SEC Climate Disclosure: What Companies Need to Know

The wait is over. On March 6, 2024, the U.S. Securities and Exchange Commission (SEC) released its long-anticipated final Climate Disclosure Rule, “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” 

The rule, which calls for publicly traded companies to report climate information in their annual reports, was first proposed in 2022. The proposal sparked widespread debate and fostered speculation as to how the final rule might differ — leaving businesses in limbo as they awaited guidance. With the latest announcement, the uncertainty has come to an end. The final SEC rule directs organizations to report their climate data in a standardized, rigorous, and globally-aligned manner. Now that firms have a clear direction of travel, they can take decisive action as they move from voluntary to regulated climate reporting.

In this article, we’ll cover the key requirements of the final rule, timing for reporting, and the steps businesses can take to prepare for filing with the SEC. 

What is the Purpose of the SEC Climate Disclosure Rule? 

The SEC rule aims to provide investors with data about the financial risks businesses face as a result of climate change.

With its final climate disclosure rule, the SEC answers the growing demand from investors for credible, comparable, reliable information about how climate change affects the financial performance of organizations and the steps they are taking to address climate-related risks. 

The rule signals that the SEC recognizes climate risk as material as other information included in a company’s Form 10-K, and it has broad implications moving forward. It represents a significant step towards providing consistency and clarity as companies respond to a wave of new disclosure expectations from the European Union, California, and the rest of the world. Ultimately, the standardized disclosures required by the SEC promise to better inform investors and help U.S. businesses compete in a global marketplace.

Key Requirements of the Final SEC Climate Rule

Affected companies must provide narrative disclosures, emissions data, and information on financial risks 

In order to provide investors with decision-useful information, the SEC wants to see a range of information about the climate-related risks publicly traded companies face. Businesses affected by the law must now incorporate three categories of disclosure into their SEC filings:

1. Narrative Disclosure

All SEC registrants must now include a narrative discussion of their identification, management, and oversight of climate-related risks. The final rule updates regulation S-K to require organizations to report on the material impacts of climate-related financial risks, their strategies to address those risks, and their governance structures, all in alignment with the recommendations of the Task Force on Climate-Related Financial Disclosures (now under the International Financial Reporting Standards). 

This section of the final rule remains largely the same as the language in the original proposal, though it is now less prescriptive, subject to materiality, and no longer includes a provision requiring disclosure of board members’ climate expertise. 

In the narrative, companies must disclose: 

• Climate-related risks that have either had or are reasonably likely to have a material impact on the company’s business strategy, results of operations, or financial condition, as well as on the company’s business model and outlook. 

• The board’s oversight of climate-related risks and management’s role (if any) in assessing and managing the company’s material climate-related risks.

• Company processes, if any, for assessing and managing material climate-related risks, and how any such processes are integrated into the company’s overall risk management systems. 

• Impacts resulting from actions taken under a transition plan, if used. 

• Activities (if any) to mitigate or adapt to material climate-related risks, including transition plans, scenario analysis, and carbon pricing, if used. 

• Climate-related targets or goals, if any, that have affected or are reasonably likely to affect the company’s business, financial condition, or results of operations. This includes material expenditures and impacts on financial estimates resulting from the target or actions taken to meet such target or goal. 

2. Scope 1 and 2 Emissions Data (with Attestation)

Under the rule, Large Accelerated Filers (LAFs) and Accelerated Filers (AFs) must share their scope 1 and 2 emissions, when those emissions are deemed material. In other words, if a reasonable investor would find the data important in making decisions, the company must disclose it. As part of their reports, companies will also need to provide certain information related to the key assumptions, data, and figures underlying their scope 1 and scope 2 data. The SEC requires attestation of emissions data using a phased approach, which we describe in more detail below. 

Importantly, the final rule does not require reporting on scope 3 emissions, which typically account for the lion’s share of a company’s overall emissions profile. However, many businesses will still need to report their scope 3 data to Europe, California, and jurisdictions worldwide that incorporate ISSB standards into their regulations, and this category should not be overlooked. 

