SEC Climate Rule: What Are We Looking for in the Final Rule?

It has been 993 days since the Center for Audit Quality (CAQ) responded to the SEC’s request for public input on climate change disclosures, and 622 days since we responded to the SEC’s rule proposal, The Enhancement and Standardization of Climate-Related Disclosures for Investors (proposed rule).

In less than a week the SEC will hold an open meeting to consider whether to adopt rules to require registrants to disclose certain climate-related information. The long-awaited climate rule is almost here! The meeting will be held virtually on March 6, 2024 at 9:45 ET and will be webcast at www.sec.gov.

Read on for what the CAQ will be looking for in the final rule.

  1. What are the attestation requirements? Perhaps not surprising, but given we are the Center for Audit Quality, we were supportive of the proposed rule requiring certain registrants to subject certain greenhouse (GHG) emissions disclosures to attestation as this will enhance the reliability and quality of GHG emissions disclosures. Our most recent S&P 500 ESG Reporting and Assurance Analysis revealed that 64% of S&P 500 companies that reported ESG information already obtain assurance over certain GHG emissions information. Research shows that assurance over climate related reporting offers increased investor protection, in particular when performed by an external audit firm. We will be paying close attention to the final rule’s attestation requirements – and in particular those requirements that will enable the SEC to promote consistent, comparable, high-quality attestation over GHG emissions.
  2. What are the regulation S-X amendments? Climate-related risks, like any other risk, will vary from company to company. The time horizon for when those risks become material to the financial statements and are reflected in the underlying financial statement accounts also can vary from company to company. At the same time, investors continue to call for greater insight into how climate-related risks are affecting the financial statements. We were supportive of the SEC’s efforts to provide more clarity on what climate-related matters a company must disclose in their financial statements. However, we expressed concerns that the proposed financial statement metrics requirements as written in the proposed rule would not achieve the intended objectives and will result in various practical implementation challenges. We recommended the SEC consider alternatives that could help focus registrants on preparing more meaningful cost-effective climate-related disclosures that are comparable from company to company. Subsequent to our comment letter response to the SEC, we held a roundtable with Ceres to discuss alternative S-X requirements. We will be paying close attention to the S-X amendments in the final rule.
  3. What is the effective date or dates for the new requirements? Implementing the requirements in the final rule in a way that will support the disclosure of high-quality information that is decision useful will take time for registrants, auditors, and others to prepare. While many S&P 500 companies mention climate-related matters in their 10-Ks, the extent of that disclosure is limited. Our most recent Analysis of Climate-Related Information in S&P 500 Companies’ 10-Ks revealed that only 125 companies provided some insight into their GHG emissions – suggesting that many companies have a long way to go to prepare for all of the proposed disclosures. We will be interested to see how much time the effective date or dates will provide for preparation to comply.
  4. Will an alternative reporting provision be adopted that is structured to encompass reports made pursuant to the criteria developed by the International Sustainability Standards Board (ISSB)? The CAQ is supportive of a globally accepted ESG reporting system that is built from existing standards and frameworks that can be adapted to the needs of investors in different jurisdictions. Accordingly, we were supportive of an alternative reporting provision structured to enable reporting pursuant to criteria developed by the ISSB. Allowing the use of the ISSB Standards as alternative reporting to satisfy SEC issuer climate reporting obligations could be a mechanism for enhancing global comparability for investors and reducing the need for issuers to report in accordance with multiple standards or requirements. We will be looking to see whether the SEC adopts an alternative reporting provision that is structured to encompass reports made pursuant to the criteria developed by the ISSB.
  5. What are the boundaries for GHG emissions disclosures? In the proposed rule the SEC aligned the organizational boundaries for GHG emissions disclosures with the boundaries of the consolidated financial statements. However, many companies have been voluntarily reporting under different organizational boundaries than proposed. As a result, companies could encounter reporting challenges and burdens as they move toward reporting under a different boundary. We will be looking to see what boundaries the final rule will require companies to use when determining their GHG emissions disclosures.
  6. What framework should be used to support GHG emissions disclosures? The proposed rule concerning the presentation, methodology, including underlying assumptions, and organizational and operational boundaries applicable to the determination of Scopes 1 and 2 emissions did not specify a framework such as the GHG Protocol. We understand the SEC did not specify a framework so that registrants would have flexibility to adapt to new approaches and GHG emissions methodologies as they emerge. We recommended the SEC specify in the final rule that a widely used framework, such as the GHG Protocol, should be used to help support GHG emissions disclosures being more comparable from company to company and limit companies from opting to use bespoke methods. We will be looking for whether the SEC specified a framework in the final rule.

The CAQ will be paying close attention to the SEC’s final climate rule. Be sure to sign up for our CAQ newsletters to stay up to date on the resources and tools we are developing to support stakeholders in understanding the new requirements.