recognized as much.” In addition, to determine what information is “necessary or appropriate,” the SEC has historically “responded to marketplace developments, investors’ need for information important to their decision-making, and advances in economic, financial, and investment analysis and analytical frameworks, as well of the costs of such disclosures.”
In particular, the SEC took issue with “objections by commenters based on the nondelegation and major-questions doctrines. The non-delegation objection was considered “misplaced because the long-standing statutory authority that we rely on provides intelligible principles to which the Commission must conform in its rulemaking.” (See this PubCo post.) The SEC considered the major-questions objection to be misplaced because it is not claiming to “‘discover in a long-extant statute an unheralded power representing a transformative expansion in [its] regulatory authority.’… Rather, it is adopting the final rules based on its long standing authority to require disclosures that provide investors with information that is important to their investment and voting decisions.” (See this PubCo post.) As discussed above, the SEC considers itself agnostic as to whether and how companies manage climate risks. Nor does the SEC believe that the rules violate the First Amendment: the required disclosures are “factual information about certain risks companies face to their businesses, finances, and operations–the type of information that companies routinely disclose when seeking investments from the public,” they advance crucial investor interests and the rules have been “appropriately tailored to serve those interests.”
Overview
The final rules create a new subpart 1500 of Reg S-K and Article 14 of Reg S-X, and draw, in part, on disclosures provided for under the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. Under the final rules, companies will have flexibility in determining the placement of the climate-related disclosures, other than the financial statement disclosures, either in a separately captioned “Climate-Related Disclosure” section or in existing sections of the registration statement or 10-K, such as Risk Factors, Business or MD&A. Companies can also incorporate by reference; however, the SEC declined to expressly permit the climate-related governance disclosure to be incorporated by reference from a proxy statement into a Form 10-K under General Instruction G.3 of Form 10-K. If the company includes responsive disclosure in other parts of the filing as permitted, the SEC advises that it should “consider whether cross-referencing the other disclosures in the separately captioned section would enhance the presentation of the climate-related disclosures for investors.” In addition, the SEC noted that, as components of 10-Ks and registration statements, these disclosures will be subject to disclosure controls and procedures.
Disclosure of climate-related risks
Definitions of climate-related risks and opportunities (Items 1500 and 1502(a)). Under the final rules, companies will be required to disclose “any climate-related risks that have materially impacted or are reasonably likely to have a material impact on the registrant, including on its business strategy, results of operations, or financial condition.” The current general risk factors requirement does not, in the SEC’s view, elicit adequate decision-useful information. The rule’s definitions are still generally consistent with the TCFD, but, in response to comments about excessive granularity, the SEC has made some tweaks, including modifying the definition of climate-related risks, making the climate-related risk disclosure requirements less prescriptive, and specifying the time frames for assessing and describing whether any material risks are reasonably likely to manifest.
Climate-related risks. Under the final rules, “climate-related risks” mean the “actual or potential negative impacts of climate-related conditions and events on a registrant’s business, results of operations, or financial condition.” Notably, the definition has been modified to exclude the proposed reference to the impact on the company’s value chain. As a result, climate-related risk involving the value chain “would generally not need to be disclosed except where such risk has materially impacted or is reasonably likely to materially impact the registrant’s business, results of operations, or financial condition,” thus limiting the burden on third parties in the value chain. The SEC was not persuaded to exclude this item entirely by arguments that it would be difficult to distinguish “between a climate-related physical risk and an ordinary weather risk or between a business activity in response to a transition risk and one that is part of a routine business strategy,” suggesting instead that compliance will become easier over time.
Climate-related risks include both physical risks (such as fires and hurricanes, including both acute and chronic risks to a the company’s business operations) and transition risks. Transition risks refer to the “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,” such as “increased costs attributable to climate-related changes in law or policy, reduced market demand for carbon-intensive products leading to decreased sales, 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, reputational impacts (including those stemming from a registrant’s customers or business counterparties) that might trigger changes to market behavior, changes in consumer preferences or behavior, or changes in a registrant’s behavior).”
