What you need to know about the SEC’s new climate disclosure rule
Most publicly traded companies are now required to disclose their climate-related risks. The Securities and Exchange Commission (SEC) announced the landmark rule on March 6, 2024 — and set off a firestorm of complaints and legal action that could go all the way to the Supreme Court.
Let’s break it down:
Key requirements of the new SEC climate disclosure rule
The SEC’s decision recognizes that climate change and climate-related events pose material risks to business performance. As such, investors and consumers should have more transparency into companies’ climate-related activities.
Companies must now disclose:
- Material climate-related risks: These are risks that could impact their business strategy, operating model or financial condition and include actual and potential risks that could arise from extreme weather events or new regulations.
- Mitigation and adaptation activities: Companies need to disclose what they’re doing to mitigate or adapt to climate risks, such as investing in renewable energy or making supply chain adjustments to build resilience. The SEC is looking for qualitative and quantitative evidence, including expenditures.
- Costs related to severe weather events: The SEC is asking companies to describe the financial and operational impacts of hurricanes, floods, wildfires and other severe weather events.
- Climate-related goals: If the company has set targets or made commitments, they must disclose them.
- Plans for board oversight of climate-related risks: Here, the SEC wants to see how climate is built into a company’s overall strategy for risk management.
Climate risk disclosures must be included in a company’s SEC filings, such as annual reports and registration statements.
The new reporting rule covers Scope 1 and Scope 2 greenhouse gas (GHG) emissions, and GHG emissions data must be audited by an external party.
Timing of the new SEC reporting requirement
The SEC called for a rolling schedule, where the disclosure requirements increase over time. A narrative disclosure and financial statements are required from large accelerated filers in 2026 (based on 2025 data). Mitigation activities, emissions data and attestations will be required in subsequent years.
Smaller reporting companies, emerging growth companies and nonaccelerated filers follow slightly later schedules.
Controversy around the SEC’s decision
The SEC approved the new rule so investors could access consistent and comparable information to guide their decisions. Proponents of the rule argue that transparency around climate could boost investor confidence and help companies attract new sources of capital.
Consumers are also demanding stronger commitments to sustainability. Companies with strong environmental, social and governance (ESG) practices can leverage their disclosures to gain a competitive advantage — or to attract and retain talent.
Despite these potential advantages, many businesses are upset over the rule, and several states are suing the SEC. They say it creates an unnecessary reporting burden and forces companies to disclose details they’d prefer to keep private.
Environmentalists argue the reporting requirements are selective and worry they’ll encourage greenwashing rather than meaningful climate action.
Meanwhile, California Gov. Gavin Newsom signed even stronger climate disclosures into law in October 2023.
Under S.B. 253 and S.B. 261, companies that operate in California must disclose their direct, indirect and value chain-related GHG emissions, as well as their climate-related financial risks. Companies will likely need resources and infrastructure to comply with California’s disclosure laws.
Effects on smaller firms
Companies that operate in the U.S., and certainly in California, need to evaluate how these disclosure requirements could affect their operations.
The SEC’s reporting requirement is mostly limited to large companies. However, smaller and medium-sized firms will feel trickle-down effects from the rule. For example, large companies are already asking partners along the value chain to measure and share their emissions data.
The supply chain will be a key focus when big businesses analyze their climate risks and environmental impact. Smaller companies need to consider how they will report and share ESG-related data with partners — and how they can leverage it to secure new relationships.
How Wipfli can help
Our ESG advisory services help you conquer compliance, manage costs and leverage ESG strategies to create new value. Companies of every size will need to adapt, collaborate and innovate to create a sustainable future. Contact us today to determine how new (and changing) regulations and reporting standards affect your organization.
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