SEC Issues Final Climate Disclosure Rules for Public Companies

At a Glance

• The final rules create a new subpart 1500 of Regulation S-K, pursuant to which domestic public companies and foreign private issuers must include certain climate-related information in their annual reports and registration statements.
• In addition to the Regulation S-K Item 1500 disclosures, the final rules add a new Article 14 to Regulation S-X, governing the requirements for a registrant’s financial statements, and requiring disclosure of expenditures, capitalized costs and charges, recoveries, and financial estimates and assumptions.
• Although the final rules provide several phase-in periods, and the existing legal challenges create uncertainty about the final scope of the rules and the timing of the reporting obligations, given the complexity and expansiveness of the final rules, registrants should begin to prepare for compliance. We suggest some initial steps, all of which should be tailored to a company’s situation.

Use the links below to jump to a section:

Climate-Related Disclosure in a Separately Captioned Section of Annual Reports and Registration Statements

Climate-Related Targets and Goals Disclosure (Item 1504)

Climate-Related Financial Measures and Related Disclosure in Financial Statements

Presentational Matters and Compliance Phase-In Periods

Preparation Steps to Take Now

On March 6, 2024, the Securities and Exchange Commission (SEC or the “Commission”) issued its highly anticipated final climate disclosure rules, which will require public companies to include climate-related disclosures in their annual reports and registration statements. The final rules create a new subpart 1500 of Regulation S-K and new Article 14 to Regulation S-X, and will require disclosure in annual reports and registration statements of: material climate risks; impact of material climate risks; governance and oversight of climate risks; risk management systems and process for material climate risks; if material, Scope 1 and/or Scope 2 emissions for large accelerated filers and accelerated filers, including an independent attestation report; and financial statement disclosures, in a note to the audited annual financial statements of certain financial statement impacts of severe weather events and natural conditions. Consistent with the proposed rules, the final rules draw from the Greenhouse Gas Protocol (“GHG Protocol”) and its definitions for Scope 1 and Scope 2 emissions. The final rules are also based on the Task Force on Climate-Related Financial Disclosures (TCFD) framework, including its defined terms and concepts.

The final rules provide for extended phase-in periods for compliance, with the first disclosures being required of large accelerated filers for fiscal periods starting in 2025 in reports filed in 2026, and various aspects only beginning to apply one or more years after the disclosure requirements apply to a registrant.

In a departure from the proposal, throughout the final rules, materiality qualifiers are included such that the disclosure is only required where risk or specified item is material. Additionally, the adopting release clarifies that the new disclosure rules are based on the traditional concept of “materiality” in the federal securities laws, meaning that information is material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision. Materiality determinations are fact-specific and require quantitative and qualitative considerations, and, as they relate to potential future events, require an assessment of both the probability of occurrence and the potential magnitude or significance to the registrant. In clarifying its reliance on the existing definitions and guidance, the SEC chose not to adopt other approaches to materiality, such as “double materiality” or “dynamic materiality” used in some other ESG-focused disclosure regimes. Although the materiality qualifiers are welcome and may help reduce the scope of disclosure that otherwise would have been called for under the proposed rules, registrants will have to put significant effort and processes into their materiality analyses.

The final rules also include a safe harbor from private securities litigation for climate-related disclosures related to transition plans, scenario analysis, the use of an internal carbon price, and targets and goals, which will also be applicable for certain issuers and transactions, such as IPOs, that are excluded from the Private Securities Litigation Reform Act (PSLRA) in other contexts. However, like the PSLRA, this safe harbor will not apply to historical facts or to forward-looking statements in the financial statements, and any disclosure covered by the safe harbor must be accompanied by a meaningful cautionary statement that identifies important factors that could cause actual results to differ materially from those in the forward-looking statement.

The adopting release identifies increasing investor demand for disclosure about climate-related risks, and that climate-related information can have a material impact on public companies’ financial performance or position and may be material to investors making investment or voting decisions. The release further indicates that the new requirements are designed to improve the consistency, comparability and reliability of climate-related disclosures. As expected, however, the final rules are the subject of scrutiny and controversy from those who think they go too far and others who believe they are not enough. Legal challenges have already been brought against the rules in the form of petitions of review in multiple federal district courts, resulting in the Fifth Circuit granting an administrative stay of the rules pending judicial review. On March 21, 2024, the actions were consolidated in the Eighth Circuit, and as part of that process, the stay imposed in the Fifth Circuit was lifted. However, the petitioners moved for another stay in the Eighth Circuit. The SEC’s response was filed on March 27 and the Court’s decision is expected in the coming weeks. Additional challenges to the rules are anticipated.