Calculating Emissions

The SEC draws from the Greenhouse Gas Protocol (GHGP) categories of emissions. Scope 1 and 2 emissions are defined as: 

Scope 1: Direct GHG emissions from sources owned or controlled by the reporting company. This includes emissions from sources like the combustion of fossil fuels in company-owned vehicles and on-site industrial processes.

Scope 2: Indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a registrant.

Cheat Sheet: Calculating Scope 1 and 2 Emissions

• The SEC rule does not require gases to be disaggregated unless any one of the six is material as disaggregated — for example, if you’ve set an emissions reduction target to reduce methane. 
• Scope 1 and 2 emissions are to be expressed in the aggregate in terms of CO2e.
• You must disclose scope 1 and 2 emissions in gross terms by excluding the impact of any purchased or generated offsets.
• You have flexibility in selecting organizational boundaries, as long as you disclose your approach.
• You can use one of the methods for determining control under the GHG Protocol, including the operational control approach – as recommended by some commenters – as long as you disclose the method used and provide investors with information material to understanding the scope of entities and operations included in the GHG emissions calculation as compared to those included in financial statements.
• You will not be required to disclose GHG emissions in terms of intensity — just absolute. 
• Description of the methodology, significant inputs, and significant assumptions used are still required, but are now more streamlined. Essentially, you must answer these questions:
  • Were the GHGs calculated using the GHG Protocol’s Corporate Accounting and Reporting Standard, EPA regulation, an applicable ISO standard, or another standard?
  • Was scope 2 measured using the location-based method, market-based method, or both?
  • Which calculation tools were used? These might include those provided by the GHG Protocol or pursuant to GHG emissions calculation under the ISO standards.
  • What type and source of emission factors were used? The final rule will not require the disclosure of any quantitative emission factors used.  Instead, it requires you to disclose the type and source of any emission factors used, such as the EPA’s emission factors for stationary combustion and/or mobile combustion of various fuel types.
• Estimates are allowed as long as underlying assumptions are described, along with the reason for using them.

Determining Materiality

The SEC Climate Rule is grounded in the concept of materiality, following the longstanding definition from the Supreme Court. This includes tests of whether the company believes the information would be important to a reasonable investor in making an investment decision and whether the information would substantially alter the total mix of information available to investors.

It will be up to each organization to conduct a materiality assessment and make a determination about which emissions they have to report. In order to determine materiality, we recommend companies first gather the necessary data to back up their decisions, including emissions metrics. This is critical — every affected company will quickly need to establish a reliable system for calculating GHG data. 

While the SEC did not provide detailed guidance on determining materiality, the rule uses two examples in which GHG emissions may be material. First, if a registrant faces a material transition risk that has manifested as a result of another jurisdiction's GHG emissions metrics requirement, then the registrant should consider whether such emissions metrics are material. Also, if a registrant has set a carbon reduction target, goal, or transition plan, they must determine if their calculations and disclosures are necessary to enable investors to understand their progress toward those goals.

Attestation Requirements

The rule requires Large Accelerated Filers and Accelerated Filers (excluding SRCs and EGCs) to submit attestation reports for their scope 1 and 2 emissions data. Starting three years after they begin disclosing, both groups will have to submit attestation reports based on “limited assurance.” In 2033, LAFs will have to upgrade to more rigorous “reasonable” assurance. 

Notably, the rule stipulates that assurance can be performed by providers as long as they are “expert” and “independent” — so the service will not be limited to auditing firms. Providers will have to apply standards that are publicly available at no cost or widely accepted and subject to public comment.  

These assurance requirements underscore the need to handle your climate data with the same rigor and care as your financial data. Robust internal controls will demonstrate a commitment to transparency and accountability — ultimately strengthening stakeholders’ confidence in your reporting. 