If a risk is identified, the company must disclose “whether the risk is a physical or transition risk, providing information necessary to an understanding of the nature of the risk presented and the extent of the registrant’s exposure to the risk,” including several specific disclosures related to each type of risk. The SEC notes that a company may need to modify its risk descriptions as conditions change. The SEC has scaled back the specificity of several of the physical risk disclosure items in response to criticisms that the rule was too prescriptive, burdensome, overly granular and potentially elicited immaterial disclosure. For example, the final rules eliminate the requirement for information about the interaction of two related physical risks and disclosures relating to the location of assets in regions of high or extremely high water stress. I didn’t see a single reference to zip codes as proposed—other than to their elimination. With regard to transition risks, the company must disclose “whether the transition risk relates to regulatory, technological, market, or other transition-related factors, and how those factors impact the registrant.” In addition, if a company has “significant operations in a jurisdiction that has made a GHG emissions reduction commitment[, it] should consider whether it may be exposed to a material transition risk related to the implementation of the commitment.”
Time horizons and the materiality determination (Item 1502(a)). As proposed, the rules would have required companies to describe any climate-related risks reasonably likely to have a material impact, which may manifest over the short, medium and long term. While some commenters favored the proposal, other commenters contended that it ran “counter to the traditional materiality standard” and would elicit speculative disclosure. In a change from the rule proposal, the final rule requires companies disclosing climate-related risks to describe “whether they 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). This standard was recommended by some commenters as more consistent with MD&A.
In evaluating the materiality of the impact of climate-related risks, the SEC advises that companies “should rely on traditional notions of materiality. As defined by the Commission and consistent with 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 if a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available. The materiality determination is fact specific and one that requires both quantitative and qualitative considerations. The “reasonably likely” aspect of the rule is also grounded in materiality, and “requires that management evaluate the consequences of the risk as it would any known trend, demand, commitment, event, or uncertainty” in MD&A. The SEC advises that management “make an objective evaluation, based on materiality, including where the fruition of future events is unknown.”
Disclosure regarding impacts of climate-related risks on strategy, business model and outlook
Material impacts (Item 1502(b), (c), and (d)). The final rules eliminate some of the more prescriptive requirements in the proposed rules, streamline the final rules and incorporate several materiality qualifiers. Under the final rules, a company will need to describe the “actual and potential material impacts of any climate-related risk” identified in response to Item 1502(a)(above) on the company’s “strategy, business model, and outlook.” The SEC views this information as “central to understanding the extent to which a registrant’s business strategy or business model has changed, is changing, or is expected to change to address those impacts,” as well as to “evaluating management’s response to the impacts and the resiliency of the registrant’s strategy to climate-related factors as it pertains to the registrant’s results of operations and financial condition.” The final rules include a non-exclusive list of the types of potential impact that may be applicable; if not material, they need not be disclosed. Once again, to reduce the compliance burden, the reference in the list of potential impacts to the impact on a company’s value chain has been eliminated and replaced with “[s]uppliers, purchasers, or counterparties to material contracts, to the extent known or reasonably available.”
Companies will also need to describe how they consider any identified material impacts as part of their strategy, financial planning and capital allocation. In addition, the final rules have been streamlined to eliminate proposed prescriptive elements such as the proposed disclosure requirement about the role of carbon offsets in the company’s climate-related strategy.
The final rules will also require a discussion of how material climate-related risks have affected or are reasonably likely to affect the company’s business, results of operations and financial condition, as well as, in Item 1502(d)(2), a qualitative and quantitative 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.” The SEC believes that this disclosure will “provide investors with important information about a registrant’s strategic decision-making concerning a material climate-related risk,” and help investors “understand a registrant’s climate risk management and assess any effects on its asset valuation and securities pricing.”
To accommodate the companies’ need to develop new systems and adjust their disclosure controls, the new rules offer an additional phase in; a company will not be required to comply with the Item 1502(d)(2) requirement until the fiscal year immediately following the fiscal year of its initial date of compliance with the disclosure under Subpart 1500 based on its filer status.
Transition plan disclosure (Items 1500 and 1502(e)). The proposal would have required a company that has “adopted a transition plan as part of its climate-related risk management strategy to describe the plan, including the relevant metrics and targets used to identify and manage any physical and transition risks.” The public submitted comments in favor and opposed to the proposed rules.
