Navigating the SEC Climate Disclosure Final Rule

What is the SEC Climate Disclosure?

The US Securities and Exchange Commission (SEC) is gearing up for a significant change in how public companies report climate-related information. This move emphasizes the growing importance of Environmental, Social, and Governance (ESG) reporting in the corporate world.

The SEC's Climate Disclosure final rule is set to reshape the reporting landscape for public companies, both domestic and foreign. It broadens disclosure requirements, particularly focusing on greenhouse gas emissions (GHG) and climate-related risks. Companies will need to incorporate these disclosures into their financial statements, such as Forms 10-K and 20-F.

Key requirements include disclosing financial impacts from severe weather events, carbon offsets, GHG emissions metrics, governance oversight of climate risks, and climate risk management strategies. Understanding materiality and safe harbour provisions is crucial for companies to determine what disclosures are significant and protect themselves from certain liabilities.

While the initial implementation date was set for May 2024, legal challenges might delay it. However, companies should still gear up for reporting obligations starting in 2025.

The SEC's Climate Disclosure rule isn't just a legal requirement—it's an opportunity for companies to showcase their commitment to sustainability and ethical business practices. Embracing these standards can build trust with stakeholders and drive positive impacts on society and the environment.

What are the Key Steps for SEC Climate Disclosure Compliance?

1. Assess impact

The final rule of the SEC Climate Disclosure affects all public companies registered with the US Securities and Exchange Commission, both domestic and foreign. This being said, certain types of registrants are not required to follow all aspects of the SEC Climate Disclosure, and may be exempt from the Scope 1 and Scope 2 GHG emission disclosure requirement.

2. Know your timeline

Understanding reporting deadlines and obligations is important to ensure compliance. The final rule, initially set to take effect on May 28, 2024 may be delayed due to legal proceedings. Additionally, depending on the type of filer, compliance dates will be different, large accelerated filers can expect to be the first to fall under the SEC Climate disclosure.

3. Understand the scope

Filers are required to prepare financial statement disclosures covering severe weather impacts, carbon offsets, and GHG emissions metrics. Additional disclosures involve governance, impact of climate risks on business strategy and climate risk management undertaken by the filer.

4. Understand materiality

Recognize what disclosures are significant. Materiality in the context of the SEC Climate Disclosure refers to matters that ‘a reasonable investor would consider important when determining whether to buy or sell securities’, or matters such that ‘a reasonable investor would view omission of the disclosure as having significantly altered the mix of information available.’

5. Prepare for audit

Strengthen accounting policies to cover climate-related financial statement disclosures. Audit and assurance requirements will be enforced for certain filers starting in 2025 and are expected to shift from limited assurance to reasonable assurance.

What are the Implications of Non-Compliance?

Failure to comply could lead to legal consequences, including fines and legal proceedings by the SEC.

How to prepare for the SEC Climate Disclosure?

Establish or refine management responsibilities, enhance board oversight, assess existing climate disclosures, identify gaps, assess reporting capabilities, and develop an action plan. Exploring the use of reporting software platforms, like ESG Flo, can aid your company in complying to the SEC Climate Disclosure.

How can ESG Flo help with SEC Climate Disclosure compliance?

ESG Flo leverages AI to automate and accelerate the collection and transformation of raw data into audit-ready metrics that can be mapped to the SEC Climate Disclosure framework and many other reporting templates. ESG Flo will help you in:

Conducting a materiality assessment

ESG Flo's algorithmic capabilities guide businesses through the materiality assessment process, aiding in the identification of key metrics that warrant attention in SEC Climate Disclosure reporting.

Collecting relevant data

ESG Flo facilitates efficient data collection for SEC Climate Disclosure compliance by streamlining data gathering, ensuring accuracy through validation and augmentation, and staying adaptable to changing regulatory needs with machine learning integration.

Preparing for assurance requirements

ESG Flo prepares businesses for limited assurance in SEC reporting by providing advanced analytics, customizable reporting templates, and facilitating collaborative workflows for streamlined coordination with internal teams and external assurance providers.