Below, we provide a high-level summary of the disclosure requirements, as well as some key observations and recommended next steps to prepare for compliance.

Climate-Related Disclosure in a Separately Captioned Section of Annual Reports and Registration Statements

The final rules create a new subpart 1500 of Regulation S-K, pursuant to which domestic public companies and foreign private issuers must include certain climate-related information in their annual reports and registration statements. The disclosure may be included in a new “Climate-Related Disclosure” section of the applicable annual report or registration statement form, or if the registrant prefers, elsewhere in the report, in which case the separately captioned Climate-Related Disclosure section may cross-reference to the placement of the responsive disclosure.

Risks, Strategy, Governance and Risk Management

Material Climate-Related Risks to Business and Financial Condition (Items 1500, 1502(a))

A registrant will be required to disclose climate-related risks that have materially impacted or are reasonably likely to have a material impact on the registrant, including on its business strategy, results of operations or financial condition (a “Material Climate Risk”). Registrants should describe whether these risks are reasonably likely to manifest in the short term (within the next 12 months) or long term (beyond the next 12 months).

In disclosing Material Climate Risks, the registrant must specify whether they are “physical risks” related to the physical impacts of the climate, or “transition risks” related to a potential transition to a lower-carbon economy. For any identified Material Climate Risk, a registrant will be required to describe the nature of the risk, including:

• For a physical risk, whether it may be categorized as acute or chronic, and the general geographic location and nature of the assets subject to the physical risk.
• For a transition risk (defined as the actual or potential negative impacts on a registrant’s business, results of operations or financial condition attributable to regulatory, technological and market changes to address the mitigation of, or adaptation to, climate-related risks), whether it relates to regulatory, technological, market, liability, reputational or other transition-related factors, and how those impact the registrant. Notably, unlike the proposed rules, the final rules do not include impacts on a registrant’s value chain in the definition of “transition risks.”

Impact of Climate-Related Risks on the Registrant’s Strategy, Business Model and Outlook (Items 1502(b)-(g))

Having identified the Material Climate Risks, a registrant will be required to disclose the actual and potential impacts of these risks on the registrant’s strategy, business model and outlook, including any material impacts on products or services; suppliers, purchasers or counterparties to material contracts (to the extent known or readily available); expenditure for research and development; and other business aspects, as applicable. Specifically, a registrant will be required to disclose:

• The impact of Material Climate Risks on its business operations (including types and locations of operations); products or services; suppliers, purchasers or counterparties to material contracts (to the extent known or reasonably available); activities to mitigate or adapt to climate-related risk; expenditure for research and development; and any other significant changes or impacts, in each case, to the extent material (Item 1502(b)).
• Whether and how any of these impacts are taken into account as part of its strategy, financial planning and capital allocation, and whether these impacts have or have not been integrated into the registrant’s business model or strategy, including how resources are being used to mitigate climate risks (Item 1502(c)).
• Whether and how any of these Material Climate Risks have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations and financial condition (Item 1502(d)(1)).
• A quantitative and qualitative description of the material expenditures incurred and material impacts on financial estimates and assumptions that directly result from activities to mitigate or adapt to the Material Climate Risks (Item 1502(d)(2)). Note: Due to a compliance phase-in period, this quantitative and qualitative description will first be required in the second-year disclosures required of the registrant.

Transition Plans (Item 1502(e))

Like the proposed rules, the final rules define a “transition plan” to mean a registrant’s strategy and implementation plan to reduce climate-related risks, which may include a plan to reduce its greenhouse gas (GHG) emissions in line with its own commitments or commitments of jurisdictions within which it has significant operations.