The SEC continues to believe that information about the plan is important “to help investors evaluate a registrant’s management of its identified climate-related risks and assess the potential impacts of a registrant’s strategy to achieve its short- or long-term climate-related targets or goals on its business, results of operations, and/or its financial condition.” It did, however, make modifications in response to comments, such as adding a materiality qualifier. As a result, the final rules provide that, if a company has adopted a transition plan to manage a material transition risk, it must describe the plan. The SEC also recognized that the proposal was overly prescriptive and, in the final rules, sought to streamline the requirements, providing flexibility to allow disclosure that “addresses the particular facts and circumstances of its material transition risk” and removing the reference to “physical risks.” Disclosure regarding climate-related opportunities continues to be optional.
A “transition plan” is defined as a company’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.” The SEC declined to qualify the definition with a requirement for board approval. The transition plan disclosure will be subject to a safe harbor.
The SEC retained the requirement for companies to update their annual report disclosure about the transition plan each fiscal year by describing any actions taken during the year under the plan, including how those actions have affected the company’s business, results of operations or financial condition. The updates should allow investors to assess the company’s progress and the plan’s impact on its business.
Item 1502(e)(2) will require a company to include, as part of its updating disclosure, “quantitative and qualitative disclosure of material expenditures incurred and material impacts on financial estimates and assumptions as a direct result of the disclosed actions taken under the plan.” The SEC expects this information to “provide an important metric to help investors assess a registrant’s climate risk management and the financial impact of a transition plan.” The SEC advises that, “if individual expenditures do not appear to be material, registrants should consider whether overall expenditures related to actions taken under the plan are material in the aggregate and, if so, provide appropriate disclosure.” A phase-in will be permitted here: a company will not be required to comply with Item 1502(e)(2) until the fiscal year immediately following the fiscal year of its initial compliance with disclosure under Subpart 1500 based on its filer status.
Disclosure of scenario analysis if used (Items 1500 and 1502(f)). The SEC proposed to require companies to describe any analytical tools, such as scenario analysis, that they use to assess the impact of climate-related risk and to support the resilience of their strategies and business models in light of foreseeable climate-related risks, including scenarios considered and impacts. Commenters supported and opposed the rule, with some criticizing the absence of a materiality qualifier and some arguing that the disclosure would reveal confidential information.
The SEC believes, however, that this disclosure “can provide important forward-looking information to help investors evaluate the resilience of the registrant’s strategy under various climate-related circumstances.” The final rule requires disclosure about scenario analyses under certain circumstances. Under the final rule, if the company “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 scenario analysis, the registrant determines that a climate-related risk is reasonably likely to have a material impact,” then the company must disclose each scenario, “including 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.” Notably, the final rule adds a materiality qualifier and streamlines the requirements. For example, the final rule eliminates the proposed reference to “any analytical tools” and the proposed requirement to “describe the resilience of its business strategy in light of potential future changes in climate-related risks.” The scenario analysis disclosure will also be subject to a safe harbor.
Disclosure of a maintained internal carbon price (Item 1502(g)). The SEC proposed that, if a company used an internal carbon price—defined as an estimated cost of carbon emissions used internally—the company would need to disclose specified information, such as the price per metric ton of carbon dioxide equivalent (“CO2e”), the measurement boundaries, the total price and the rationale. Comments again were mixed.
The SEC believes that information about internal carbon pricing “will help investors evaluate how a registrant is managing climate-related risks, particularly transition risks, and the effectiveness of its business strategy to mitigate or adapt to such risks.” As a result, the final rules will require a company that uses internal carbon pricing to disclose certain information about the internal carbon price if its use is material to how the company evaluates and manages a climate-related risk identified under Item 1502(a). The company must disclose the price per metric ton of CO2e and the total price, including how the total price is estimated to change over time. In response to comments, a materiality qualifier has been added and the proposed requirement to describe the rationale and how a company uses an internal carbon price to evaluate and manage climate-related risks has been eliminated. The internal carbon price disclosure will be subject to a safe harbor.
