Fundamentally, the SEC’s new rules expand the four corners of the traditional disclosure regime by requiring companies to describe how they account for climate-related externalities.

Sweeping climate risk disclosure rules were finalized on March 6, 2024, by the U.S. Securities and Exchange Commission (SEC). These new rules will drastically reshape the flow of information and may impact the allocation of capital around climate change-related risks and opportunities within the U.S. economy. Roughly two years after they were first proposed in March 2022, the long-awaited final rules standardize the way public companies must track and disclose their climate risks and their progress towards their climate goals. Some public companies must also disclose certain greenhouse gas (GHG) emissions, but in a major departure from the proposed rules, companies will not need to disclose their Scope 3 emissions and will only need to disclose Scope 1 and Scope 2 emissions if such emissions are material (discussed below). Beyond GHG emissions, the final rules add a significant number of materiality qualifiers to other areas of the proposed rules.

In another change from the proposed rules, the final rules also extend the phase-in periods for when the rules become effective. While fiscal year 2025 will be the first year large accelerated filers must start disclosing certain climate risks, the rules will not be fully rolled out for all filers until fiscal year 2033, pending challenges in the courts. Several legal challenges were filed shortly after the final rules were released and have since been consolidated in the Eighth Circuit Court of Appeals. In a rare move, the SEC voluntarily stayed and has agreed to pause the new rules pending judicial review.

The new rules respond to a long debate within the SEC about how to address investors’ information needs as well as whether and how the commission should standardize the stream of climate-related, decision-useful information into capital markets. In recent years, a groundswell of interest in environmental, social and governance (ESG) issues (and a corresponding backlash) has been followed by the emergence of a smattering of voluntary frameworks and standards that help companies report climate data. According to some investors, the quantity and variety of these standards and metrics has led to a fragmented information landscape, making it harder for investors to make rational economic decisions about what companies will be better long-term stewards of their investments in light of the risks posed by climate change. In a statement, SEC Chair Gary Gensler noted that the new rules will “provide investors with consistent, comparable, decision-useful information, and issuers with clear reporting requirements.” However, other commentators, including a dissenting statement issued by SEC Commissioner Mark Uyeda, claim that prescribing climate-related disclosures veers the SEC “outside of its lane” and into “an economically and politically significant policy decision” without clear congressional authorization.

Fundamentally, the SEC’s new rules expand the four corners of the traditional disclosure regime by requiring companies to describe how they account for climate-related externalities. As wildfires and the growing frequency and intensity of extreme weather events illustrate, companies do not operate in a vacuum—ecological constraints affect corporate profitability in ways that are not necessarily reflected on income statements and balance sheets. Under the new rules, even companies with very few environmental liabilities—for example, nonpolluting companies or services-oriented companies—will need to begin considering how climate change impacts, and is reasonably likely to impact, their business and strategy.

Similar to existing regulations around disclosing financial information, many of the new climate change regulations are highly technical in nature. Just as how traditional financial disclosure follows best practices in the accounting industry, the new climate change rules are designed to follow current best practices that are commonplace within the ESG and sustainability standards industries. The rules build on two already widely used frameworks for disclosing climate-related information―the Task Force on Climate-Related Financial Disclosures and the GHG Protocol.

This Alert summarizes the key points of the new rules and highlights what companies need to start doing now to prepare, including by identifying and managing climate risks, potentially tracking GHG emissions, and measuring and reporting progress on climate and transition plans.

Executive Summary

The new rules, “The Enhancement and Standardization of Climate-Related Disclosures for Investors," amend Regulations S-K and S-X, requiring companies to add certain climate-related disclosures and financial metrics to their registration statements and annual reports.

The rules add a new subpart 1500 to Regulation S-K, requiring a new stand-alone section called “Climate-Related Disclosures” that outlines new areas of disclosure including identifying, describing and/or measuring:

• Climate-related risks;
• The impacts of climate risks on company strategy, business model and outlook;
• Progress toward climate-related targets and goals, if any;
• Governance and oversight regarding climate risks;
• How climate risks are managed;
• How climate risks are incorporated within certain financial statement metrics;
• Scope 1 and Scope 2 GHG emissions, if material and only for accelerated and large accelerated filers; and
• Third-party attestation as to any required Scope 1 and Scope 2 GHG emissions.