Although there is no requirement to adopt a transition plan, a registrant that has adopted a transition plan to manage a material transition risk will be required under Item 1502(e)(1) to: (i) describe the plan as part of its overall climate-related risk management disclosure, and (ii) update its annual report disclosure about the transition plan each fiscal year with details of actions taken during the year under the plan and any impacts of those actions on the registrant’s business, results of operations or financial condition. Unlike the proposed rule, this is limited to plans for material transition risks identified as Material Climate Risks. The rules provide flexibility to address the particular facts and circumstances of a registrant’s plan and do not impose a prescribed list of factors to be disclosed. If a registrant does not have a transition plan, no disclosure is required.

Item 1502(e)(2) requires quantitative and qualitative disclosure of material expenditures incurred and material impacts on financial estimates and assumptions as a direct result of the disclosed actions taken under the plan. Note: Due to a compliance phase-in period, this quantitative and qualitative disclosure will first be required in the second-year disclosures required of the registrant.

Transition plan disclosure required by Item 1502(e), except for any disclosure of historical facts, will be covered by the safe harbor provided by Item 1507, which permits certain climate-related disclosures to constitute “forward-looking statements” and receive protections under the PSLRA.

Scenario Analysis (Item 1502(f))

The final rules did not adopt the proposed requirements for a registrant to describe the resilience of its business strategies in light of potential future changes in climate-related risks, and to describe any analytical tools that it uses to assess the impact of climate-related risk and to support the resilience of its strategy and business model. However, if a registrant conducts scenario analysis to assess the impact of climate-related risks, and, based on that analysis, the registrant determines that Material Climate Risks exist, the final rules require a registrant to describe each such scenario, including a brief description of the parameters, assumptions and analytical choices, as well as the expected material impact. Registrants will have the flexibility to determine the mix of qualitative and quantitative disclosure that best meets their circumstances.

Scenario analysis disclosure required by Item 1502(f), except for any disclosure of historical facts, will be covered by the safe harbor provided by Item 1507.

Internal Carbon Pricing (Item 1502(g))

If a registrant maintains and internally uses an estimated cost of carbon emissions (“Internal Carbon Pricing”), the final rules require certain disclosure if that use is material to the evaluation and management of any Material Climate Risks. If material, a registrant will be required to disclose, in the registrant’s reporting currency: (i) the price per metric ton of CO₂e, and (ii) the total price, including how the price is estimated to change over short and long term. If a registrant uses more than one Internal Carbon Pricing to evaluate and manage Material Climate Risks, it must provide the disclosures for each along with its reasons for using different prices.

To the extent that there is a difference between the scope of entities and operations involved in the use of Internal Carbon Pricing and the organizational boundaries used for purposes of calculating GHG emissions, it must be described.

Internal Carbon Pricing disclosure required by Item 1502(g), except for any disclosure of historical facts, will be covered by the safe harbor provided by Item 1507.

Observation: While the final rules represent a significant addition to existing disclosure obligations, many large issuers are already providing disclosures that go beyond the SEC’s new requirements.

Although most of the new disclosures are tied to materiality, the concept of materiality can be a double-edged sword here. On one hand, it will enable registrants to exclude immaterial disclosures and reduce the disclosure burden. On the other hand, it can be hard to apply in practice. For many registrants, these are new materiality assessments, which may be difficult to make, especially given that market practice is still evolving rapidly. Registrants should begin reviewing current climate-related strategies, processes and disclosures to identify risks, plans and analyses, and begin building out their materiality assessment frameworks.

Oversight and Governance of Climate-Related Risks by the Registrant’s Board and Management (Item 1501)

A registrant will be required to provide certain disclosure about the oversight of climate-related risks by a registrant’s board of directors and management with the aim of providing investors sufficient information to determine to what extent a registrant is addressing its climate-related risks.

With respect to a registrant’s board of directors, the final rules require disclosure, as applicable, regarding:

• The board committees or subcommittees responsible for the oversight of climate-related risks, if any
• How the board is informed of climate-related risks, and the processes by which the board or board committee discusses climate-related risks
• Whether and how the board oversees progress against disclosed climate-related targets, goals or transition plans

With respect to a registrant’s management, the final rules largely track the proposed rules, but clarify the disclosures are limited to Material Climate Risks. The final rules require disclosure, as applicable, regarding:

• Whether certain management positions or committees are responsible for assessing and managing climate-related risks, including identifying the positions or committees and disclosing the relevant expertise in sufficient detail
• The processes by which the responsible managers or committees are informed about and monitor climate-related risks
• Whether the responsible positions or committees report to the board or board committee on climate-related risks

Risk Management System or Processes Regarding Climate-Related Risks (Item 1503)

A registrant will be required to disclose, as applicable, its process for identifying, assessing and managing Material Climate Risks. If a registrant has not identified any Material Climate Risks, no disclosure will be needed.

