In March 2024, the Securities and Exchange Commission (SEC) adopted new regulations requiring publicly traded companies to disclose their exposure to climate-related business risks and to detail their own greenhouse gas emissions. The rules affecting annual reports and registration statements are a considerable change from pre-existing standards of climate-related risk management and reporting.
The SEC Climate Rule stay in April delayed the enactment of the regulations, pending judicial review. Even though the timeline for final enactment is unclear, companies are reviewing their current reporting and compliance measures to anticipate issues.
What’s in the SEC’s Pending Climate Disclosure Rules?
The purpose of the new climate disclosure rules is to standardize climate impact and risk reporting. This gives shareholders, governments, and the general public access to “consistent, reliable, and comparable information” about climate-based risks associated with companies’ business models and operations.
Initially, the SEC Climate Disclosure proposal was a sprawling document that borrowed heavily from similar legislation in Europe and California’s climate disclosure laws. The pared-down version retains the core requirements focused on a few areas of climate-related business risk disclosure.
General Disclosure Requirements and the Value Chain
The SEC will require domestic companies and foreign private issuers to disclose actual and potential material risk to their business strategy, financial condition, and operations, including proprietary physical assets (ex. warehousing), leased assets (ocean port access), or labor force.
This will not require climate-related risk disclosures involving value chain partners “unless such risk is material to the registrant’s business, results of operations, or financial condition.”
Unfortunately, this leaves considerable room for interpretation. There are resources available, like the SEC Climate Disclosure fact sheet, that offer valuable insight into assessing the “materiality” of supply and value chain risk assessments. For many businesses, the interpretation of these resources is likely to be reduced mandatory reporting of climate-related risks faced by supply chain partners.
Greenhouse Gas Emissions
The final rules additionally require disclosure of scope 1 and scope 2 emissions from large accelerated and accelerated filers, while exempting emerging growth companies (EGCs) and smaller reporting companies (SRCs). The original proposal had mandated emissions reporting from all filers, as well as scope 3 disclosures, which would have included reporting of indirect emissions related to supply chain vendors and end users; however, this is no longer mandated.
Companies can prepare for these requirements by investing in accurate internal reporting of fuel and energy use, which may involve software like climate management and accounting platforms (CMAPs).
Financial Disclosures
All registrants are required to disclose climate-related financial information in any audited statement. They must also disclose the financial impact of severe weather events equal to or greater than 1% of the absolute value of the total stockholder value or deficit. The document explains what qualifies as a natural disaster and how to evaluate its impact on accounting; it clarifies standards for measuring expenditure, loss, and charge-offs to make weather-related costs clear in financial reporting.
Read more: How to Improve Distribution’s Carbon Footprint
The New SEC Disclosure Rule Timeline & Status
These regulations are more than two years in the making. The SEC first presented its climate-related disclosure proposal in March 2022. After considerable public comment, the final draft was adopted in March 2024. Less than a month later, the SEC elected to voluntarily stay the rules in the face of numerous lawsuits from corporations and environmental advocates alike. By the end of April, 43 states joined litigation, with 18 siding with the SEC. Judicial review is still in progress with an unclear timeline and result.
Therefore, the earliest disclosures would likely deal with information covered by the fiscal year 2025 (filed in 2026) for large accelerated filers, with accelerated filers (2026) and EGCs, SRCs, and non-accelerated filers (2027) joining in subsequent years.
Legal Limbo: Will the Rules Become Reality?
Many are now wondering, Could the new climate disclosure rules still be struck down before companies would need to follow them?
In June, the US Supreme Court put the SEC’s work in serious jeopardy. By a 6-3 vote, the justices overturned the long-held Chevron deference, which held that courts should defer to executive branch agency regulatory interpretations, so long as an individual agency interpretation was not unreasonable. In overturning the principle of deference, the Supreme Court indicated a narrower view of federal agency authority than it had previously held. Experts believe this new construction could render the SEC’s climate-related disclosure mandates unenforceable.
At this time, the regulations are in the court’s hands, and companies are navigating considerable uncertainty.
How Companies Are Preparing
Many are preparing to comply by gathering relevant information and following prescribed financial statement guidelines to mitigate non-compliance risks and demonstrate transparency to shareholders. In the long term, these practices may ultimately prove beneficial for companies that follow them, regardless of the judicial outcome. Companies with ESG reporting and sustainability commitments may earn additional investment and enjoy a more receptive consumer environment.
It’s difficult to say if the rules will be enforced as introduced by the SEC, though there are alternative avenues. Similar disclosures could be introduced through state legislators, while federal disclosure requirements would need to pass through Congress.
Tilley Is Ready for What Comes Next
Tilley Distribution’s proactive approach to compliance and reporting standards positions us as an ideal partner for specialty ingredients solutions and supply chain services. Across industries and markets, we leverage internal resources and regional expertise to combine value-added services with a comprehensive specialty ingredients portfolio. See what makes Tilley a vital link in your organization’s supply chain; speak with a representative today.