The new rules also add a new Article 14 to Regulation S-X mandating certain climate-related financial statement disclosures in the notes to companies’ consolidated financial statements.

Action Items

1. Consider the biggest risks that climate change presents to your business, operations and strategy now and in the future.
2. Review current climate risk and environmental disclosures, if any.
3. Analyze any material climate-related targets or goals previously set by the company, including targets or goals that have not been publicly disclosed, if any.
4. Evaluate the board and management’s oversight, policies and practices around climate risk and climate disclosures.
5. Assemble a team, designate responsibility and determine competency gaps.
6. Find help and hire consultants where needed to create processes to identify, manage and share climate risks moving forward.
7. Build tools to start tracking GHG emissions with a reputable, independent, third-party provider (if your company is an accelerated or a large accelerated filer) and determine whether your GHG emissions are material.
8. Develop a strategy for mitigating and adapting to climate change. Consider drafting a sustainability report to consolidate findings and thoughtfully articulate strategy in light of the new rules, being mindful of where certain disclosures (e.g., transition plans, targets or goals) could trigger additional reporting obligations.
9. Review and adopt internal controls and procedures to gather the right kinds of climate-related data from throughout your company, including reviewing internal controls over financial reporting and how data on climate risks are shared with financial reporting channels.
10. Prepare your finance teams, accountants, auditors and potentially new attestation providers for new workflows related to independent review of integrated climate data and financials.
11. Pay attention. Legal challenges have already pressured the SEC into pausing the rollout of the new rules. Climate risk disclosure will continue to be an evolving issue. It will be important to stay on top of new updates and to be able to adjust your strategy accordingly.
12. Plan ahead. The new rules are dense and detailed, with many terms, definitions and metrics that will likely be uncharted territory for many affected companies. Complying with the new rules is going to be a difficult process, requiring the cooperation of many parties over the next months and years. Make a plan and get to work, being mindful of the deadlines and phase-ins that apply to your company (see “Phase-Ins” section below).

The Rules

The following sections identify the key disclosures in each of the new requirements and explain the relevant climate-related vocabulary with which issuers should begin familiarizing themselves.

Identifying Climate-Related Risks

Section 1502(a) of the new rules requires registered companies to identify any climate-related risks that have materially impacted or are reasonably likely to have a material impact on the company’s strategy, results of operations or financial condition, and whether such risks are reasonably likely to manifest over the short or long term (i.e., within the next 12 months or beyond the next 12 months).

“Climate-related risks” are defined as the actual or potential negative impacts of climate-related conditions and events on a company’s business, results of operations or financial condition.

Companies must describe the nature of their climate-related risks, articulate the extent of the company’s exposure to the risks and categorize the risks as either a physical risk or transition risk.

Physical risks are the risks of direct impacts to asset values from climate-related events and patterns, and include both “acute” and “chronic” physical risks. Acute physical risks are “event-driven” and may relate to shorter-term severe weather events like hurricanes, floods and wildfires. Chronic physical risks relate to longer term weather patterns, such as higher temperatures, rising sea levels and drought, as well as related effects such as decreased arability of farmland, decreased habitability of land and decreased availability of fresh water. As applicable, companies should disclose the geographic location of the risk and the properties, processes or operations subject to the physical risk.

Transition risks are the actual or potential negative impacts on a company’s business, results of operations or financial condition that are attributable to regulatory, technological and market changes related to climate change mitigation or adaptation. In other words, transition risks are the risks associated with the realignment of markets, regulatory regimes and technology innovations during the shift toward a lower carbon economy. The rules require companies to describe the nature of their transition risks and whether they relate to regulatory, technological, market or other transition-related factors, and how those factors impact the company. Such risks could include changes in law, policy or market behavior—for example, local laws that require renewable energy purchases or reduced consumer demand for carbon-intensive products.

