SEC Climate Rule Part 2: What We Were Looking For in the Final Rule versus What We Found

In part 1of this blog we explored what we’d be looking for once the SEC released its long-awaited climate rule. With the wait finally over, read on for what we found.

Attestation requirements. Given that assurance over climate-related reporting enhances the reliability of that information and offers increased investor protection, we were pleased to see that the final rule retained the requirement for attestation over greenhouse (GHG) emissions disclosures. In a modification from the proposal, the SEC will require only large accelerated filers (LAFs) to progress from limited assurance to reasonable assurance at a later date. Accelerated filers will only need to obtain limited assurance. Certain investors may be disappointed with this modification, given their calls for companies to replace the use of limited assurance with reasonable assurance.¹ The final rule grants companies more time to obtain assurance than what was initially proposed, with the first assurance report required 3 years after the GHG emissions compliance date and the move to reasonable assurance by LAFs required after 7 years.

Regulation S-X requirements. The SEC had proposed disclosure of financial impact metrics which would have required a registrant to disclose the financial impacts from severe weather events and other natural conditions and transition activities on any relevant line item in the registrant’s consolidated financial statements during the fiscal years presented – applying a 1% disclosure threshold on a line-by-line basis. In response to feedback received (from numerous commentors, including the CAQ), the SEC modified its proposed regulation S-X requirements. The SEC removed the need to consider the impact of transition activities as part of this particular requirement. The final rule requires registrants to disclose the effects of severe weather events and other natural conditions. The SEC removed the requirement to disclose the impact on each line item of a registrant’s consolidated financial statements but retained the 1% disclosure threshold at the overall income statement and balance sheet level and also established de minimis thresholds. The SEC indicated that these revisions would help minimize costs and burdens on registrants while providing investors with decision-useful information.

Effective date. The SEC recognized it will take time for registrants, auditors, and others to prepare for implementing the requirements in the final rule in a way that will support the disclosure of high-quality information that is decision useful. Accordingly, the SEC made various accommodations. The final rules will be phased in for all registrants with the compliance date dependent upon the status of the registrant and the content of the disclosure. The final rules provide additional phase-in periods for disclosures pertaining to material expenditures, GHG emissions, the assurance requirement, and the electronic tagging requirement if the registrant is an LAF. The rule also provides an accommodation that allows Scope 1 and/or Scope 2 emissions disclosure, if required, to be filed on a delayed basis by a domestic registrant, in its Form 10-Q for the second fiscal quarter in the fiscal year immediately following the year to which the GHG emissions disclosure relates.²

Alternative reporting provision. The SEC did not adopt an alternative reporting provision structured to encompass reports made pursuant to the criteria developed by the International Sustainability Standards Board (ISSB). The SEC acknowledged that some commenters (the CAQ being among them) had recommended that the Commission consider allowing the use of the ISSB’s climate-related disclosure standards as an alternative to the Commission’s climate disclosure rules. We were of the view that allowing the use of the ISSB Standards as alternative reporting to satisfy SEC registrant climate reporting obligations could have been a mechanism for enhancing global comparability for investors and reducing the need for registrants to report in accordance with multiple standards or requirements. While the Commission acknowledged that there are similarities between the ISSB’s climate-related disclosure standards and the final rules, and that registrants may operate in jurisdictions that will adopt the ISSB standards, the Commission indicated that those jurisdictions had not yet integrated the ISSB standards into their climate-related disclosure rules and accordingly declined to recognize the use of the ISSB standards as an alternative reporting provision at this time.

GHG emissions boundaries. Ultimately, the SEC allowed for flexibility in determining the organizational boundaries used when calculating GHG emissions. Unlike the rule proposal, which would have required a registrant to use the same scope of entities and other assets included in its consolidated financial statements when determining the organizational boundaries for its GHG emissions calculation, the final rule provides that the registrant must disclose the method used to determine the organizational boundaries, and if the organizational boundaries differ materially from the scope of entities and operations included in the registrant’s consolidated financial statements, the registrant must provide a brief explanation of the difference and describe the method used to determine those boundaries. This is a welcome revision given that many registrants have been voluntarily reporting under different organizational boundaries than what had been proposed. We expect this change to help address concerns about reporting challenges and compliance burden associated with the proposed requirement.

Framework to be used to support GHG emissions disclosures. The proposed rule concerning the presentation, methodology, including underlying assumptions, and organizational and operational boundaries applicable to the determination of Scopes 1 and 2 emissions did not specify a framework such as the GHG Protocol. We recommended the SEC specify in the final rule that a widely used framework, such as the GHG Protocol, should be used to help support GHG emissions disclosures being more comparable from company to company and limit companies from opting to use bespoke methods. While the final rule does not specify use of the GHG Protocol, it requires a brief description of the protocol or standard used to report the GHG emissions, including the calculation approach, the type and source of any emission factors used, and any calculation tools used to calculate the GHG emissions. The SEC indicated that such disclosure should assist investors in understanding the emission disclosures and promote consistency and comparability over time.

If you have questions about the final rule, please send them our way to consider covering in future blogs. Also, be sure to sign up for our CAQ newsletters to stay up to date on the resources we are developing to support stakeholders in understanding the new requirements. Download a high-level summary of the SEC climate rule here.

Endnotes

1. Closing the Gap: Investor Insights into Decision-Useful Climate Data Assurance | Ceres

2. The rule also provides an accommodation that allows Scope 1 and/or Scope 2 emissions disclosure, if required, to be filed on a delayed basis as follows: ‘If a foreign private issuer, in an amendment to its annual report on Form 20 F, which shall be due no later than when such disclosure would be due for a domestic registrant;’ and ‘if filing a Securities Act or Exchange Act registration statement, as of the most recently completed fiscal year that is at least 225 days prior to the date of effectiveness of the registration statement.’