SEC Climate Disclosure Rule: Understanding the Final Mandate for Transparent Reporting

May 2, 2024by Ekata Ghadle0

On March 6, 2024, the Securities and Exchange Commission (SEC) announced a final rule mandating climate-related disclosures in annual reports and registration statements, starting with reports for the year ending December 31, 2025, for large accelerated filers with a calendar-year end. This final rule differs from the proposed rule in several ways. Notably, the undertakings are not required to disclose Scope 3 GHG emissions, the financial statement disclosure requirements are reduced, and there is a longer timeline for implementing the disclosures and related assurance requirements. 

The undertakings must include certain information in the footnotes of their financial statements, such as the financial effects of severe weather events and natural conditions, details about carbon offsets and renewable energy certificates (RECs), and impacts on financial estimates and assumptions due to severe weather events, natural conditions, or disclosed climate-related targets or transition plans. These disclosures will undergo the existing audit requirements for financial statements. 

What is SEC Climate Disclosure Rule?

The Securities and Exchange Commission (SEC) has pressed on the need for clear climate-related financial disclosures. With the National Oceanic and Atmospheric Administration (NOAA) reporting a record-breaking 23 weather events and climate disasters costing over $1 billion in 2023, the financial risks linked to climate change are becoming more evident. Investors also demand greater transparency; a recent McKinsey report revealed that 85 percent of surveyed chief investment officers consider ESG factors important in their investment decisions. 

As per preliminary drafts, the SEC’s climate disclosure rule aims to compel publicly listed companies to reveal a wide range of climate-related information. However, the impact may extend beyond just these companies—a ripple effect could draw smaller businesses into compliance as suppliers to larger firms, compelled to disclose their climate impact, may face pressure to do the same. Moreover, consumer expectations are also driving this shift. 

What is the final rule for SEC Climate Disclosure?

The final rules focus on the Security and Exchange Commission’s (SEC or the Commission) attempts to address the investor’s demand for a uniform, comparable and reliable report about the financial impacts of climate-related risks on an undertaking’s operations. Additionally, they aim to showcase how the company efficiently manages these risks while also considering concerns about mitigating the associated costs of compliance with the rules. 

The final rules mandate an undertaking to disclose the following information: 

Key changes:

Scope 1 and 2 emissions disclosure: For large accelerated filers (LAFs) and accelerated filers (AFs) that are not exempted, details regarding significant Scope 1 emissions and/or Scope 2 emissions are necessary. Entities mandated to report Scope 1 and/or Scope 2 emissions must provide an assurance report at the limited assurance level. For LAFs, this assurance level will transition to reasonable assurance following an additional transition period. 

Elimination of Scope 3 emissions: The undertakings are not mandated to disclose their Scope 3 emissions. 

Materiality: The use of 1% threshold is limited, as per the standard materiality definition, specifying disclosure threshold for financial statements. 

Compliance: An extension is provided during phase-in periods. 

Applicability: The final rule disclosures apply to the publicly listed companies that are obligated to pursue SEC Act Section 13(a) or Section 15(d) and companies that file Securities Act or Exchange Act registration statements. 

Key Provisions: The final rule amends and creates new sections within Regulations S-K and S-X that the SEC believes will provide more consistent, comparable, and reliable information for investors to evaluate climate-related risks to registrants. Key requirements include: 

Key Components: The undertaking must provide the following quantitative and qualitative information along with the audited financial statements:  

GHG Emissions Metrics: Scope 1 emissions (the undertaking’s owned or controlled operations emissions) and Scope 2 emissions (purchase electricity, steam, heat or cooling emissions): 

  • The disclosures are to be made in metric tons of carbon dioxide equivalent. 
  • The emissions shall be reported separately for material GHG constituents. 

The above disclosures should be presented individually for Scope 1 and Scope 2 on a gross basis (prior to any offsets). Companies are required to indicate if and how there are significant differences in the organizational boundary compared to the entities and operations included in the consolidated financial statements. 

Governance: The board of directors and management of the undertaking are responsible for evaluating and addressing climate-related risks, which includes monitoring the advancement of climate-related targets, goals, or transition plans. 

Strategy, business model and outlook

  • The undertaking must address the climate-related risks that have a material impact on the business strategy, supply chain, and/or financial condition. 
  • The undertaking must address whether the identified climate-related risks have an actual or potential material impact on the strategy, business model, and outlook. 
  • If the undertaking leverages internal carbon price and it is material to the evaluation of climate-related risks, price and other information. 
  • If the undertaking leverages scenario analysis to evaluate climate-related risks to its business and, based on the analysis, identifies that this risk may have a material impact, a scenario description, assumptions, and financial implications. 
  • If the undertaking has implemented a climate transition plan, it should provide a description of the plan and its progress over time. 