Impacts of Climate-Related Risks on Strategy, Business Model and Outlook

The rules require a narrative description of how the company’s identified climate risks are actually or potentially likely to materially impact the company’s operations (1502(b)), how the company manages these risks and incorporates them into their business strategy (1502(c)), and how climate risks have materially impacted or are reasonably likely to materially impact the company’s business (1502(d)).

As applicable, companies are required to discuss the impacts of climate risks on their business operations, including the types and locations of its operations; products or services; suppliers and purchasers; technologies or processes to mitigate or adapt to climate change; and research and development expenditures.

If a company has adopted a transition plan to manage a material transition risk, the company must provide a description of the plan (1502(e)). Transition plans are strategy and implementation plans to reduce climate risks, including plans or commitments to reduce GHG emissions in line with its own commitments or aligning with the commitments of jurisdictions within which it has significant operations. Importantly, transition plan disclosures must be updated annually to describe any actions taken during the previous year, including how such actions have impacted the company’s business, results of operations or financial condition.

The regulations have specific rules regarding two popular tools some companies use to incorporate climate risks into business strategy: scenario analysis and internal carbon pricing. Scenario analysis is a planning tool that some companies use to prepare business strategies according to different climate outcomes, typically by projecting possible global temperature increases of 1.5 degrees Celsius, 2 degrees Celcius and 3 degrees Celsius above pre-industrial levels and playing out the different impacts each scenario might have on business strategy.[1] Internal carbon pricing is a method by which some organizations estimate a price on carbon emissions for internal management or incentivizing purposes.[2]

Measuring and Reporting Progress on Climate Targets and Goals

In recent years, many companies, especially large companies, have made public commitments to reduce their GHG emissions or otherwise meet certain sustainability goals. For example, some companies have set a goal of reducing their emissions in line with the Paris Climate Accords, which call for reducing GHG emissions by 45 percent by the year 2030 and reaching net zero emissions by 2050.

New Item 1504 requires companies to disclose:

1. Whether it has set any climate-related targets or goals (if such target or goal has materially affected or reasonably likely to materially affect the company’s business);
2. Descriptions of the scope of activities involved, units of measurement, time horizons, any baselines used, how progress is tracked and how it intends to meet its targets or goals; and
3. Any progress made toward meeting its climate-related targets or goals.

Importantly, new Item 1504 applies to targets and goals regardless of whether they have been shared with the public. Even internally set targets and goals will now require disclosure, if such targets or goals are material to the company.

Similar to the transition plan disclosures described above, targets and goals disclosures must be updated annually to describe any actions taken during the previous year.

Additionally, like the strategy disclosure rules discussed above, the targets and goals disclosure has specific rules on two widely used tools—carbon offsets and renewable energy credits (RECs)—if such tools are a material component of a company’s plan to achieve climate-related targets or goals. Carbon offsets are financial products that represent a per-unit reduction in GHG emissions. RECs are financial products that represent a unit of electricity generated by renewable energy sources.[3]

Some commentators have questioned whether the details and metrics necessitated by Item 1504 create a “backdoor” Scope 3 emissions disclosure requirement, given that so many public companies have already set targets or goals to reduce their Scope 3 emissions. While representatives have confirmed that this was not the SEC’s intention and have clarified that disclosure of Scope 3 emissions are not required under Item 1504, some companies may opt to voluntarily disclose Scope 3 emissions metrics if they are material to their targets or goals, until the SEC elaborates further through the comment letter process.

Governance and Oversight of Climate-Related Risks

Item 1501 of the new rules requires companies to describe the oversight, assessment and management of climate-related risks provided by the board of directors and management.

Companies must describe the board of directors’ oversight of climate risks. If applicable, companies must identify any board committee or subcommittee responsible for the oversight of climate risks and describe the processes by which the board or such committee or subcommittee is informed about such risks. If the company has disclosed a climate-related target or goal or a transition plan, the company must describe whether and how the board of directors oversees progress against the target or goal or transition plan.

Companies must similarly describe management’s role in assessing and managing the company’s climate risks. As applicable, companies should address:

1. Whether and which management positions or committees are responsible for assessing and managing climate risks and the relevant expertise of such position holders or committee members;
2. The processes by which such positions or committees assess and manage climate risks; and
3. Whether such positions or committees report information about climate risks to the board of directors or a committee or subcommittee of the board of directors.