Placement of Data

Under the final rule, companies can make their GHG emissions disclosures either in their second quarter (Q2) Form 10-Q, or as an amendment to their Form 10-K, filed in Q2. This provides organizations with more time to gather their carbon data. 

3. Financial Statement Disclosures

In a note to the financial statement, companies will have to disclose information about the capitalized costs, expenditures, charges, and losses incurred as a result of severe weather events and other climate-related disasters, including hurricanes, tornadoes, floods, drought, wildfires, extreme temperatures, and sea level rise, subject to a 1% threshold. They will also need to share the material financial impact of the use of carbon offsets and renewable energy credits (RECs) if they are used to meet the organization’s stated climate goals. 

If climate-related weather and events materially impact the estimates and assumptions the company uses for its financial statements, it will need to include a qualitative description of that impact.

Who Does the Rule Apply To? 

All companies registered with the SEC will be affected.

The final rule affects thousands of businesses. All SEC-registered companies, including foreign issuers, must provide a narrative discussion of climate risks. Large Accelerated Filers (those with a public float of $700M USD or more) and Accelerated Filers (those with a public float of $75M to $700M USD) will need to report their material scope 1 and 2 emissions. Companies that don’t meet the $75M USD public float threshold will not have to report scope 1 and 2 metrics. If you're unsure about your status, consult with your legal or financial team. Here’s more information on how the SEC categorizes filers. 

SEC Climate Disclosure Timeline

Disclosures will phase in starting in 2026.

The SEC’s climate disclosure requirements will roll out over time depending on a company’s filing category, with narrative disclosures first and emissions metrics coming later. Narrative disclosures and financial statement notes will be required starting in 2026 for LAFs, in 2027 for AFs, and in 2028 for smaller reporting entities and emerging growth companies. The first scope 1 and 2 emissions disclosures will start in 2027 for LAFs and in 2029 for AFs. 

How Does the Final SEC Rule Differ from the Proposed Rule? 

Emissions data, timelines, and assurance requirements have changed.

While the final SEC rule mirrors the original proposal on many fronts, there are several areas of divergence — most notably the omission of scope 3 reporting requirements. Companies that have been preparing for reporting should take time to understand the key differences, which include: 

1. Less prescriptive TCFD-based disclosures. While narrative disclosure requirements remain largely the same, the final rule is less prescriptive, with reporting subject to materiality. It also removes an earlier provision requiring disclosure of a board member’s climate expertise. 
2. More limited emissions reporting. The final rule does not require scope 3 disclosure. Further, it only requires scope 1 and 2 data for LAFs and AFs — NAFs, SRCs, and EGCs are exempt — and this data is subject to a materiality filter. 
3. Changes to assurance requirements. The assurance provision from the proposal remains for LAFs and AFs where they have determined scope 1 and 2 emissions to be material. Both groups will have to obtain limited assurance within three years of their initial disclosures, and reasonable assurance will be required for LAFs within seven years. 
4. Updated financial statement provision. The proposed rule called for the inclusion of a note to the financial statements addressing climate impacts on line items. The final rule only requires a note to the financial statements related to severe weather events or the costs associated with the purchase of carbon offsets or RECs to meet the company’s climate goals.   

How Can Businesses Prepare for SEC Climate Disclosure? 

Start by establishing a reliable methodology and internal controls.

The SEC's Climate Disclosure Rule cements the transition from an era of voluntary climate disclosure to one of regulated disclosure — and the bar for data quality continues to climb. First, Large Accelerated Filers and Accelerated Filers should prepare to calculate their scope 1 and 2 emissions as a method to determine whether those emissions are material. Also, to ensure this data is traceable, transparent, and reliable, companies must establish effective internal controls and bolster their capacity to collect, manage, and report accurate GHG data — whether it is their first time or tenth.

This can be a daunting task, but resources are available to help. To prepare for reporting scope 1 and 2 emissions, teams should develop a reliable accounting methodology, following three critical steps: 

Steps for Developing a Reliable GHG Accounting Methodology 

1. Establish a repeatable and transparent data collection process

Companies need a data collection process that is both transparent and repeatable, enabling accurate measurements and facilitating third-party verification. Documentation of the data collection process is essential to comply with the SEC proposal's disclosure requirements.

