AN INVESTOR GUIDE TO THE SEC RULE

ON CLIMATE-RELATED DISCLOSURES
ACTIONABLE INSIGHTS FOR A DECARBONIZING WORLD
March 2024 AUTHORS:
Stephanie Jones
Andrew Howell, CFA
Guillaume Morauw
Marie Li
Maximilian Schreck
Elle Stephens

INTRODUCTION
On March 6, 2024, the Securities and Exchange Commission (SEC) issued a final rule for “The Enhancement
and Standardization of Climate-Related Disclosures for Investors.” The rule builds on the SEC’s initial
interpretative guidance on climate risk disclosure in 2010, and will provide investors with comparable, specific,
and decision-useful information about companies’ environmental risks and strategies. The final rule follows
release of a proposed rule in March 2022 and a subsequent comment period in which over 24,000 letters were
filed by investors, businesses, and other stakeholders, with most of those supportive of the proposal.

The final rule requires covered companies to disclose certain types of climate-related information, bringing
climate risk disclosure on par with other financial reporting requirements for publicly traded companies. The SEC
has long required publicly traded companies to disclose information that indicates risks they may face, like from
legal proceedings, market shifts, resource scarcity, or uncertain circumstances like Y2K or COVID-19. In adding
climate risk disclosures to the SEC reporting framework, the rule mirrors similar requirements in other
jurisdictions including the European Union, United Kingdom, and Japan. The SEC requirements will be phased in
over several years and will replace inconsistent, voluntary reporting of climate risk exposure with clear and
consistent standards. Better information will allow for better management of risk. The rule therefore marks an
essential step forward in enhancing investors’ capacity to manage portfolio-wide climate risks, protecting the
overall health of the financial system.

The purpose of this investor guide is to provide the financial sector with an overview of the rule and its key
components, summarize the implications of the rule for investors, put the rule into context with other
international frameworks, and map out next steps towards implementation of the rule. In all, EDF believes that
this rule represents a crucial step forward in climate-related financial risk reporting and will strengthen the
overall health and stability of the financial system. We recommend that investors – the direct beneficiaries of
this rule – publicly voice their perspectives on the importance of climate risk disclosure to help inform and
support the rule’s implementation.

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OVERVIEW OF THE RULE
The new rule on climate-related disclosures requires publicly traded companies registered with the SEC to disclose
certain climate-related information in registration statements and annual reports. This information includes: 1)
material climate-related risks to the company,1 2) the company’s activities to mitigate or adapt to such risks, 3)
information about management’s role in managing material climate-related risks and the board of directors’
oversight of those risks, and 4) information on climate-related targets or goals that are material to the company’s
business operations.

Additionally, the rule requires larger companies to disclose Scope 1 (direct) and Scope 2 (from energy use)
greenhouse gas (GHG) emissions, if material, to facilitate investors’ assessment of transition-related risks. In
response to input from commenters, the SEC will allow such disclosures to be filed on a delayed basis (e.g., for
domestic companies, any required GHG emissions disclosures may be made in the second quarter following the
relevant fiscal year). Starting in 2029, companies required to make GHG emissions disclosures will need to include
an attestation report from a qualified, independent third party affirming their calculations.

Finally, the rule requires companies to disclose certain relevant information in their financial statements.
Companies will disclose costs, expenditures, charges, and losses related to severe weather events, subject to
certain thresholds, and related to carbon offsets and renewable energy credits or certificates, if material to
climate-related targets or goals. Companies will also need to describe material impacts, if any, of climate-related
factors on the estimates and assumptions that went into preparing the financial statement.

The final rule incorporates longer phase-in periods for reporting requirements than were in the initial proposal, with
compliance deadlines depending on a company’s filer status and the type of disclosure. For many of the disclosure
requirements, large accelerated filers will first need to report on fiscal year 2025, accelerated filers on fiscal year
2026, and other filers (smaller reporting companies, emerging growth companies, and non-accelerated filers) on
fiscal year 2027. Companies will have additional time to comply with certain disclosure requirements. For example,
Scope 1 and 2 emissions disclosures are required for fiscal year 2026 for large accelerated filers, and for fiscal
year 2028 for accelerated filers that are subject to the requirement, while other filers are not required to report on
emissions at all. These extended phase-in periods provide companies with time to develop, modify, and implement
any processes and controls necessary to the assessment and reporting of material climate-related risks.

1 Per the rule, “materiality refers to the importance of information to investment and voting decision about a particular company, not to the importance of the
information to climate-related issues outside of those decisions.”

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The SEC received thousands of comments from affected stakeholders and other parties on the proposed rule and
made a number of modifications as a result. Key changes are highlighted below.

