The Securities and Exchange Commission (SEC) adopted its final rules for climate-related disclosures in annual reports and registration statements on March 6, 2024. At nearly 900 pages (886 to be exact), there’s much to digest.
Although the U.S. Court of Appeals for the Fifth Circuit granted an administrative stay (a stop order) on March 15, 2024, planning for compliance with the rules is best started now. As you work to document policies, procedures and processes, keep controls in mind – these will need to withstand assurance on internal controls over financial reporting and greenhouse gas (GHG) emissions. Ensuring proper data and analysis throughout the process will be key to making sure disclosures are accurate.
Below are some of the disclosure highlights.
Nonfinancial Statement Disclosures (Regulation S-K)
According to the rules, the disclosures may be provided in a separate, appropriately captioned section of the registration statement/annual report or appropriate section of the filing, such as Risk Factors, Description of Business, or Management’s Discussion and Analysis. The disclosures may also be incorporated by reference in another SEC filing, if they meet the electronic tagging requirements of the final rules.
Based on our analysis of the rules, the following are key areas of focus:
Climate Risk Management and Oversight:
- Processes to identify, assess and manage material climate related risks; whether and how the processes are incorporated into the registrant’s risk management processes; and any oversight by the board of directors.
- Actual and potential impact of identified risks on business strategy, model, and outlook; including risks that have or are reasonably likely to materially impact business strategy, operations, or financial condition.
- Activities to mitigate or adapt to material climate-related risks, including any transition plans, scenario analysis or internal carbon prices.
Climate Targets or Goals:
- Targets or goals that have or are reasonably likely to materially affect the registrant’s business, results of operations or financial condition.
- Material expenditures and material impacts on financial estimates and assumptions resulting from the target, goal, or actions taken to make progress toward meeting the target or goal.
Greenhouse Gas Emissions and Assurance:
Large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempt are required to disclose material scope 1 and 2 GHG emissions for fiscal years beginning (FYB) in calendar years FYB 2026 and FYB 2028, respectively.
For LAFs:
- Limited assurance is required in FYB 2029
- Reasonable assurance is required in FYB 2033
For AFs:
- Limited assurance is required in FYB 2031
- There is no reasonable assurance requirement
Smaller reporting companies (SRC) and emerging growth companies (EGC) are exempt from the GHG disclosures.
The proposed scope 3 GHG disclosure is not in the final SEC rules. Although it is not an SEC required disclosure, companies required to comply with other standards (such as the International Sustainability Standards Board, Corporate Sustainability Reporting Directive, and California’s climate legislation) will need to report this information under the applicable standards.
Financial Statement Disclosures (Regulation S-X)
Key items to be disclosed in notes to the financial statements in registration statements and annual reports filed with the SEC include:
- Capitalized costs, expenditures, charges and losses incurred due to severe weather events or other natural conditions subject to certain thresholds.
- Capitalized costs, expenditures, and losses related to carbon offsets and renewable energy credits or certificates if material to the registrant’s strategy to achieve its disclosed climate targets or goals.
- A qualitative description of the development of estimates and assumptions if those estimates and assumptions used to produce the financial statements were materially impacted by risks and uncertainties related to severe weather events or other natural conditions.
Please note that the above summary is not an exhaustive list, and it’s important to reference the SEC Fact Sheet and the text of the final rules, “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” to learn more.
Compliance Timing
For disclosures other than GHG emissions, such as financial statement disclosures, LAFs must provide them starting with FYB 2025; AFs in FYB 2026; and SRCs and EGCs in FYB 2027.
Certain quantitative and qualitative disclosures related to transition plans and activities about climate-related targets or goals are required in the following year.
Lastly, Inline eXtensible Business Reporting Language (Inline XBRL) tagging is required for LAFs and AFs in FYB 2026; and SRCs and EGCs in FYB 2027.
What’s next?
The compliance process may seem daunting, but it doesn’t have to be. We recommend partnering with a third-party expert to support you in this process. It’s advised to start the compliance planning process as soon as you can. Internal controls will need to endure assurance of internal controls over financial reporting and GHG emissions. Make sure to have a well-defined plan to obtain climate related data.
As always, the internal audit experts at Sikich can support your organization in meeting this critical compliance objective and more. Contact our team today.
