Summary: The Securities and Exchange Commission today adopted a slimmed-down final version of its rule to enhance and standardize climate-related disclosures by public companies and in public offerings. The vote to adopt the rule, which dropped Scope 3 and scaled back Scope 1 and 2 requirements, was 3-2 along party lines, and it drew criticism from both conservatives and progressives. You can read the fact sheet here and press release here.

  • Scope 1 (greenhouse gasses directly emitted by a company) and scope 2 (emissions from fuel/energy a company buys) requirements have been scaled back and will now also be phased in. Companies can use the materiality standard in deciding whether to report direct emissions. The final rules would require disclosure of Scope 1 and/or Scope 2 greenhouse gas (GHG) emissions on a phased-in basis by certain larger registrants when those emissions are material.
  • Scope 3 requirements have been dropped. Scope 3 emissions are a consequence of a firm's activities but derive from its upstream and downstream activities, which may be neither owned nor controlled by it.
  • The filing of an attestation report covering the required disclosure of such registrants' Scope 1 and/or Scope 2 emissions is also on a phased-in basis.
  • Requirements from the proposal for companies to describe board members' climate expertise and delineate the impact of severe weather or other natural conditions and transition activity on each line of the company's consolidated financial statements have been dropped.

Opposition: People and groups from both sides of the aisle have voiced opposition to the final rule. In fact, a group of 10 states led by West Virginia already filed a petition in the U.S. Court of Appeals for the 11th Circuit alleging that the rule "exceeds the agency's statutory authority."

From the right, Commissioner Hester Pierce led the opposition at the SEC, stating that she believed that the SEC lacked the authority to enact such a rule without congressional approval. Furthermore, Pierce estimates that the rule will increase the SEC disclosure cost to a company by 21%. Pierce also questioned whether the new rule preempted California and other states' authority to regulate. Commissioner Mark Uyeda echoed Commissioner Pierce's comments.

House Financial Services Chairman McHenry also put out a statement in strong opposition to the adoption of the rule. You can read that statement here.

On the left, Senator Elizabeth Warren had put pressure on SEC Chairman Gensler to put forth a "strong rule." Warren opposes the move to drop Scope 3 emissions from the final rule; among other things, the SEC did to pare back the rule. Senator Warren and others sent a letter to the SEC last year, urging Gensler to keep certain portions of the proposed rule. You can find her letter here.

While liberal groups applauded the SEC for adopting the rule, many groups, like the Sierra Club, voiced concern that the rule was rolled back. "Despite some of the significant rollbacks from the proposed version—which will not help protect investors from climate risks, and are not supported by the law nor the extensive public comments—the SEC's rulemaking represents a net positive for investors and our capital markets over the current status quo. This rule will provide investors with much-needed information about companies' climate risks, though it is a mistake to allow companies to continue hiding their greenhouse gas emissions and other important risks,” Ben Cushing, campaign director of the Sierra Club, said in a statement.

Summary of the Content of the Disclosure: (Included in SEC Fact Sheet)

  • 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;
  • For large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted, information about material Scope 1 emissions and/or Scope 2 emissions;
  • For those required to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level;
  • 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 1 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.

Presentation of the Disclosure: (Included in the SEC Fact Sheet)

The Final Rule would require a registrant to:

  • File the climate-related disclosure in its registration statements and Exchange Act annual reports filed with the Commission;
  • Provide the Regulation S-K mandated climate-related disclosures either in a separate, appropriately captioned section of its registration statement or annual report or in another appropriate section of the filing, such as Risk Factors, Description of Business, or Management's Discussion and Analysis, or, alternatively, by incorporating such disclosure by reference from another Commission filing, as long as the disclosure meets the electronic tagging requirements of the final rules; and
  • Electronically tag climate-related disclosures in Inline XBRL.