Risk management: The undertaking’s methodology to detect, evaluate, and manage climate-related risks and determine whether the processes are incorporated into the business’s enterprise risk management program. 

Targets and goals: If the climate-related goals cause material impact on the business, result of operations, or financial performances, the following information should be disclosed: 

  • Scope of the activities covered 
  • Time frame 
  • Baseline for tracking progress 
  • The undertaking’s plan to meet goals or targets 
  • Annual update on the undertaking’s progress related to the targets or goals and how it can be achieved 
  • Details regarding carbon offsets or Renewable Energy Certificates (RECs) should be provided if they constitute a significant component of the strategy to accomplish climate-related targets or goals 

The final rule requires an undertaking to disclose the following information in the footnotes of the financial statements: 

Severe weather and other natural conditions financial statements effects

  • The undertaking has to disclose the capital costs, expenditures, charges, and incurred losses arising from severe weather events and other natural disasters (such as hurricanes, floods, tornados, droughts, extreme temperature, etc.) provided they exceed a threshold of greater than 1% of the absolute value of pretax income (loss) or $100,000. 
  • The total capital costs and expenses identified in a balance sheet as a result of severe weather events are subject to a threshold greater than 1% of the absolute value of shareholder’s equity or deficit or $500,000. 
  • The undertaking must identify the total among the above-mentioned paragraphs before considering any recoveries, such as insurance, that should be disclosed separately. It must also share the amount identified for every affected line item of a financial statement. 
  • The undertaking should not link severe weather events or natural conditions directly to climate change. Instead, when they find that such events significantly affected their costs or losses, they must include the entire amount in their disclosure. 

Carbon offset and renewable energy credit (REC) information

If carbon offsets and RECs play a crucial role in achieving climate-related goals of a business’s strategy (such as net-zero commitments), the undertaking must provide a detailed breakdown of the beginning and ending balances. This breakdown should include a separate disclosure of the total amount spent, capitalized, and any losses incurred related to these instruments throughout the year. Additionally, the company should disclose the specific line items affected in the financial statements and outline the accounting policy regarding these instruments. 

Estimates and assumptions: The disclosure should address whether severe weather events, natural phenomena, or disclosed climate-related targets or transition plans materially influenced the estimates and assumptions reflected in the financial statements. 

Location, Timeframe and Safe Harbor

The undertaking must share information about greenhouse gas emissions (except for scope 1 and scope 2 emissions) in their annual reports when they file them. For US-based registrants, this emission data can be included in the second-quarter Form 10-Q of the following year. Foreign companies can add this info in an update to their annual report on Form 20-F, which is due 225 days after their fiscal year ends. 

When filing registration statements, the undertakings need to include greenhouse gas emissions data for the most recent fiscal year. Other details should cover all fiscal years shown in the filing’s annual financial statements. 

Apart from the financial statement disclosures, US registrants should add information about GHG emissions in a new section of Form 10-K (Item 6), just before the MD&A or in another suitable section, like risk factors. Foreign companies should include this in Form 20-F (Item 3.E). 

The SEC’s final rule states that registrants should define materiality consistently with the US Supreme Court, meaning something is important if a reasonable investor would consider it crucial when deciding to buy or sell securities or vote. Materiality depends on various qualitative and quantitative factors and is judged based on the situation. 

Additionally, the final rule offers protection to registrants from liability for disclosures about transition plans, scenario analysis, internal carbon pricing, and targets and goals, except for historical facts. 

Assurance, ICFR, DCPs

The information in the financial statements will be reviewed by auditors to make sure it follows the rules. This includes both the actual numbers and how they’re reported. For big companies and smaller ones that aren’t classified as “emerging growth companies,” auditors will also look at how the company controls this information internally. 

Any other information the undertaking provides, like details about greenhouse gas emissions, will be monitored by the company’s management to ensure accuracy. The undertaking’s top executives will have to check and confirm this periodically. For big organizations, the details about greenhouse gas emissions will get a certain level of assurance from auditors. This level of assurance will change for big companies over time. 


In summary, the Securities and Exchange Commission’s (SEC) final rule on climate disclosure represents a pivotal advancement in promoting transparency and accountability in corporate reporting. By mandating comprehensive disclosures on climate-related risks and impacts, including Scope 1 and Scope 2 emissions, governance structures, risk management practices, and climate transition plans, the SEC aims to equip investors with essential information for making informed decisions. This rule not only addresses the growing demand for clear climate-related financial information but also fosters a culture of sustainability and responsible business practices. Embracing these disclosure requirements underscores a commitment to transparency, resilience, and long-term value creation in the face of evolving environmental challenges.

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