Governance disclosure
Board oversight disclosure (Item 1501(a)). The proposed rules would have required disclosure of a long list of specified information about board oversight of climate-related risks, largely based on the TCFD framework, including whether any board members had climate-related expertise. The SEC made some modifications in response to commenters, eliminating some of the proposed disclosures, such as board climate-related expertise. While some of the prescriptive aspects of the proposed rule have been removed, the SEC did not add any materiality qualifiers in this context; the SEC “expect[s] that any risks elevated to the board level will be material to the company and limited in number.” The final rules require companies to describe board oversight of climate-related risks, including identifying any board committee or subcommittee responsible for the oversight of climate-related risks, and describing the processes used to inform the board or committee about these risks. If there is a climate-related target or goal or transition plan disclosed, the company is to describe whether and how the board oversees progress against the target or goal or transition plan. No disclosure is required if there is no responsive information, such as no board oversight of climate-related risks.
Management oversight disclosure (Item 1501(b)). The proposed disclosure regarding management oversight also included a long list of items, and again, in response to comments, the SEC made some modifications. Under the final rules, a company will need to describe management’s role in assessing and managing its material climate-related risks, including, as applicable, a non-exclusive list of disclosure items, such as “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 as necessary to fully describe the nature of the expertise.” Relevant expertise may include experience such as “[p]rior work experience in climate-related matters; any relevant degrees or certifications; any knowledge, skills, or other background in climate-related matters.” The SEC agreed with commenters who argued that the information would be useful “given the direct role that management will play in overseeing any such risk,” but emphasized that this disclosure is required only when companies have identified a material climate risk.
Other disclosure items are the “processes by which such positions or committees assess and manage climate-related risks,” and “[w]hether such positions or committees report information about such risks to the board of directors or a [board] committee.” The SEC believes that this list of disclosures “should help elicit specific information about management’s oversight of climate-related risks and thereby mitigate any tendency towards boilerplate disclosures.” The proposal to describe management’s role in assessing climate-related opportunities has been eliminated.
Risk management disclosure (Item 1503)
The proposal would have required detailed disclosure about a company’s processes for identifying, assessing and managing climate-related risks. Commenters both supported and opposed this proposed rule, but, here again, the words “granular” and “prescriptive” rear their heads in comments. The SEC believes that, because climate-related risks can have material effects on a company’s business, investors should have information enabling them to understand the company’s risk management practices. Nevertheless, few companies include this information in their periodic or voluntary sustainability reports.
The final rules require a company to describe any processes for identifying, assessing and managing material climate-related risks. The addition to the final rules of a materiality qualifier means that if no material climate-related risk has been identified, no disclosure is required. The final rules “do not require registrants to speculate in their disclosures about future restructurings, write-downs, or impairments related to climate risk management.” As part of their disclosure, companies are to address the applicable disclosure items on a non-exclusive list, including how the company “(1) Identifies whether it has incurred or is reasonably likely to incur a material physical or transition risk; (2) Decides whether to mitigate, accept, or adapt to the particular risk; and (3) Prioritizes whether to address the climate-related risk.”
In addition, if a company is managing a material climate-related risk, it must disclose whether and how any of the management processes it has described for identifying, assessing and managing material climate-related risks have been integrated into its overall risk management system or processes. This information, the SEC believes, can “help investors understand and assess the effectiveness of those climate risk management processes” and “make better informed decisions about the overall risk profile of their investment.” Once again, describing opportunities will be entirely voluntary.
Targets and Goals Disclosure (Item 1504)
Overall disclosure. The proposed rules would have required that, if a company has set any climate-related targets or goals, it must disclose information about those targets or goals, based on a long list of specific items, as well as its progress toward these goals. Comments again were mixed, with some commenters advocating even more disclosure and others arguing that the rules were again overly prescriptive, costly and burdensome and likely to elicit immaterial information in many cases.
The final rules require a company to “disclose 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.” The SEC believes that if an internal target or goal has or is reasonably likely to have that effect, due, for example to material expenditures or operational changes that are required to achieve the target or goal, then investors need information to help them understand the financial impact and assess transition risk management. Notably, the SEC declined to follow commenters’ recommendations to require disclosure only of those targets or goals that are both material and publicly announced, or only if formally adopted by the board or CEO, although disclosure is not required unless the target or goal is material. The SEC also declined to follow commenters’ recommendations to require the disclosure of targets or goals “related to mitigation of impacts on local communities or that concern human capital management goals.” Rather, the SEC limited its rule to require disclosure where achievement of the target or goal “would materially impact its business, results of operations, or financial condition.”