Issue Proposed Rule Final Rule

Less prescriptive (i.e., more flexible) disclosures on
climate-related risks to company and company’s
Disclosures on climate-related risks to
governance, strategy, risk management, and targets/
company and company’s governance,
metrics relating to those risks (similar to TCFD). (For
strategy, risk management, and
example, eliminated the proposed requirement to
targets/metrics relating to those risks
describe board members’ climate expertise.)
(similar to TCFD).
Disclosures on Scope 1 and 2 GHG emissions for
Disclosures on Scope 1 and 2 GHG
Overall larger companies, if material, with independent
emissions with independent auditing,
auditing (no Scope 3).
and Scope 3 if material or if part of
a target. Scaled-back set of financial statement metrics and
disclosures on climate-related impacts and
Financial statement metrics and
expenditures. (For example, eliminated the proposed
disclosures on climate-related impacts
requirement to disclose climate-related impacts
and expenditures.
above a 1% threshold on each line item of the
financial statement.)
Materiality limitations for certain
requirements – i.e., disclosure only
Materiality limitations specified for most
required if the company deems the
requirements, including Scope 1 and 2 GHG
Materiality information material to investors –
emissions disclosures (no Scope 3) and TCFD-
such as for Scope 3 GHG emissions
aligned disclosures.
disclosures and some of the TCFD-
aligned disclosures.

Scope 1 and 2 GHG emissions disclosures, with

Scope 1 and 2 GHG emissions, with
independent auditing, required only for large
independent auditing, and Scope 3 if
GHG Emissions accelerated filers and accelerated filers, and only
material or if part of a target. Smaller
Disclosures when those emissions are material (no Scope 3
reporting companies exempted from
requirements). Option to provide this disclosure on a
auditing and Scope 3 requirements.
delayed basis.

Safe harbor from private liability for forward-looking

Safe harbor from liability for Scope 3 statements pursuant to the Private Securities
GHG emissions disclosures and for Litigation Reform Act, and affirmation that forward-
Safe Harbors forward-looking statements pursuant looking disclosures pertaining to transition plans,
to the Private Securities Litigation scenario analysis, the use of an internal carbon price,
Reform Act. and targets and goals fall within this protection. (No
Scope 3 GHG emissions disclosure requirements.)

Phased in by type of disclosure and Phased in by type of disclosure and company size,
company size, with first disclosures with first disclosures from large accelerated filers for
Implementation
from large accelerated filers for FY2025, and full implementation by FY2033. More
Timeline
FY2023, and full implementation by gradual phase-in and more exemptions for small
FY2028. filers than in proposal.

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IMPLICATIONS FOR INVESTORS
Transparency around the scope and scale of climate risk is fundamental to healthy investment markets.
Climate change adds risk to the financial system through physical climate risks, such as extreme weather
events that damage companies’ assets and operations, and transition risks to companies’ business models
linked to shifts in policy, technology, and consumer demand. These risks are distributed unequally across
regions, sectors, and individual businesses.

To incorporate climate-related financial risks into their decision-making, investors must be able to identify and
evaluate such risks. Investors in the U.S. have so far had to rely upon voluntary disclosures that companies
make under frameworks like the Task Force on Climate-related Financial Disclosures (TCFD). However, the
voluntary nature of these protocols has limited their utility. The new SEC climate risk disclosure rule aligns the
reporting practices that many U.S. businesses already have in place and supports investors’ ability to
accurately assess and price climate risks in investment decisions.

The SEC received support for its rulemaking in public comments from companies and financial institutions
including Bank of America, Vanguard, Walmart, Total Energies, General Motors, and United Airlines. These
companies and others have called for enhanced standardization of climate risk disclosures because:

Climate risk is financial risk. Substantial research documents the potentially disruptive impacts of climate
change across a wide range of industries, including both physical risks to companies’ assets and
operations, as well as transition risks. Market participants have significant interest in understanding the
size and scope of these risks.

Investors need better information to make more informed investment decisions. Climate-related
information is essential to managing financial risk. Non-standardized and voluntary risk disclosures are of
limited value for market participants in evaluating individual companies or comparing performance across
an industry, due to data gaps and inconsistency. Many financial institutions resort to paying large sums to
third party data providers for modelled data, in the absence of consistent company-reported data. The
new rule will provide market participants with consistent, comparable, and decision-useful information.

The rule brings disclosure of climate-related financial risks level with the disclosure of other forms of
financial risk. Historically, the SEC has required publicly traded companies to disclose various financial
risks. However, climate-related risks, despite their potential impact on the global economy by 2050, have
not been subject to the same level of rigor. The new rule changes that.

Climate disclosure rules are rapidly becoming the norm. With the new rule, the U.S. aligns with other
jurisdictions that have adopted climate-related disclosure requirements, including the European Union and
California. Standardized U.S. climate risk disclosure enhances the comparability of U.S. data with data
from other jurisdictions, enabling market participants to effectively manage climate-related financial risks.

