After two years of development, including extensive public comment, the Securities and Exchange Commission (SEC) released new disclosure requirements related to climate change; specifically, financially material risks posed to corporate operations by greenhouse gas (GHG) emissions.

The new rule’s reporting standards advance efforts to achieve more consistent, coordinated regulatory reporting across jurisdictions on a range of environmental, social, and governance (ESG) risks. Breckinridge participated in the development process through its own comments submitted to the SEC. (See: SEC Proposes Climate-Related Reporting Requirements). 

The new rule represents incremental progress in improving regulatory reporting that investors can consider in assessing potential risks to their investment portfolios linked to long-term climate change. But the path to full enforcement was complicated less than two weeks after it was announced by the Fifth Circuit U.S. Court of Appeals, which temporarily stayed enforcement of the rule in response to legal action by two companies operating in the oil and gas sector.¹ Perhaps indicative of the complexity around the issue of climate-risk reporting, some business organizations criticized the SEC rule as going too far while some environmental groups criticized them as not going far enough.

New disclosure rule announced after two years of public comment

Two years after the SEC first proposed the rule, the SEC voted on March 6, 2024, to impose corporate climate-disclosure requirements on public companies. The two-year public comment period involved intense lobbying from some of the world's biggest and most influential industry and climate groups. Final rule requirements are softer than originally proposed in March 2022 but solidified a step towards addressing standardized climate-related disclosure.

Under the rule as announced, companies with $700 million in shares held by public investors will be required to disclose Scope 1 and 2 emissions beginning in fiscal year 2026, with audit assurance in 2029. Companies with $75 million to $700 million in shares held by public investors will be required to disclose beginning in fiscal year 2028, with audit assurance in 2031. Smaller companies are exempt from emissions reporting. There are materiality thresholds governing whether a company needs to report.

A key change from proposed rule to rule passed on March 6 was that companies would no longer be required to report indirect GHG emissions, known as Scope 3. The SEC received over 16,000 comments concerning the cost of compliance and consistency and reliability of Scope 3 data

The language also requires companies to disclose climate-related risks, internal carbon prices, mitigation strategies, transition plans, scenario analysis, and processes related to the oversight and management of climate risks. The rule also offers a safe harbor from private liability for climate-related disclosures thus shielding companies from certain legal challenges.

The SEC requirements are less stringent than regulations passed by California and the European Union. California law—also currently being challenged in court—requires companies with over $1 billion of annual revenue to publicly disclose Scope 1 and 2 emissions starting in 2026 and Scope 3 in 2027.

In 2022, Breckinridge wrote a letter to the SEC supporting the proposed requirements. Despite the backtrack on the Scope 3 rule, we believe the additional disclosure, including the standardizing reporting of Scope 1 and 2 emissions, is an important development. 

Climate risk is financial risk. Enhanced climate reporting will enhance our ability to understand how companies are preparing for the coming transition to a low carbon economy. This view is foundational to Breckinridge’s support of the Net Zero Asset Managers initiative (See Breckinridge Marks One Year as Signatory to Net Zero Asset Managers Initiative) and our Net Zero fixed income investment customization (See A More Comprehensive Climate-Aware Investing Strategy). 

Update April 4, 2024: SEC issues stay on climate rules implementation.

The SEC put its climate reporting rules for public companies on hold on April 4, 2024, following legal challenges.

Bloomberg Law reported that², in a statement, the SEC said it “will continue vigorously defending” the rules, despite issuing the hold, formally called a stay.

“In issuing a stay, the Commission is not departing from its view that the Final Rules are consistent with applicable law and within the Commission’s long-standing authority to require the disclosure of information important to investors in making investment and voting decisions.”

[1] “That Didn’t Take Long ... Fifth Circuit Temporarily Blocks New SEC Climate Disclosure Rule,” The National Law Review, March 27, 2024.

[2] “SEC Freezes Climate Rules After Challengers Pushed for Pause,” Bloomberg Law, April 4, 2024.

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