When describing these processes, the proposed rule would have required registrants to discuss certain enumerated factors. However, the final rules allow registrants the flexibility to determine which factors are the most significant to their analysis and should therefore be addressed.

A registrant will also be required to address how it identifies whether it has incurred (or is reasonably likely to incur) a material physical or transition risk; how it decides whether to mitigate, accept or adapt to a particular risk; and how it prioritizes addressing climate-related risks.

Further, a registrant will be required to disclose whether and how these climate-related risk management processes are integrated into its overall risk management environment.

Observation: The final rules are not nearly as prescriptive as the proposed rules and are more in line with what is generally required by other SEC disclosure rules applicable to these areas. Many large registrants are already providing much of this information on a voluntary basis, either in public filings or other ESG reports. Nevertheless, for many registrants, the final rules will represent an expansion of the disclosure about a registrant’s climate-related risk oversight, strategy, and risk assessment and management, as well as demand a higher level of rigor in determining what to disclose and ensuring the accuracy of the disclosure. The new disclosure requirements about management and the board’s role in climate risk oversight and governance share some similarities with the recently adopted cybersecurity disclosure, so this framework should be at least somewhat familiar to registrants.

Climate-Related Targets and Goals Disclosure (Item 1504)

Disclosure of Climate-Related Targets or Goals (Item 1504(a)-(c))

A registrant will be required to disclose any climate-related target or goal, whether public or nonpublic, if that target or goal has materially affected, or is reasonably likely to materially affect, the registrant’s business, results of operations or financial conditions (e.g., due to material expenditures or operational changes that are required to achieve the target(s) or goal(s)) (“Material Climate Goals”). These Material Climate Goals are not limited to GHG emissions, but can include any climate-related target or goal.

Where a registrant has set Material Climate Goals, it must provide any additional information or explanation necessary to an investor’s understanding of the material impact or reasonably likely material impact of the target or goal, including, as applicable, a description of:

• The scope of activities included in the target
• The unit of measurement
• The defined time horizon by which the target is intended to be achieved, and whether the time horizon is based on one or more goals established by a climate-related treaty, law, regulation, policy, or organization
• If the registrant has established a baseline for the target or goal, the defined baseline time period and the means by which progress will be tracked
• A qualitative description of how the registrant intends to meet its climate-related targets or goals

The registrant must also disclose its progress, including a description of: (i) any progress toward meeting the Material Climate Goals and how progress has been achieved, and (ii) any material impacts to the registrant’s business, results of operations or financial condition as a direct result of the target or goal or the actions taken to progress toward meeting the Material Climate Goals. Information about progress on Material Climate Goals must be updated each fiscal year by describing the actions taken during the year.

A registrant will also be required to provide qualitative and quantitative disclosure of any material expenditures and material impacts on financial estimates and assumptions that are a direct result of any Material Climate Goals. Note: Due to a compliance phase-in period, this quantitative and qualitative description will first be required in the second-year disclosures required of the registrant.

Material Climate Goals disclosures required by Items 1504(a)-(c), except for any disclosure of historical facts, will be covered by the safe harbor provided by Item 1507.

Use of Carbon Offsets or RECs (Item 1504(d))

A registrant will be required to disclose certain information about carbon offsets or renewable energy credits (RECs) if they have been used as a material component of a registrant’s plan to achieve Material Climate Goals. Disclosure under this Item 1504(d) must be made in addition to any financial information required to be disclosed under the new Article 14 of Regulation S-X (discussed below). Registrants must determine, based upon their specific facts and circumstances, the importance of the carbon offsets and credits to their overall transition plan and provide disclosure accordingly.