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CLIMATE RISK DISCLOSURE IN OTHER JURISDICTIONS
The SEC’s adoption of climate risk disclosure standards in the US aligns with a trend toward such requirements in
key jurisdictions globally. In recent years, more than 40 other countries with over $55 trillion in GDP have taken
steps to require corporate climate disclosures.

The establishment of the ISSB and the 2023 publication of its inaugural standards created a global baseline for
corporate sustainability disclosures that many jurisdictions have built from. However, the scope of disclosure rules
varies by jurisdiction. Most major jurisdictions outside the US include Scope 1, 2 and 3 emissions in their
disclosure frameworks. In the EU, the Corporate Sustainability Reporting Directive goes beyond investor-focused
climate data reporting to address environmental, social and governance topics from a double materiality
perspective2, an approach that has also been proposed in China.

Global Frameworks for Mandatory Climate Disclosure

Key elements Status Scope of Coverage

• Scope 1 and 2 GHG
emissions, if material
Finalized in March 2024,
• Narrative disclosures in Companies registered with the SEC
with phased-in compliance
line with TCFD’s four (over 7,000 entities), with smaller
US beginning for large accelerated
pillars: governance, filers exempt from certain
filers on some disclosures in
strategy, risk requirements
2026 for FY2025.
management,
metrics/targets
• Scope 1, 2 and 3 Published in February 2024, with
Large, listed entities
China application expected in 2026 for
• Double materiality (over 400 entities)
FY2025
• Scope 1, 2 and 3 Legislation published in December
2022 (Sector-agnostic standards
• Double materiality published in December 2023). All large companies operating in the
EU • Sector-agnostic standards Phased application with first EU and all listed companies
covering environmental, (50,000 entities)
reporting in 2025 for FY2024.
social and governance
topics Upcoming: sector-specific standards
SB 253 (the Climate Corporate Data
Accountability Act) and SB 261(the
Climate-Related Financial Risk Act) SB 253 covers public and private
both signed into law October 2023. companies doing business in
• Scope 1, 2, and 3
California with $1 billion or more in
SB 253 requires scope 1 and scope
• Climate-related financial annual revenue.
California 2 disclosures by FY 2026, and
risk disclosures consistent scope 3 disclosures by 2027.
SB 261 covers public and private
with recommendations
companies doing business in
from the TCFD framework SB 261 requires TCFD-aligned
California with $500 million or more
disclosures by 2026.
in annual revenue.
Upcoming: implementing
regulations
2 Double materiality refers to the consideration of how a company’s activities impact people and the planet (impact materiality), in addition to how social and
environmental factors may impact the company’s development and performance (financial materiality).

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WHAT COMES NEXT
Rigorous, standardized climate risk disclosures are essential for investors to accurately price risks and allocate
capital prudently, which is why investors have supported the need for a mandatory disclosure framework offering
comparable, specific, and decision-useful information about climate risk. When implemented, the SEC rule will
improve the quality and quantity of climate risk information available to investors in the U.S. market.

In the months ahead, the climate risk disclosure rule will be the subject of litigation challenges in federal courts
from various parties – so far, some oil and gas sector entities and state attorneys general – that asserted
opposition to the rule even before the language was published.3 And while many members of Congress have
recognized the importance of SEC action on climate risk disclosures, others have announced their intentions to
attack the rule using the Congressional Review Act or other legislative tools.

Investors can help ensure that the rule successfully goes into effect by supporting it publicly and otherwise.
This can include restating previous endorsements, issuing new statements of support, engaging with professional
membership organizations to encourage support for (and discourage opposition to) the rule, and participating
directly in the litigation over the rule.

CONCLUSION
This final rule, informed by the SEC’s rigorous analysis and consideration of investor and business feedback,
represents an important step forward in climate-related financial risk reporting. It replaces the current
fragmented system with a standardized approach, enabling market participants to make informed decisions
based on consistent, comparable, and decision-useful information. Ultimately, this rule will strengthen the overall
health and stability of the U.S. financial system.

Further reading

Banking Regulators Take Critical Steps to Account for Climate-Related Financial Risks - an article by EDF’s
Lead Counsel for Climate Risk (Nov 2022).

What Investors and the SEC Can Learn from the Texas Power Crises – a report from EDF and scholars at
The Brookings Institution (June 2021).

Comments to SEC on Climate Disclosure – joint comments filed by EDF, the Institute for Policy Integrity at
NYU Law School, and the Initiative on Climate Risk and Resilience Law (June 2021).

Mandating Disclosure of Climate-Related Financial Risk – a joint report from EDF and the Institute for Policy
Integrity at NYU Law School (Feb 2021).

The SEC should require companies to disclose climate change risk – an article by EDF’s Lead Counsel and
Director of Climate Risk Strategies (Dec 2020).

3 Environmental organizations are also seeking court review of the rule, but are not asking the courts to strike it down. Rather, they are challenging the SEC’s
decision to drop some of the proposed disclosure requirements.