Last Updated on August 12, 2024 by Anne Brock
How will current and future climate risks affect investors to your publicly traded company? Would your location put you at risk for destructive weather extremes? To what extent are you required to report publicly about your climate-related business plans, including carbon emissions and clean energy transitions? Rules for this are still in process, currently involved in legal challenges to the U.S. Securities and Exchange Commission. The long-awaited rules involved years of input in the form of public comments, then were published in March 2024, only to be stayed or put on hold by the S.E.C. amid legal challenges by April. They are currently under judicial review.
In short, this was to be an update to the Securities Act of 1933 and Securities Exchange Act of 1934, called Enhancement and Standardization of Climate-Related Disclosures for Investors. It aims to provide a framework for investors to be informed of the emerging risks related to climate change and how companies are guarding against that. It involves reporting on carbon emissions both directly related to the company’s business and to its energy purchases.
Here is a look at details as announced in March by the S.E.C.:
“Specifically, the final rules will require a registrant 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;
- 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 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.”
See that full S.E.C. announcement here on its website. This short video aims to explain the main areas of climate reporting. Certain small businesses would be exempt from these reporting rules.
Here is a link to the order issuing the stay that followed in April. The legal challenges to this have involved multiple states, business leaders, some energy companies and even environmentalists, with some saying the rules are too strict and others saying they are not strong enough. The Sierra Club here argues that the reporting rules don’t go far enough and should also look at emissions both up and down a company’s supply chain.
This previous 2010 guidance by the S.E.C. remains, and time will tell how updated Climate reporting rules for public companies will evolve and emerge as the new standard.
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