If a registrant determines that carbon offsets or RECs are used as a material component of meeting the registrant’s climate targets, then it will be required to disclose:

• The amount of carbon avoidance, reduction or removal represented by the offsets or the amount of generated renewable energy represented by the RECs
• The nature and source of the offsets or RECs (nature refers to whether the offsets or RECs represent carbon avoidance, reduction or removal; source refers to the party that has issued the offset or REC)
• A description and location of the underlying projects
• Any registries or other authentication of the offsets or RECs
• The cost of the offsets or RECs

The final rules permit registrants substantial flexibility regarding placement of the RECs’ disclosure in its overall climate-related disclosures.

Observation: Although the rules do not require that registrants establish climate-related targets or goals, if a registrant does, and any such target or goal has materially affected or is likely to materially affect its business, operations or financial condition, the registrant will be required to provide the above disclosure, including annual updates. It is therefore possible that the establishment of targets or goals could effectively expand a registrant’s disclosure obligations to discuss metrics, including Scope 3 emissions, not otherwise specifically required under the final rules.

GHG Emissions Metrics

The final rules mandate disclosure of certain GHG emissions metrics, if material to the registrant. While scaled back from the proposed rules and less prescriptive, the SEC reinforced its goal to provide investors with more consistent, comprehensive and tailored information than what is currently publicly available.

Scopes 1 and 2 GHG Emissions Metrics (Item 1505)

In a notable change from the proposed rules, which would have required disclosure of Scopes 1 and 2 without regard to materiality and Scope 3 emissions if material or part of a target, the final rules will require large accelerated filers and accelerated filers to disclose Scopes 1 and 2 GHG¹ emissions to the extent either or both are material to the registrant, but they do not require disclosure of Scope 3 emissions. Smaller reporting companies and emerging growth companies are exempt from these requirements. The final rules define the terms “Scope 1 emissions” (direct GHG emissions from operations that are owned or controlled by a registrant) and “Scope 2 emissions” (indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat or cooling that is consumed by operations owned or controlled by a registrant) in accordance with the GHG Protocol.

As discussed above, the determination of whether information, including emissions metrics, is “material” to a registrant is rooted in the traditional notions of materiality under securities laws. As such, the amount of emissions is not the sole determinative factor for the materiality assessment, but rather is based on whether a reasonable investor would consider the disclosure of the registrant’s Scope 1 emissions and/or its Scope 2 emissions important when making an investment or voting decision, or such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available. Item 1505 requires emissions to be expressed in the aggregate in terms of CO₂e, in gross terms not reflecting the impact of any carbon offsets. In addition, if required to disclose its Scope 1 and/or Scope 2 emissions, and any constituent gas of the disclosed emissions is individually material, a registrant must also disclose that constituent gas disaggregated from the other gases. The final rules also require a registrant to describe the methodology, significant inputs and significant assumptions used to calculate the registrant’s disclosed GHG emissions. Specifically, a registrant will be required to describe:

• The organizational boundaries used, including the method to determine those boundaries. If those boundaries differ materially from the scope of entities and operations included in the registrant’s financial statements, the registrant must explain that difference.
• The operational boundaries used, including the categorization of emissions and emission sources.
• The protocol or standard used to report emissions, including the calculation approach, the type and source of emission factors used, and any calculation tools used to calculate GHG emissions

In recognition of the time it takes to determine GHG emissions, the final rules provide extra time to make the required disclosures, by allowing a domestic public company registrant to incorporate by reference into its Form 10-K emissions information from its quarterly report on Form 10-Q for the second quarter of the following fiscal year, or in an amended annual report on Form 10-K — in either case, to be provided no later than the due date of the second quarter Form 10-Q of the following fiscal year. The registrant must include an express statement in its annual report indicating its intention to incorporate by reference this information from its Form 10-Q or to amend its annual report on Form 10-K to provide this information by the due date. This disclosure must be provided for the most recently completed fiscal year and, to the extent previously disclosed, for any historical period covered by the filing.