In their description of the target or goal, companies are required to “provide any additional information or explanation necessary to an understanding of the material impact or reasonably likely material impact of the target or goal,” including, as applicable (i.e., if necessary to an understanding), the scope of activities, unit of measurement, time horizon (and whether it is based on a treaty or rule), any baseline that has been established and how progress will be tracked, and a qualitative description of how the company intends to meet the goal. The final rule will also require companies to update that disclosure “each fiscal year by describing the actions taken during the year to achieve its targets or goals.” Notably, “the final rules do not include emissions’ in the list of information that must be disclosed if necessary to an understanding of the material impact or reasonably likely material impact of a target or goal. If a registrant has set a material target or goal to reduce emissions, it will be required to disclose this when explaining the scope of activities included in the target.” Under the final rules, the company will have the flexibility to determine which factors to highlight in its qualitative description of how it plans to meet its targets or goals. Companies can alternatively include this disclosure in connection with their discussions of transitions, strategy or risk management.
As a new element in the final rule, the discussion must include any material impact on 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,” including “quantitative and qualitative disclosure of 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.” The SEC suggests that providing for this disclosure in the context of Reg S-K, Item 1504, with a materiality qualifier instead of the proposed bright-line threshold, “appropriately balances investors’ need for this information with commenters’ concerns about implementation challenges” of the proposal, specifically “concerns about registrants’ abilities to identify, attribute, and quantify the impact of transition activities in the financial statements.” The SEC advises that, “when considering which expenditures related to progress under a disclosed target or goal are material over the relevant period and therefore require disclosure, registrants should consider whether overall expenditures related to progress under a disclosed target or goal are material in the aggregate and, if so, provide appropriate disclosure.” The requirement for quantitative and qualitative disclosure of any material expenditures and material impacts (Item 1504(c)(2)) will be subject to a compliance phase in until the fiscal year immediately following the fiscal year of its initial disclosure compliance date based on its filer status.
The carbon offsets and RECs disclosure requirement (Item 1504(d)). The SEC also proposed to require a company that uses carbon offsets or renewable energy credits or certificates as part of its net emissions reduction strategy to disclose their role in the company’s climate-related business strategy, along with, among other things, the amount of carbon reduction represented by the offsets or the amount of generated renewable energy represented by the RECs. A carbon offset, which is typically purchased by companies to “offset” their own emissions, is defined as “an emissions reduction or removal of greenhouse gases in a manner calculated and traced for the purpose of offsetting an entity’s GHG emissions.” An REC means “a credit or certificate representing each purchased megawatt-hour (1 MWh or 1000 kilowatt-hours) of renewable electricity generated and delivered to a registrant’s power grid.”
The SEC has added a materiality to the final rule. Under the final rule, a company will be required to disclose specified information about the carbon offsets or RECs only if they are “a material component of a registrant’s plan to achieve climate-related targets or goals.” In that event, companies will required to disclose “the amount of carbon avoidance, reduction or removal represented by the offsets or the amount of generated renewable energy represented by the RECs [added in the final rules]; the nature and source of the offsets or RECs [added in the final rules]; 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.” The final rules add provisions to disclose the “nature” to “help investors understand whether a purchased offset represents carbon avoidance, reduction, or removal, and whether an REC is bundled or unbundled.” With regard to offsets, some commenters had indicated that some detail was necessary because “carbon offset purchases vary considerably in terms of quality and effectiveness.” Disclosing the source of the offset or REC “will help investors determine whether the offset has met certain criteria of an established standard-setting body, and whether the REC originated from and met the standards of a compliance market or is instead derived from a more loosely regulated voluntary market.”