Risk Management

New Item 1503 requires companies to describe their processes for identifying, assessing and managing climate-related risks, and whether any such processes are integrated into the company’s overall risk management system.

In providing such disclosure, companies should address, as applicable, how the company:

1. Identifies whether it has incurred or is reasonably likely to incur a material physical or transition risk;
2. Decides whether to mitigate, accept or adapt to a particular risk; and
3. Prioritizes whether to address the climate-related risk.

Additionally, the rules require a description of how any of the management processes mentioned fit into the company’s overall risk management system or processes.

Financial Statement Metrics

New Article 14 of Regulation S-X requires particular climate-related disclosures within financial statements and the notes to financial statements, including expenditures, losses and capitalized costs and charges that are attributable to climate-related impacts such as severe weather events or other natural condition such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures and sea level rise.

Generally, the company must provide a qualitative description of how any estimates and assumptions used to produce the consolidated financial statements were materially impacted by exposures to risks, uncertainties or known impacts related to severe weather events, or any climate-related targets or transition plans disclosed by the company.

Specifically, companies are required to disclose the aggregate amount of expenditures and losses during the fiscal year that resulted from climate impacts. These disclosures must separately identify where the expenditures and losses are presented in the income statement. Climate-related expenditures and losses, however, need only be disclosed if the aggregate amount equals or exceeds 1 percent of the absolute value of income or loss before income tax expense or benefit for the relevant fiscal year. Companies also do not need to disclose this if the aggregate amount of expenditures and losses is less than $100,000 for the relevant year.

Companies are also required to disclose the aggregate amount of capitalized costs and charges, excluding recoveries, incurred during the fiscal year as a result of climate impacts. These disclosures must separately identify where the capitalized costs and charges are presented in the balance sheet. Climate-related capitalized costs need only be disclosed if the aggregate amount equals or exceeds 1 percent of the absolute value of stockholders’ equity or deficit at the end of the relevant fiscal year. Companies also do not need to disclose this if the aggregate amount of capitalized costs and charges is less than $500,000 for the relevant year.

If a company is required to disclose expenditures and losses or capitalized costs and charges, then the company must separately state the aggregate amount of any recoveries recognized during the fiscal year as a result of severe weather events and other natural conditions and where the recoveries are presented on the income state and balance.

If carbon offsets or RECs have been used as a material component of a company’s plan to achieve its disclosed climate targets or goals, companies must disclose the aggregate amount of carbon offsets and RECs expensed, the aggregate amount of capitalized carbon offsets and RECs recognized, and the aggregate amount of losses incurred on the capitalized carbon offsets and RECs, during the fiscal year. Additionally, companies are required to disclose the beginning and ending balances of the capitalized carbon offsets and RECs for the fiscal year, and separately identify where the expenditures expensed, capitalized costs and losses are presented in the income statement and the balance sheet. If disclosing carbon offsets or RECs, the company must describe its accounting policy for carbon offsets and RECs.

Tracking and Disclosing GHG Emissions

Within the new “Climate-Related Disclosures” section of registration statements and annual reports, companies must disclose how they track GHG emissions, but only if their GHG emissions are material. In a significant departure from the proposed rules, these GHG emissions rules apply to accelerated and large accelerated filers only, and do not apply to smaller reporting companies or emerging growth companies.

“GHG emissions” are defined to include the direct and indirect emissions of carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), nitrogen trifluoride (NF3), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulfur hexafluoride (SF6), all expressed in metric tons of carbon dioxide equivalent (CO2e). Direct emissions, also known as Scope 1 emissions, are GHG emissions from sources that are owned or controlled by a company (e.g., onsite fossil fuel combustion). Indirect emissions are GHG emissions that result from the activities of the company, but occur at sources not owned or controlled by the company. Scope 2 emissions are indirect emissions that come from the generation of purchased or acquired electricity, steam, heat or cooling services that are consumed by operations owned or controlled by a company (e.g., offsite fossil fuel combustion and emissions associated with the amount of electricity a company consumes from the local power grid).