GHG Emissions Metrics Attestation Requirement (Item 1506)

After a phase-in period of three years after the emissions disclosure is first required, registrants disclosing Scope 1 and/or Scope 2 emissions will be required to include an attestation report covering emissions disclosure and to provide, in the relevant filing, certain related information about the service provider. The final rules contemplate two assurance levels: “limited” and “reasonable.” Large accelerated filers (LAFs) and accelerated filers (AFs) (other than smaller reporting companies and emerging growth companies) must obtain limited assurance beginning the third fiscal year after the Scopes 1 and 2 emissions disclosure compliance date, and nonaccelerated filers (NAFs), smaller reporting companies (SRCs) and emerging growth companies (EGCs) are not subject to the attestation requirement. LAFs must subsequently transition to the reasonable assurance standard beginning no earlier than 2033.

The timeline for obtaining assurance is shown below:

*Note: The requirement to provide GHG emissions disclosure does not apply to private companies that are party to a business combination transaction involving securities registered on Form S-4 or F-4.

The final rules also establish minimum standards for the experience, expertise and independence for a GHG emissions attestation provider. The attestation provider must be independent from the registrant and any of its affiliates and must be an expert in GHG emissions by virtue of having significant experience in measuring, analyzing, reporting or attesting to GHG emissions. The final rules do not prescribe an attestation standard, but the provider’s standards must be publicly available at no cost, or be widely used for GHG emissions assurance and established by an organization that has followed due process procedures, including the broad distribution of the framework for public comment.

The form and content of the attestation report must follow the requirements set forth by the standards used by the attestation provider. Registrants must also disclose whether the attestation provider is subject to any oversight inspection program (and if so, which program(s)) and must disclose certain information about the registrant’s current assurance provider and any previously engaged providers for the fiscal year period covered by the attestation report that resigned, declined to stand for reappointment, or were dismissed. The attestation report must be provided in the same filing containing the GHG emissions disclosure.

Registrants that obtain voluntary assurance of their GHG emissions before the required compliance date must disclose information about the provider, the assurance standard used, the level and scope of assurance provided, and the results of the assurance services, among other things, in the relevant report.

For limited assurance engagements, the assured disclosure will not be considered part of the registration statement prepared or certified by an “expert” within the meanings of Sections 7 and 11 of the Securities Act of 1933, amended, but registrants will be required to file as an exhibit to certain registration statements (or periodic reports incorporated into the registration statement) a letter from the attestation provider that acknowledges awareness of the use in a registration statement of a GHG emissions attestation report. For reasonable assurance engagements, however, an attestation provider will be required to submit a consent in connection with Section 7 of the Securities Act, to which Section 11 liability would attach.

Observation: The requirement to obtain independent, third-party assurance in the form of an attestation report is a noteworthy development. Although compliance dates are later and phased in more gradually than contemplated by the proposed rules, the marketplace for attestation providers is not fully formed. Simply put, it will take time for assurance standards to be developed and for service providers to develop the necessary expertise in both GHG emissions and attestation practices. Moreover, the imposition of Section 11 liability on providers giving “reasonable assurance” will require providers to design and implement due diligence processes and practices appropriate to take on such potential liability associated with rendering a report included in a securities filing. We expect this requirement to be a challenge for many public companies, especially those that have not previously calculated their GHG emissions or obtained any level of assurance on those calculations.

Climate-Related Financial Measures and Related Disclosure in Financial Statements

In addition to the Regulation S-K Item 1500 disclosures, the final rules add a new Article 14 to Regulation S-X, governing the requirements for a registrant’s financial statements, and requiring disclosure of expenditures, capitalized costs and charges, recoveries, and financial estimates and assumptions. Disclosures called for by Article 14, which are required to be presented in a note to the audited financial statements, are required in any filing that must include both climate-related disclosure under Item 1500 and the registrant’s audited financial statements. These financial disclosures are required for the most recently completed fiscal year, and to the extent previously disclosed or required to be disclosed, for the historical years presented in the audited consolidated financial statements included in the report.

Expenditures

A registrant will be required to disclose the aggregate amount of expenditures expensed as incurred and losses (excluding recoveries) incurred during the fiscal years presented as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures and sea level rise (“Severe Weather Events”). Examples provided include expenses or losses to restore operations, relocate assets, or recognize impairment losses on affected assets. Disclosure of the aggregate amount will be required if the aggregate amount of expenditures expensed as incurred and losses equals or exceeds 1% of the absolute value of income or loss before income tax expense or benefit for the relevant fiscal year. If the aggregate amount of expenditures expensed as incurred and losses is less than $100,000 for the relevant fiscal year, disclosure is not required.