Safe Harbor for Certain Climate-Related Disclosures (Item 1507)
The safe harbor was originally proposed for Scope 3 GHG emissions disclosure, but since that requirement has been eliminated, some commenters recommended broadening the scope to apply to other types of climate-related disclosures. The final rules provide that disclosures (other than historic facts) disclosed under four Reg S-K Items constitute “forward-looking statements” for purposes of the PSLRA safe harbors: Item 1502(e) (transition plans); Item 1502(f) (scenario analysis); Item 1502(g) (internal carbon pricing); and Item 1504 (targets and goals). Scopes 1 and 2 emissions disclosures are not within the scope of the safe harbor. The SEC states that “[t]o the extent that disclosures made in response to these Items or to any other subpart 1500 provision contain one or more of the following statements, they will fall within the PSLRA statutory definition of ‘forward-looking statement’”:
- “A statement containing a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, capital structure, or other financial items;
- A statement of the plans and objectives of management for future operations, including plans or objectives relating to the products or services of the issuer;
- A statement of future economic performance, including any such statement contained in a discussion and analysis of financial condition by the management, made pursuant to Commission rules;
- Any statement of the assumptions underlying or relating to the above statements; and
- A statement containing a projection or estimate of items specified by Commission rule or regulation.”
To address concerns that the safe harbors may not be applicable to disclosures that mix factual and forward-looking statements, the SEC is expressly extending the PSLRA safe harbors to include disclosures (other than historical facts) that provide a complex mixture of both forward-looking and factual information related to climate-related risks and assumptions concerning those risks. However, the safe harbor “will not be available for statements consisting solely of historical fact because such information does not involve the assumptions, judgments, and predictions about future events that necessitates additional protections.” Thus, the rules provide that all information required by the four specified Items “is considered a forward-looking statement for purposes of the statutory safe harbors, except for historical facts, including, as nonexclusive examples, terms related to carbon offsets or RECs described pursuant to [Item 1504] and statements in response to [Items 1502(e) or 1504] about material expenditures actually incurred.” That is, the safe harbor identifies as examples of historical facts not covered by the safe harbor “information related to carbon offsets or RECs described pursuant to a target or goal and a registrant’s statements in response to Item 1502(e) (transition plan disclosure) or Item 1504 (targets and goals disclosure) about material expenditures actually incurred.” Likewise, the safe harbor does not apply to forward-looking statements included in financial statements prepared in accordance with GAAP or to forward-looking statements that are incorporated by reference from the financial statements. Other aspects of the PSLRA continue to apply, such as the requirement for meaningful cautionary statements.
The safe harbors will apply to these forward-looking statements in connection with some transactions and issuers that may otherwise be excluded from the PSLRA safe harbors, including statements made in connection with blank check offerings, rollups or IPOs; concerning penny stock issuers; or related to a partnership, LLC or a direct participation investment program. The safe harbor will also apply to issuers that are not public reporting companies at the time that the statement is made.
Structured Data Requirement (Item 1508)
Companies will be required to tag the climate-related disclosures in Inline XBRL. For large accelerated filers, Inline XBRL will be required for disclosures beginning one year after initial compliance with the disclosure requirements of subpart 1500. Other categories of filers will be required to comply with the tagging requirements upon their initial compliance with subpart 1500 disclosure requirements.
Treatment for Purposes of the Securities Act and the Exchange Act
Under the final rules, the climate-related disclosures will be treated as filed and, therefore, subject to potential liability Section 18 and Section 11.
Registrants Subject to the Climate-Related Disclosure Rules and Affected Forms
The final rules will apply to periodic reports under the Exchange Act and registration statements under the Securities Act and Exchange Act. The SEC believes that “disclosures about climate-related risks and their financial impacts should be treated like other business and financial information because they are necessary to understand a company’s operating results and prospects and financial condition.” The disclosure will be required in Forms 10-K, registration statements on Form 10 and Form S-1, S-4 (with an exception), or S-11, and, for foreign private issuers, on Form 20F and registration statements on Form F-1 or Form F-4 (with an exception). The SEC is not adopting “substituted compliance” for FPIs at this time, while it observes how international reporting develops. The final rules will not apply to Forms S-8 and 11-K.
The final rules will apply to both SRCs and EGCs, except for the disclosures requiring Scopes 1 and 2 emissions, from which SRCs and EGCs will be exempted. The final rules will also apply to companies engaged in an IPO; there is no exemption or transitional relief provided. The SEC notes, however, that historically, EGCs have accounted for almost 90% of IPO companies. In addition, initial filings by companies that are not SRCs and EGCs that report material Scope 1 and/or Scope 2 emissions “will only be required to provide emissions data for one year because they will not have previously provided such disclosure in a Commission filing.”