2. Organize and rigorously control GHG emissions calculations 

You should treat GHG emissions calculations as a core function, employing the same rigor and technology infrastructure used in revenue and expense accounting. Carbon accounting software that presents calculations in an activity ledger can build confidence in the data you’re reporting and streamline the auditing process. Auditors can review each activity line item and associated calculations, minimizing manual errors and ensuring data integrity. Just as financial accounting teams rely on financial enterprise resource planning (ERP) systems for revenue and expense accounting, SEC reporting teams can tap into carbon ERP systems to automate activity data submission and calculations — ultimately enhancing efficiency and accuracy.

3. Integrate GHG emissions into broader investor disclosures 

To ensure consistency in both internal and external reporting, it’s essential to integrate GHG emissions data into the broader investor disclosure process. By incorporating GHG calculations and verifiable data, companies can build robust disclosure management processes and seamlessly integrate these metrics into annual filings. Managing GHG emissions data within an IT-controlled environment allows for the integration of disclosures for different entities (like California, the EU, or voluntary CDP reports), as well as SEC filings.

Establishing Internal Controls 

The inclusion of GHG emissions data in your SEC filings underscores the need for robust internal controls. CEOs and CFOs must now oversee a company's disclosure controls and procedures for preparing GHG reports. This means you need to treat GHG reporting with the same discipline you apply to other aspects of your Form 10-K. Documenting the process of creating disclosures and assigning ownership of specific tasks is essential to mitigate risks. Audit and risk teams consistently implement controls around revenue and expense numbers, and the same practice should apply to GHG accounting.

A process that automates high-risk processes and ensures accurate data collection, end-to-end transparency, and traceability can ensure compliance and auditability. This approach is helpful when undergoing third-party verification, facing investor scrutiny, or preparing for regulatory review. By utilizing carbon accounting software within a controlled IT environment, businesses can input source data, perform emissions calculations, and significantly reduce the risk of manual errors — all while maintaining an audit trail of every data point. 

How Persefoni Can Help You Get Ready for SEC Climate Disclosure

Carbon accounting software can be an invaluable tool for meeting the SEC’s new climate disclosure requirements. Persefoni’s AI-enabled carbon accounting platform is designed specifically for regulatory reporting to the SEC and other jurisdictions. Several features set it apart: 

It ensures quality, audit-grade data. 

Persefoni’s tool includes advanced data controls, comprehensive GHGP-aligned calculations, and enterprise-grade security. All GHG measurements can be traced back to the calculation and source data used to determine the CO2e. Calculations are tied to appropriate emission factors, eliminating manual errors, and are verified by a controlled system with a SOC 1 attestation. They can be readily reviewed and validated by a third party, facilitating the assurance process. With our updated reporting tool, users who have completed their GHG inventory can also generate a report from a growing set of voluntary and regulatory quantitative frameworks, allowing them to fulfill their disclosure obligations to various entities, including the SEC. 

It’s self-guided and user-friendly.

The platform doesn’t require extensive carbon accounting experience. Its easy-to-use interface taps into generative AI to provide in-platform support and expertise — cutting down on frustration and making carbon accounting approachable for the wide range of teams that will likely be involved in SEC reporting. 

You can calculate scope 1 and 2 emissions for free. 

Before you can determine whether or not your scope 1 and 2 emissions are material under the SEC’s definition, you will need a baseline measurement. Persefoni’s free tool can be particularly beneficial here. Instead of spending thousands of dollars for an initial assessment, you can use Persefoni to calculate scope 1 and 2 emissions at no cost — using the same technology trusted by publicly traded companies like Xerox, Dropbox, Aramark, Citi, and others. 

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Get ready for SEC reporting. Calculate your emissions for free with Persefoni.