The disclosure must separately identify where the expenditures expensed as incurred and losses are presented in the income statement.

Capitalized Costs and Charges

A registrant will be required to disclose the aggregate amount of capitalized costs and charges (excluding recoveries) incurred during the fiscal years presented as a result of Severe Weather Events. Examples provided include capitalized costs or charges to restore operations, retire affected assets, or repair or replace affected assets. Disclosure of the aggregate amount will be required if the aggregate amount of capitalized costs and charges equals or exceeds 1% of the absolute value of stockholders’ equity or deficit as of the end of the relevant fiscal year. If the aggregate amount of capitalized costs and charges is less than $500,000 for the relevant fiscal year, disclosure is not required.

The disclosure must separately identify where the capitalized costs and charges are presented in the balance sheet.

Recoveries

If a registrant is required to provide disclosure of expenditures expensed as incurred, and losses or capitalized costs and charges, then it will also be required to include separately, as contextual information, the aggregate amount of any recoveries recognized during the fiscal year as a result of Severe Weather Events.

The disclosure must separately identify where the recoveries are presented in the income statement and the balance sheet.

Carbon Offsets and RECs

If a registrant has used carbon offsets or RECs as a material component of its plans to achieve its disclosed climate-related targets or goals, the registrant will be required to disclose (i) the aggregate amount of carbon offsets and RECs expensed, (ii) the aggregate amount of capitalized carbon offsets and RECs recognized, and (iii) the aggregate recognized amount of losses incurred on the capitalized carbon offsets and RECs, each during the fiscal year. The registrant will also be required to disclose the beginning and ending balances of the capitalized carbon offsets and RECs for the fiscal year.

The disclosure must separately identify where the expenditures expensed, capitalized costs and losses are presented in the income statement and the balance sheet. If this disclosure is required, the registrant must also state its accounting policy for carbon offsets and RECs as part of the required contextual information.

Financial Estimates and Assumptions

A registrant will be required to disclose whether the estimates and assumptions it used to prepare its financial statements were materially impacted by exposures to risks and uncertainties associated with, or known impacts from, Severe Weather Events. If so, the registrant will be required to provide a qualitative description of how the development of the estimates and assumptions were impacted by those events, conditions, targets or transition plans.

Contextual Information and Attribution

A registrant will be required to provide contextual information describing how each specified financial statement effect disclosed pursuant to Article 14 was derived, including a description of significant inputs and assumptions used, significant judgments made, and other information that is important to understand the financial statement effect, and, if applicable, policy decisions made by the registrant to calculate the specified disclosures. The adopting release indicates that this context should provide necessary transparency to facilitate investors’ understanding and peer comparisons.

For purposes of these requirements to disclose the financial statement effects resulting from severe weather events or other natural conditions, S-X Item 14-02(g) states that if the event or condition is a significant contributing factor in incurring the cost, expenditure, charge, loss or recovery, then the full amount must be disclosed.

Observation: The final rules differ in a number of ways from the proposed rules, limiting the disclosure to the financial statement effects of certain events rather than also requiring disclosure of the costs of mitigating those risks or transitioning to a lower carbon economy. Examples of financial statement estimates and assumptions that may require disclosure pursuant to the final rules include those related to the estimated salvage value of certain assets, estimated useful life of certain assets, projected financial information used in impairment calculations, and estimated loss contingencies. The final requirements also incorporate materiality and call for aggregate disclosure rather than line-by-line impacts.

Consistent with the proposal, the disclosure will be required in a note to the financial statements, and therefore would be (i) included in the scope of any required audit of the financial statements in the relevant disclosure filing, (ii) subject to audit by an independent registered public accounting firm and (iii) within the scope of the registrant’s internal control over financial reporting.

Presentational Matters and Compliance Phase-In Periods

The final rules are applicable to all domestic companies and foreign private issuers, except Canadian companies that qualify to use the Multijurisdictional Disclosure System and file annual reports on Form 40-F. All other registrants will be required to include the climate-related disclosures in their annual reports on Form 10-K or 20-F, as applicable, and in their registration statements (including for IPO companies) according to the tiered phase-in periods set forth in the table below.