The final rules will not apply to private companies that are parties to business combinations (Rule 165(f)), involving a registration statement on Forms S-4 and F-4. In addition, in a change from the proposal, the final rules will not require companies to disclose material changes to their climate-related disclosures in their Forms 10-Q or, in certain circumstances, Form 6-K for FPIs. Canadian registrants that use the MJDS and file their Exchange Act registration statements and annual reports on Form 40-F will not be subject to the requirements. The rules are also not applicable to asset-backed issuers.
Compliance Dates
The compliance dates for the final rules are delayed and staggered according to filer status, with large accelerated filers first, and smaller reporting companies, emerging growth companies and non-accelerated filers receiving the longest phase-in period. There are also extended phase-ins for certain types of disclosures, such as Scope 1 and 2 emissions. The requirements to provide quantitative and qualitative disclosures about material expenditures and material impacts to financial estimates and assumptions required by Item 1502(d)(2), Item 1502(e)(2), and Item 1504(c)(2) are delayed until the fiscal year immediately following the fiscal year of the company’s initial compliance date for subpart 1500 disclosures based on its filer status. Inline XBRL data also has a one-year delay.
The release provides an illustration of compliance dates for a large accelerated filer:
“For example, an LAF with a January 1 fiscal-year start and a December 31 fiscal yearend date will not be required to comply with the climate disclosure rules (other than those pertaining to GHG emissions and those related to Item 1502(d)(2), Item 1502(e)(2), and Item 1504(c)(2), if applicable) until its Form 10-K for fiscal year ended December 31, 2025, due in March 2026. If required to disclose its Scopes 1 and/or 2 emissions, such a filer will not be required to disclose those emissions until its Form 10-K for fiscal year ended December 31, 2026, due in March 2027, or in a registration statement that is required to include financial information for fiscal year 2026. Such emissions disclosures would not be subject to the requirement to obtain limited assurance until its Form 10-K for fiscal year ended December 31, 2029, due in March 2030, or in a registration statement that is required to include financial information for fiscal year 2029. The registrant would be required to obtain reasonable assurance over such emissions disclosure beginning with its Form 10-K for fiscal year ended December 31, 2033, due in March 2034, or in a registration statement that is required to include financial information for fiscal year 2033. If required to make disclosures pursuant to Item 1502(d)(2), Item 1502(e)(2), or Item 1504(c)(2), such a filer will not be required to make such disclosures until its Form 10-K for fiscal year ended December 31, 2026, due in March 2027, or in a registration statement that is required to include financial information for fiscal year 2026.”
The release contains a similar illustration for an accelerated filer.
The SEC’s table below show the compliance dates of the final rules, applicable to both annual reports and registration statements. For registration statements, “compliance would be required beginning in any registration statement that is required to include financial information for the full fiscal year indicated in the table.”
| Compliance Dates under the Final Rules1 | ||||||
| Registrant Type | Disclosure and Financial Statement Effects Audit | GHG Emissions/Assurance | Electronic Tagging | |||
| All Reg. S-K and S-X disclosures, other than as noted in this table | Item 1502(d)(2), Item 1502(e)(2), and Item 1504(c)(2) | Item 1505 (Scopes 1 and 2 GHG emissions) | Item 1506 – Limited Assurance | Item 1506 – Reasonable Assurance | Item 1508 – Inline XBRL tagging for subpart 15002 | |
| LAFs | FYB 2025 | FYB 2026 | FYB 2026 | FYB 2029 | FYB 2033 | FYB 2026 |
| AFs (other than SRCs and EGCs) | FYB 2026 | FYB 2027 | FYB 2028 | FYB 2031 | N/A | FYB 2026 |
| SRCs, EGCs, and NAFs | FYB 2027 | FYB 2028 | N/A | N/A | N/A | FYB 2027 |
| (1) As used in this chart, “FYB” refers to any fiscal year beginning in the calendar year listed. (2) Financial statement disclosures under Article 14 will be required to be tagged in accordance with existing rules pertaining to the tagging of financial statements. See Rule 405(b)(1)(i) of Regulation S-T. | ||||||
