Nearly two years after the SEC issued its preliminary climate rule, the world’s largest financial regulator voted in a three-to-two decision on March 6 to adopt the Enhancement and Standardization of Climate-Related Disclosures for Investors rule. It applies to roughly 2,800 public US companies and 540 foreign companies with business in the US. Commissioners Gensler, Crenshaw and Lizarraga supported the modified rule, with Commissioners Peirce and Uyeda opposing it.
In his remarks, Chairman Gensler reinforced the underlying purpose of the SEC to provide rules that promote “merit neutral” disclosure and noted that investors demand useful, comparable, and credible information on how material climate-related disclosures inform investment decisions. The SEC received more than 24,000 comment letters since the rule was first proposed in March 2022, the most ever received for a single proposal. While many comment letters were supportive of the rule, many were not, noting the high costs of compliance and the subjectivity of measurement approaches, among other criticisms. The rule starts taking effect in 2026 for FY25 reporting.
Here are five immediate takeaways on where the SEC landed on the final rules action following the unprecedented comment period:
Scope 3 has been omitted
Requiring a company to report on its Scope 3 – or indirect value chain emissions – was by far the most controversial element of the initial proposed regulation and has been removed completely from the final rule. Critics questioned the availability and credibility of Scope 3 data and the subjectivity it would create for firms around methodologies for calculation. This contrasts with the climate risk reporting rules of both California Climate Accountability Package (SB-253 and SB-261) and the European Union’s Corporate Sustainability Reporting Directive (CSRD), which both require more stringent Scope 3 disclosures. As Chairman Gensler commented during the March 6 public meeting, many SEC registrants with global operations will still be subject to additional jurisdictional disclosure requirements. Some have interpreted the SEC’s delayed vote and weakened stance on Scope 3 as a move by the Commission to let other jurisdictions lead the way on Scope 3 reporting requirements. The omission of Scope 3 from the rule has been met with criticism from environmental groups, which argue that avoiding indirect emissions weakens the rule. According to International Energy Agency (IEA), as of October 2022, 38% of S&P 500 were disclosing Scope 3 emissions as compared with 56% and 55% for Scopes 1 and 2.
Scopes 1 and 2 remain mandatory but only if determined material by registrant
Accelerated and large accelerated filers (AFs and LAFs) will be required to report on Scopes 1 and 2 greenhouse gas emissions (GHGs) starting in 2027 for fiscal year 2026, but only if the issuer determines them material to strategy, results of operations, or financial condition. The materiality test principle aligns to Supreme Court case law and especially TSC Industries v. Northway (1976) where disclosure of information is determined by whether a “reasonable” shareholder may find the information important and if the omission of that information has significance in the voting decision of that shareholder. In her dissent, Commissioner Peirce questioned whether a reasonable investor would find climate-related information decision-useful, but SEC commissioners who voted in support countered this argument by citing the volume of comment letters from supporting the rule. They also noted that nearly 90% of the Russell 1000 already publicly reports some climate information, albeit outside the SEC filing ecosystem. With the new rule, this information will now be a standard part of annual reports and other registration statements and not be confined to sustainability reporting.
Scopes 1 and 2 will require independent assurance for largest firms over a gradual timeline
Some SEC registrants will still need to seek external assurance on their emissions data, but they will have more time to comply under the modified rules. Attestation on Scopes 1 and 2 for LAFs will require limited assurance for fiscal year 2029 reporting and reasonable assurance for fiscal year 2033 reporting. Additionally, AFs will be required to obtain limited assurance for fiscal 2031 reporting but will not be required to obtain reasonable assurance, a key difference from the proposed rule. Smaller reporting companies (SRCs), emerging growth companies (EGCs), and non-accelerated filers (NAFs) will not be required to disclose Scope 1 and 2 emissions or seek attestation on the associated emissions.
Companies will need to disclose more details on their overall climate risk management
The rules require firms with GHG reduction targets or goals that utilize carbon reduction tools, such as internal carbon pricing mechanisms, carbon offsets, and renewable energy certificates (RECs), to provide additional information on how these costs affect the financial and operational considerations of the business. In essence, the SEC has concluded that firms that have existing GHG reduction goals have effectively already decided that this information is material. This requirement focuses on providing consistent reporting on the expenditure required to achieve reduction targets. In addition, firms will need to provide disclosures regarding efforts to mitigate or adapt climate-related risk, such as the use of scenario risk analysis or other transition planning. Finally, if the board of directors has specific oversight of these actions, this information needs to be made public. This overall climate risk management element of the SEC rule is closely aligned with the widely adopted TCFD voluntary framework, now part of the global ESG reporting harmonization efforts of the IFRS Foundation.
Additional information will be required for losses associated with severe weather events or other natural conditions
The SEC stopped short of requiring registrants to link losses from events like hurricanes or flooding to consolidated financial statements, but firms will still need to disclose these costs in a note to financial statements. More specifically, filers will need to report on what is largely considered physical climate risks on their operations: “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.”
What’s next?
Even though the SEC’s rule makes several concessions to industry, as Professor and former SEC commissioner Joseph Grundfest said, subsequent lawsuits are “just as [sure] as the sun rises in the East.” These suits will likely come from multiple parties and be based on many different lines of legal reasoning. These legal challenges will take up much of the public discourse on these rules, but communicators should also prepare for upcoming compliance deadlines as outlined in the release, as at least some of them will make it through the courts.
In the political arena, Republicans in Congress have introduced legislation to challenge the SEC’s ability to mandate climate disclosure. The SEC Act of 2023, introduced by Rep. Stephanie Bice (R-OK), would amend the Securities Exchange Act of 1934 to prohibit the SEC from requiring an issuer to make climate-related disclosures that are not material to investors, and for other purposes. Should Republicans take control of the White House and both houses of Congress in the upcoming November election, the regulation could also be subject to review and potential reversal via the Congressional Review Act.
How businesses should prepare
As with all major regulatory developments or litigation, communicators should stay in close contact with their legal colleagues on emerging lawsuits. If a company is signing onto or signaling support for a particular lawsuit, communicators should have at least a basic understanding of the legal argument behind it. In addition, other jurisdictions such as California and the EU have already finalized climate-related risk reporting where many SEC registrants will need to comply with as soon 2026 for FY25 reporting.
Some cases may focus on procedural issues such as the length of the comment period, while others may address the substance of the rule head on. Any external communications involving these cases will need to be appropriately calibrated. Questions may also be raised by media or other stakeholders regarding lawsuits the company is specifically not supporting. It’s unlikely that these matters would be discussed in the media, but it is something customers, vendors, and suppliers may ask about.
While the legal and political drama plays out, communicators should prepare for compliance to begin as outlined in the rule, which for LAFs could begin in 2026 with fiscal year 2025 reporting. Within hours of the SEC approving the rules, ten Republican-led states announced their intention to file a lawsuit challenging the regulations.
In the medium to long term, the new SEC rule and the growing international regulatory regime around climate disclosures will give activists more information to hold companies accountable for their green claims and climate commitments. Companies should ensure they have established climate risk governance that supports realistic climate goals, alongside clear communication plans that articulate the methodologies, assumptions, and limitations of disclosed climate data.
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--Natalie Short, Senior Vice President, Edelman Smithfield (natalie.short@edelmansmithfield.com)
--Andy Morimoto, Director, Climate Policy, Edelman Global Advisory (andy.morimoto@edelmanEGA.com)
--Lane Jost, Head of ESG Advisory, Edelman Smithfield (lane.jost@edelmansmithfield.com)