SEC adopts climate-related disclosure rule

The SEC on Wednesday adopted a long-awaited rule for climate-related disclosures.

The 3–2 vote by SEC commissioners to adopt The Enhancement and Standardization of Climate-Related Disclosures for Investors came nearly two years after the rule was proposed and after the commission had received nearly 24,000 comments, SEC Chair Gary Gensler said during Wednesday’s proceedings.

“The SEC’s action today brings much-needed clarity for businesses and investors on climate-related information and the reporting disclosures required of U.S. companies,” Sue Coffey, CPA, CGMA, AICPA & CIMA’s CEO–Public Accounting, said in a statement. “Capital markets are already demanding this information, with many businesses voluntarily setting goals and supplying data. The SEC rule moves us closer to the kind of consistent, comparable, and high-quality reporting that investors, lenders, and other stakeholders require.

“The final SEC rule requires assurance over greenhouse gas (GHG) emissions, with some companies obligated to move from limited to reasonable assurance over time. We believe CPAs are best suited to undertake these engagements, especially when making connections back to a company’s financial statements.

“Our ongoing research with the International Federation of Accountants (IFAC) underscores the detrimental impact of inconsistent, fragmented reporting on climate-related disclosures. We strongly support adoption of a global baseline of sustainability standards issued by the International Sustainability Standards Board (ISSB). As other jurisdictions around the world begin to integrate ISSB standards into their disclosure rules, U.S. companies would benefit from the SEC’s acceptance of their use.”

The 886-page rule doesn’t include any requirements related to Scope 3 GHG emissions, which were included in the proposed rule in March 2022, but other GHG disclosures deemed material will begin to affect public companies registered with the SEC as early as fiscal year (FY) 2026.

Large accelerated filers will have to disclose Scope 1 and Scope 2 GHG emissions beginning in FY 2026 and obtain limited assurance beginning with FY 2029 and reasonable assurance beginning with FY 2033. Most accelerated filers will follow with disclosure of Scope 1 and 2 GHG emissions beginning in FY 2028 and limited assurance beginning in FY 2031 but won’t be required to obtain reasonable assurance.

While GHG disclosures were the most publicly debated aspect of the proposed rule, the final rule requires affected registrants, as early as FY 2025, to disclose:

• Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition;
• The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook;
• 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 of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities;
• Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices;
• Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
• Any processes the registrant has for identifying, assessing, and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes;
• Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition. Disclosures would include material expenditures 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 such target or goal;
• The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds, disclosed in a note to the financial statements;
• The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals, disclosed in a note to the financial statements; and
• If the estimates and assumptions a registrant uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted, disclosed in a note to the financial statements.

— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at Bryan.Strickland@aicpa-cima.com.