As previously noted, the final rules permit registrants to provide GHG emission and assurance information on Form 10-Q for the second fiscal quarter (or as an amendment to Form 10-K by the deadline for the second quarter 10-Q), or for foreign private issuers, 225 days after the end of the registrant’s fiscal year in an amendment to form 20-F.

The final rules do not require interim disclosure on Form 10-Q or 6-K. Narrative and quantitative climate-related disclosures must be tagged in Inline XBRL.

Phase-In Periods for Compliance With Final Rules

Note: FYB, as used in the table, refers to any fiscal year beginning in the calendar year listed.

Table Footnotes

(1) Registrants may provide this disclosure on a delayed basis by the time of the second quarter Form 1-Q deadline after the year for which disclosure is required.
(2) Financial statement disclosure under Article 14 of Regulation S-X must be tagged in accordance with existing rules for tagging of financial statements.

Preparation Steps to Take Now

Although the final rules provide several phase-in periods, and the existing legal challenges create uncertainty about the final scope of the rules and the timing of the reporting obligations, given the complexity and expansiveness of the final rules, registrants should begin to prepare for compliance. The following list provides suggestions for some initial steps, all of which should be tailored to the company’s particular situation:

• Develop an Internal Working Group — A good first step is to form an internal, cross-disciplinary working group to start analyzing the potential requirements and their applicability to the registrant. Many registrants have already organized such a group (and now may be a good time to reassess whether the group’s composition remains appropriate), which often includes employees representing product development/design, procurement, legal, accounting/finance, internal audit, and communications / investor relations, among others. The working group can also identify available resources and those that may still be needed to comply with the final rules or other required or desirable reporting, and help develop budgeting for those resources.
• Inventory Existing Processes and Disclosures for Gaps — The working group should take stock of the registrant’s existing activities and disclosures related to climate-related matters that affect its products, services and financial condition compared to the standards in the final rules. This analysis may include determining what information the registrant is already tracking, identifying information requests it receives from customers and investors, understanding the scope of its existing disclosures, and identifying what gaps remain. For example, to the extent that registrants are already disclosing GHG emissions in voluntary reports, consider whether the substance of the disclosure would be sufficient under the rules. Identify any climate-related targets or goals, and implement a process for tracking and disclosing progress (or changing or withdrawing goals that are not achievable or no longer part of the strategy).
• Plan Refinements to Governance, Risk Management, and Disclosure Controls Processes and Procedures — For most registrants, the final rules may require updates to existing governance, risk management and disclosure controls practices. Materiality assessments will now need to include climate risks, plans and strategies, and other items. Internal control over financial reporting will need to integrate the new financial statement disclosures. Disclosure controls and procedures may require enhancements related to GHG emissions, targets and transition plans; use of scenario analyses; and RECs and carbon offsets, as well as other related disclosure areas. Corporate governance guidelines, committee charters and other governance documents should be reviewed holistically to address climate risk and ensure clarity about defined roles.
• Continue Compliance With Other Climate-Related Disclosures — The final rules do not overturn or moot any previous climate-related disclosure rules or laws, including the SEC’s 2010 climate guidance or those required by other states (e.g., California) or countries, including the European Union’s Corporate Sustainability Reporting Directive (CSRD). Different reporting frameworks may lead to different disclosure details, which is likely to give rise to litigation risk or investor confusion, and could necessitate or weigh in favor of additional reporting in SEC reports or explanation of the differences between reports. Registrants will also want to develop rigorous internal processes to ensure that disclosures, even if they are different given different disclosure regimes and requirements, are nevertheless consistent.
• Monitor Filer Status — Registrants should monitor for potential changes in their reporting status in the development of compliance plans. The final rules do not provide much guidance on how the phased-in compliance timelines would be affected in the event of a change in filer status. The loss of smaller reporting company or emerging growth company status can have substantial reporting obligations under the final rules that will require significant lead time to address.
• Stay Updated on Legal Challenges — As noted, the rules are facing a number of lawsuits and challenges, so the state of the final rules is far from certain.

Footnote

1. The final rules define GHG as carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), nitrogen trifluoride (NF₃), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulfur hexafluoride (SF₆).