The Securities and Exchange Commission (SEC) has officially mandated climate-related disclosures for public companies listed on US stock exchanges. The decision, coming after a comprehensive review process involving over 24,000 comment letters and a detailed meeting, saw the Commissioners vote 3-2 in favor of the rule. Here’s what you need to know about the final rule distilled from the extensive 886-page document:
Key Highlights from the SEC’s Final Rule
Implementation Timeline
The SEC has introduced a phased-in approach, offering exemptions for smaller companies. The largest corporations will begin compliance with the new rule starting FY2025, with disclosures due in annual filings from FY2026.
Focus on Material Impact
The SEC requires disclosures only on climate-related issues that have a significant financial impact, adhering to the Supreme Court’s definition of financial materiality. This move ensures that only the most consequential climate-related information will need to be reported.
Exception for Physical Climate Risks
Companies are now obliged to disclose any financial impacts from physical climate risks that exceed 1% of pre-tax profits.
Demographic Insights
Companies should also share how diverse their workforce is, helping us see if they’re bringing in different kinds of talent.
Scope 3 Emissions Disclosure Not Mandatory
The final rule has drawn attention for exempting companies from reporting “Scope 3” emissions, which pertain to indirect emissions in the value chain. However, firms are still required to disclose material climate risks, including those associated with value chain activities.
Adoption of TCFD Framework
The disclosures will follow the framework set by the Task Force on Climate-related Financial Disclosures (TCFD), aligning with global standards and aiding companies in managing the new requirements. All of the disclosures must be made in the annual 10K filing with a notable exception: material scope 1 and 2 climate emissions can be disclosed in the company’s second-quarter 10Q filing.
Anticipated Costs and Litigation Hurdles
The SEC estimates that the average annual compliance cost for companies could range from less than $197,000 to over $739,000 over the first decade. Also, and despite the clear path set by the SEC, the rule faces immediate legal challenges, with several states already moving to contest the mandate. These legal battles are expected to delay implementation, even as companies navigate a complex landscape of global and local climate reporting requirements.
The Path Forward
As regulations evolve, capital owners, asset managers, and companies must stay informed and adapt their strategies accordingly. Our platform equips businesses with the insights needed to navigate the regulatory landscape effectively.
For detailed support on how to navigate these changes and take advantage of their analysis capabilities, please contact our team.
