March 11, 2024 - On March 6th, the SEC adopted its long-awaited “The Enhancement and Standardization of Climate-Related Disclosures” rulemaking (“Climate Disclosure Rules”). The final rule differs significantly from the initial proposal, which attracted 24,000 comment letters. The final text was narrowly approved by the SEC in a vote along party lines and leaves both proponents and detractors of the rule disappointed. The SEC has already been sued over the rulemaking. With its future uncertain, the Climate Disclosure Rules impose significant new requirements for in-scope companies (i.e., SEC registrants), with certain exceptions.
Below we take a high-level look at what the rule says, with a focus on the impacts for private companies.
- Scope 3 emissions disclosure not required for any registrant: This is one of the most impactful changes in the final rulemaking. Scope 3 emissions are emissions from entities up and down a company’s value chain. While Scope 3 emissions are considered important to fully understand the GHG emissions of a company, the methodology for calculating these emissions is not standardized, based on estimates and the least currently reported by companies. Inclusion of Scope 3 emissions also posed the greatest risk to private companies. While only SEC registrants are covered by the Rules, it was certain that a Scope 3 disclosure requirement for those companies would indirectly cover many non-registrant companies that participate along reporting companies’ value chain.
- Scope 1 and Scope 2 emissions disclosure required only by large accelerated filers (i.e., public float exceeds $700 million) and accelerated filers (i.e., public float $75-$700 million) and only if material. Scope 1 and Scope 2 emissions are those that a company is directly responsible for and those that come from energy the company purchases and uses. Unlike the proposal, the Climate Disclosure Rules only require reporting of Scope 1 and Scope 2 emissions if material to the registrant. Third-party assurance requirements were also scaled back.
- Climate-related disclosure requirements based on materiality, including disclosures regarding impacts of climate-related risks, use of scenario analysis, and maintained internal carbon price.
- BDCs were not exempted from the Climate Disclosure Rules. Despite the SEC’s receipt of numerous comments pointing out that BDCs are not companies with operations and should be exempt from the Climate Disclosure Rules, the SEC declined to exclude BDCs. Emerging Growth Companies (EGCs) were excluded and may be an avenue for relief to the extent a BDC is an EGC. Non-accelerated filers are also relieved of GHG emissions reporting. It is notable that BDCs were also included in the SEC’s proposed ESG Disclosure Rules for Funds and Advisers, which may mean that there are two distinct GHG emissions reporting requirements.
- Asset-based securities issuers were not included in the Climate Disclosure Rules (as they were not in the proposal). The SEC did note however that it may consider climate-related disclosure requirements for asset-backed securities issuers in a future rulemaking.
- Climate Disclosure Rules’ requirements are phased-in over time based on company float size as described in the chart in the SEC’s Final Rules fact sheet.
For further information, please review the SEC’s Fact Sheet. Allen & Overy and Crowell & Moring have also published client alerts. We continue to digest the rulemaking and will update membership as appropriate.