If a company’s Scope 1 and/or Scope 2 emissions are material, then the company must disclose such emissions separately. Additionally, if Scope 1 and/or Scope 2 disclosure is required, and if the emissions of any one particular constituent GHG (e.g., methane) is material, then the company must also separately disclose that constituent GHG’s emissions apart from the other GHGs.

Companies must also describe the methodology, significant inputs and any significant assumptions used to calculate its material GHG emissions, including:

1. The organizational boundaries that determine the operations owned or controlled by the company for the purpose of calculating its GHG emissions;
2. The operational boundaries used to calculate its GHG emissions, which includes the organizational boundaries plus any further operations that determine indirect emissions, as well as the company’s approach to categorizing emissions and sources; and
3. The protocol or standard used to report GHG emissions, including the calculation approach, the type and source of any emission factors used and any calculation tools used to calculate the GHG emissions.

Attestation of Scope 1 and Scope 2 GHG Emissions

New Item 1506 requires companies disclosing GHG emissions pursuant to Item 1505 to provide an attestation report from an independent provider attesting to the company’s Scope 1 and Scope 2 emissions. Any attestation report required under Item 1506 must be provided pursuant to standards that are publicly available at no cost or that are widely used for GHG emissions assurance and established by a body or group that has followed due process procedures, including the broad distribution of the framework for public comment.

Attestation providers must be independent from the company and must have significant experience in measuring, analyzing, reporting or attesting to GHG emissions. The “independence” requirement means that attestation will likely need to come from a different provider than the firm or organization that provides GHG emissions reports for the company.

The rules provide for a phase-in period for the level of assurance required by the independent provider, at first with only limited assurance and later with reasonable assurance. While not specifically defined in the rules, limited assurance generally means negative assurance (i.e., no material mistakes have been identified in the GHG emissions disclosure) while reasonable assurance generally means positive assurance (i.e., assurance that the disclosure is free from material misstatements).

Filer Type	Scopes 1 and Scope 2 GHG Disclosure Compliance Date	Limited Assurance	Reasonable Assurance
Large accelerated filer	FY 2026 (filed in 2027)	FY 2029 (filed in 2030)	FY 2033 (filed in 2034)
Accelerated filer	FY 2028 (filed in 2029)	FY 2031 (filed in 2032)	N/A

The attestation report itself must be included in the “Climate-Related Disclosure” section of the applicable filing and must follow certain best practices in the GHG emissions tracking industry.

Phase-Ins

The following chart summarizes the staggered phase-in process for the new rules, other than regarding GHG emissions disclosure, which is covered above, with the compliance date dependent on the company’s filer status.

	Disclosure and Financial Statement Impacts
Filer Type	All other Reg. S-K and S-X disclosures	Item 1502(d)(2)[4], Item 1502(e)(2)[5] and Item 1504(c)(2)[6]
Large accelerated filer	FY 2025 (filed in 2025)	FY 2026 (filed in 2027)
Accelerated filer (other than smaller reporting companies and emerging growth companies)	FY 2026 (filed in 2026)	FY 2027 (filed in 2028)
Smaller reporting company, emerging growth company and nonaccelerated filer	FY 2027 (filed in 2028)	FY 2028 (filed in 2029)

Conclusion

The new climate risk rules represent one of the single biggest changes to the public company disclosure regime in the history of the SEC. The proposed rules received a record-breaking number of comments and were the subject of intense lobbying. As noted above, the new rules already face several court challenges that could impact final disclosure requirements. Despite some of these uncertainties, companies should nevertheless start preparing now. Adapting to the new rules will be long and difficult—especially for public companies that do not already gather or disclose climate information—and will require the cooperation of many different parties over time. Companies should discuss the new rules with management, boards of directors and their professional advisers, and should consider hiring climate experts (whether consultants or new in-house positions) to start analyzing climate risks and their impact on business strategy.

For More Information

If you have any questions about this Alert, please contact Darrick M. Mix, Brad A. Molotsky, C. Ben Vila, any of the attorneys in our Capital Markets Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.