What the SEC’s New Climate Disclosure Rules Could Mean for Companies and Investors
Key findings
- The Securities and Exchange Commission has approved new rules that will require the largest U.S.-listed companies to publish their material Scope 1 and 2 greenhouse gas emissions and other climate-related financial information.
- While the rules do not require companies to disclose emissions from their value chain (Scope 3), companies are required to disclose climate-related risks that are likely to have a material impact in the short or long term.
- The rules may help to narrow a global disclosure gap: Only 45% of U.S.-listed companies currently disclose their Scope 1 and 2 emissions, compared with 73% of listed firms in other developed markets.
The largest U.S.-listed companies will be required to publish their material operational and energy-related greenhouse gas (GHG) emissions and other climate-related financial information annually under new rules adopted by the Securities and Exchange Commission (SEC).[1] The measures are designed to standardize disclosure of climate-related information available to investors.
The long-awaited rules will require so-called large accelerated filers (LAFs) to publish their material Scope 1 and 2 emissions and climate-related risks, as well as any processes they use to identify, assess and manage those risks.[2] Companies will also be required to detail capitalized costs and total expenditures expensed as a result of severe weather events. The rules do not require companies to disclose emissions stemming from their value chain (Scope 3).
Mind the disclosure gap
The rules may help narrow a gap in transparency between U.S.-listed firms and listed companies globally in disclosing both their emissions and financially relevant climate risks. U.S.-listed companies constitute roughly two-thirds (63%) of the total value of global equity markets.[3] As the exhibit below details, of the nearly 2,400 companies in the MSCI USA Investable Market Index (IMI), less than half (45%) disclose their Scope 1 and 2 emissions, and only 29% disclose some (and not necessarily the most-material) Scope 3 emissions, which make up the lion's share of emissions for most companies.[4]
US-listed companies lag in disclosing GHG emissions
Source: MSCI ESG Research, as of Feb. 15, 2024.
GHG emissions contribute to the systemic risks of climate change. Listed companies globally could see their costs of adapting to extreme heat, for example, quadruple to USD 4 trillion, if average global temperatures were to rise 3 degrees C (5.4 degrees F). The U.S. alone registered a record number of billion-dollar disasters in 2023, which marked the hottest calendar year on record globally.[5] In that context, it may not be surprising that transparency is in great demand — more than 80% of investors who commented on the SEC's proposed climate disclosure rules supported them.[6]
The requirement will not, however, catch all companies off guard. A majority of U.S.-listed companies in emissions-intensive sectors like utilities, materials and energy are already disclosing their Scope 1 and 2 emissions, as are companies in consumer staples, as our next exhibit shows.[7] The SEC's rules would standardize the obligation to disclose such emissions sector-wide but could also help to bring consistency and comparability to those disclosures.
Scope 1 and 2 GHG emissions disclosure in the US by sector
Companies represented by the MSCI USA IMI Index. Sectors as defined by GICS®. The GICS® structure comprises 11 sectors, 24 industry groups, 69 industries and 158 sub-industries. Source: MSCI ESG Research, as of March 7, 2024.
The information below summarizes key provisions of the final rules, which the SEC modeled in part on the framework developed by the Task Force on Climate-related Financial Disclosures (TCFD) — a global baseline for corporate climate disclosure — with the goal of reducing the reporting burden for companies and maintaining predictability for investors.
Largest companies impacted
The rules apply to the largest companies with SEC reporting requirements. That includes both LAFs and accelerated filers as well as large non-U.S. companies with U.S.-traded shares. Companies covered by the rules would be required to include climate-related disclosures in their registration statements and annual 10-K report.
While the rules do not apply to unlisted companies, those that are planning to go public may need to include climate-related disclosures in the registration statements they file with the SEC ahead of an initial public offering.
Summary of the rules
Companies covered by the rules would be required to include in their annual financial filings with the SEC:
- Material Scope 1 and 2 GHG emissions in absolute terms
- Disclosure of climate-related physical and transition risks that are reasonably likely to have a material impact on the company in the short or long term, including how the company oversees and manages those risks
- The company's climate-related targets, goals, use of scenario analysis and transition plans, including material expenditures incurred and impacts on financial estimates and assumptions as a direct result of the actions taken to achieve them
- The impact of severe weather events and other natural conditions such as hurricanes, extreme heat, wildfires and sea-level rise, including expenditures related to such events that will need to show as a stand-alone line item in their financial statements
- Information about an internal price on carbon, if the company uses one that is financially relevant to how the company manages climate-related risk
- Capitalized costs and other information about the use of carbon credits or renewable energy certificates if used as a material component of a company's climate plan
1 “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” SEC, March 6, 2024. The information in this post is provided as is and does not constitute legal advice or a binding interpretation. Any approach to comply with regulatory or policy initiatives should be discussed with your own legal counsel and/or the relevant competent authority, as needed.2 See “Accelerated Filer and Large Accelerated Filer Definitions,” Securities and Exchange Commission, available at www.sec.gov.3 Represented by the MSCI ACWI Investable Market Index (IMI), which includes large-, mid- and small-cap listed companies across 23 developed-market and 27 emerging-market countries. With 9,064 constituents, the MSCI ACWI IMI index covers approximately 99% of the global equity investment opportunity set, as of Feb. 29, 2024.4 See “CDP Technical Note: Relevance of Scope 3 Categories by Sector,” CDP, Version 2.0, Jan. 25, 2023.5 See “U.S. struck with historic number of billion-dollar disasters in 2023,” National Oceanic and Atmospheric Administration, Jan. 9, 2024. See also, “Global Climate Highlights 2023,” EU Copernicus Climate Change Service, February 20246 Cynthia A. Williams and Robert G. Eccles, “Review of Comments on SEC Climate Rulemaking,” Harvard Law School Forum on Corporate Governance, Nov. 23, 2022.7 Sector definitions according to the Global Industry Classification Standard (GICS®). GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.
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