SEC adopts climate-related disclosure rule
This Wednesday the US Securities and Exchange Commission (SEC) voted (3 to 2) in favour of the long-awaited and domestically controversial Climate Related Disclosures for Investors rule. The new rule introduces enhanced, standardised, Inline XBRL reporting for various aspects of climate risk, designed to improve investor access to information. However, the requirements have been scaled back since the rule was first proposed and companies have been given more time to comply, an extra year to start disclosing their climate information in Inline XBRL and a lengthy implementation period for assurance over the new climate sections of their disclosures.
The rule aims to address investors’ demand for more reliable information about the financial impacts of climate-related risks and companies’ strategies to manage these risks. Commissioners supporting the rule (in the majority) were at pains to point out that some 90% of impacted companies already provide a range of sustainability information on a voluntary basis, the introduction of the rule aims to bring consistency, comparability and quality to the disclosures.
The SEC has mandated iXBRL tagging for the rule, noting that it will enable automated extraction and analysis of the information, allowing investors and other market participants to efficiently identify responsive disclosure, as well as perform large-scale aggregation, comparison, filtering, and other analysis of this information across registrants. The SEC received comments that continuing with the iXBRL would ease compliance as investors and filers are already familiar with the language.
SEC Chair Gary Gensler emphasised the importance of providing investors with “complete and truthful disclosure” and highlighted the evolution of disclosure requirements over the years to meet changing market needs. The final rules build upon existing reporting requirements by mandating material climate risk disclosures.
The rule has faced a controversial journey – with significant push-back from businesses and some politicians who argue that the SEC is overstepping its role as a financial regulator with this focus on climate. Several lawsuits are already on their way, with 10 US states vowing to sue the SEC over the new rule.
The final rule requires disclosure of climate-related risks, their impact on the company, related mitigation activities, and procedures for identifying and overseeing climate-related risks. Climate-related targets and any associated financial impacts are also expected to be disclosed. Reporting requirements also include Scope 1 and Scope 2 emissions for large accelerated filers and accelerated filers, and assurance is required for emissions disclosures at a limited level. Companies will also have to provide detailed information about the capitalised costs, expenditures expensed, charges and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to certain minimum reporting thresholds.
However, significant changes from the initial proposed rule include the elimination of Scope 3 reporting for GHG emissions and broad exemptions for smaller companies. Under the original proposal, all public companies would have been required to report greenhouse gas emissions, while the final rule will apply only to large businesses.
Lawsuits permitting, large-accelerated filers and accelerated filers should transition to reporting this information in iXBRL starting fiscal year beginning 2026 – providing a significant boost to investors looking to make use of digital, comparable climate-risk data on US companies. Stay tuned for further developments!
For more information, see the fact sheet here.
