Disclosing climate risks

Last month, the U.S. Securities and Exchange Commission (SEC; www.sec.gov) finalized rules [1] that require registrants to disclose information about climate-related risks in their annual reports and registration statements. Recognizing that climate-related risks can affect a company’s business and financial position, the SEC rules are intended to give investors “more consistent, comparable and reliable information about the financial effects of climate-related risks on a registrant’s operations and how it manages those risks.” The new rules were first proposed two years ago, in March of 2022. Since that time, the SEC has considered more than 24,000 comment letters about the initial proposal before voting on, and passing a modified final ruling on March 6, 2024. The final rules will become effective 60 days after publication in the Federal Register, and compliance dates will be phased in, depending on the registrant’s filer status.

 

The final rules

The final rules require registrants to disclose information about climate-related risks that materially impact business strategy, operations or finances. Some disclosures related to severe weather events and other natural conditions are also required. In its Fact Sheet about the rules, the SEC states that the rules require the following, among other things, to be disclosed: “material climate-related risks; activities to mitigate or adapt to such risks; information about the registrant’s board of directors’ oversight of climate-related risks and management’s role in managing material climate-related risks; and information on any climate-related targets or goals that are material to the registrant’s business, results of operations, or financial condition.”

In addition, some registrants are required to disclose Scope 1 and Scope 2 greenhouse gas (GHG) emissions. Scope 1 includes direct GHG emissions from sources that are controlled or owned by an organization. Examples are emissions from fuel combustion from boilers, furnaces and vehicles. Scope 2 refers to indirect GHG emissions, for example those that are associated with the purchase of electricity, steam, heat and cooling. Scope 3 emissions result from an organization’s upstream and downstream activities [2].

The proposed rules included requirements to report Scope 3 emissions, but this requirement was dropped in the final rules. In response to the final rules announcement, the American Chemistry Council (ACC; www.americanchemistry.com) states “While it will take some time to digest the lengthy rule package, we’re pleased that the Commission has removed the proposed requirement that companies quantify and report on ‘Scope 3’ emissions. ACC members supply critical chemistries used in the value chains of nearly every sector of the economy. This requirement posed unique challenges for the chemical sector while providing little value to investors.” The ACC also points out that its members already track Scope 1 and 2 emissions through its Responsible Care program, and it further states “ACC and its members are committed to being partners and solution providers in supporting a sensible path to a lower-emissions economy. We vigorously participated in this rulemaking and look forward to engaging on proposals with significant impacts for companies and sustainability efforts.” ■

Dorothy Lozowski, Editorial Director

 

 

 

 

^{1. The Enhancement and Standardization of Climate-Related Disclosures: Final Rules can be found at www.sec.gov}

^{2. Source for the definition of emission scopes: U.S. Environmental Protection Agency; www.epa.gov}