The Securities and Exchange Commission adopted (in a 3-2 vote) final rules requiring disclosures about the material impacts of climate-related risks on their business, financial condition, and governance.

These rules had first been proposed in March 2022.  The SEC adopted the final rules after considering, over a two-year period, some 4,500 unique comment letters from various authors. The SEC made some modifications from the Proposed Rules, most conspicuously withdrawing disclosure of greenhouse emissions from the users of a company’s products and services (so-called Scope 3 emissions). 

The SEC observes that many companies currently disclose substantial climate related information but characterizes this disclosure as “partial,” “fragmented,” “inconsistent” and “often difficult for investors to find and/or compare across companies.” The SEC says that its experience with its existing climate disclosure guidelines, in effect since 2010, indicates inadequate disclosures that leave the “need to both standardize and enhance the information available.” It says that “providing these disclosures in [SEC] filings also will subject them to enhanced liability that provides important investor protections by promoting the reliability of the disclosures.”

Of immediate interest to boards of directors are the final rules on disclosure of governance related to climate matters. The Final Rules will require public companies to disclose certain information about their board of directors’ oversight of climate-related risks. The Final Rules are somewhat less prescriptive than the proposed rules, which elicited substantial concerns from commenters on various grounds, such as potential intrusion into board processes, influence on board composition and practices, and disclosure of immaterial or sensitive information.  The SEC has scaled back some of the proposed requirements and eliminated others, while retaining key elements that will affect how companies report climate-risk governance.

Under the Final Rules, companies will have to disclose:

  • A description of the board of directors’ oversight of climate-related risks, if the board exercises such oversight.
  • The identification, if applicable, of any board committee or subcommittee responsible for overseeing climate-related risks and a description of the processes by which the board or such committee is informed about such risks. 
  • If the company has disclosed a target or goal related to climate change or a transition plan, whether and how the board oversees progress against the target or goal or transition plan. 

These disclosure requirements will apply only to companies that have information responsive to them, meaning that companies whose boards do not exercise oversight of climate-related risks or do not have any climate-related targets, goals, or transition plans will not have to disclose anything under these rules.  

The SEC has omitted from the Final Rules some of the more detailed requirements that were proposed, such as:

  • The identity of specific board members responsible for climate-risk oversight.
  • Whether any board member has expertise in climate-related risks and the nature of the expertise.
  • How frequently the board is informed of climate-related risks.
  • Information regarding whether and how the board sets climate-related targets or goals, including interim targets or goals.

The SEC stated that these changes are intended to avoid any misperception that this information is required for all companies, particularly those without existing processes or information to disclose, and to eliminate any unintended effects on the company’s governance structure and processes by focusing on one area of risk at the expense of others.   The SEC clarified that the Final Rules do not seek to influence companies’ decisions about how to manage climate-related risks or favor any governance structure or process, but rather focus on disclosure of companies’ existing or developing climate-risk governance practices. 

Beyond governance, companies will be required to disclose or include in filings:

  • Climate-related risks, actual and potential material impacts of these risks on the strategy, business model and outlook, activities taken to mitigate or adapt to material risks;
  • A description of material expenditures incurred and material impacts on financial estimates from mitigation and adaptation;
  • Specified disclosures concerning a registrant’s activities to mitigate or adapt to a material climate-related risk;
  • Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
  • Processes for identifying, assessing, and managing material climate-related risks;
  • Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations or financial condition; and
  • Financial statement note disclosure on capitalized costs of severe weather events, subject to a one percent and de minimis disclosure threshold.

The SEC emphasized that its objective is limited to advancing investor protection, market efficiency, and capital formation, and not to address climate-related issues more generally. It stressed that the Final Rules must be read in that context, specifically highlighting that whenever the Final Rules reference materiality this “refers to the importance of information to investment and voting decisions about a particular company, not to the importance of the information to climate-related issues outside of those decisions.”

Commissioner Peirce, in her dissent, noted that the SEC had failed to justify why climate issues deserve special treatment and suggested that the rules should have been reproposed for comment, especially given the significant comments generated by the original proposal, the adoption in the interim of other climate-related disclosure rules in Europe and in California, and the changes in these rules versus the proposed rules.  Commissioner Peirce also questioned the robustness of the economic analysis.  Commissioner Uyeda joined Commissioner Peirce in dissenting. 

Commissioner Crenshaw was emphatic in her comments that the SEC had authority to adopt rules that were more in line with the proposed rules and that would have, in her view, been more consistent with investor needs.    Commissioner Crenshaw seemed to suggest that some notion of substituted compliance be considered in the future if a registrant complied with other climate disclosure standards.

See the SEC’s Fact Sheet.

A detailed alert will follow.