On March 6, 2024, the Securities and Exchange Commission (SEC) announced the completion of the highly anticipated climate disclosure rule.
This pivotal decision underscores the importance of providing investors with uniform, easily accessible information regarding climate-related disclosures. The rule mandates that businesses with obligations under the Securities Act and/or Exchange Act—including business development companies (BDCs), real estate investment trusts (REITs), and issuers of registered non-variable insurance contracts—disclose their climate-related information. Notably, asset-backed issuers are not encompassed by this rule.
ACA Group, a developer of scalable compliance, risk and technology solutions, has recently delved into the disclosure rules and what they mean.
The initial proposal of the climate disclosure rule, which was unveiled in March 2022, garnered unprecedented feedback, marking it as the most commented-on proposed rule in SEC history. This extensive public engagement led to several modifications in the final version. Under the finalized rule, registrants are required to disclose their Scope 1 and Scope 2 emissions if such disclosures are considered material, whereas Scope 3 emissions disclosure remains optional.
The concept of materiality plays a crucial role in this context. Although Scope 3 emissions are not mandatory for disclosure under the final rule, they should not be overlooked. The SEC employs a materiality threshold that hinges on whether a reasonable investor would find the omitted information crucial in making investment decisions. During an Investor Advisory Committee panel on March 7, 2024, the SEC highlighted the persisting relevance of materiality in securities laws, which is reflected in the climate disclosure rule.
The scope of the final rule is comprehensive, applying to all SEC registrants with Exchange Act reporting requirements, as well as entities filing Securities Act or Exchange Act registration statements. This includes a broad spectrum of companies from large accelerated filers to foreign private issuers, with certain exemptions such as Canadian registrants under the MJDS filing on Form 40-F.
The rule introduces several reporting mandates, emphasizing the need for disclosure of material climate-related risks in registration statements, financial statements, and annual reports. It outlines the necessity for disclosures of Scope 1 and/or Scope 2 emissions, based on their materiality, and requires limited assurance, with large accelerated filers eventually needing to provide reasonable assurance.
Moreover, the rule advises on disclosing climate-related risks that are expected to significantly impact the registrant in both the short and long term. It also necessitates information on the use of scenario analysis, internal carbon pricing, climate-related goals or targets, and the financial implications of severe weather events or natural conditions, following a 1% de minimis threshold.
By aligning closely with the Task Force on Climate-Related Financial Disclosures (TCFD) framework, the SEC aims to enhance the clarity and consistency of climate-related disclosures.
Private equity firms, particularly those preparing for an IPO, must assess the potential material climate-related risks and the necessity of disclosing transition plans or climate-related goals, despite emerging growth companies being exempt from emissions reporting requirements.
The evolving landscape of environmental, social, and governance (ESG) mandates necessitates a thorough understanding and preparation for regulatory changes. ACA’s ESG Advisory Team offers guidance and support in navigating these new requirements, ensuring compliance and strategic alignment with regulatory expectations.
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