The U.S. Securities and Exchange Commission (SEC) announced today the approval of its long-awaited climate-related disclosure rules for U.S. public companies, requiring companies for the first time to provide information in annual reports and registration statements on climate risks facing their businesses, plans to address those risks, the financial impact of severe weather events, and, in some cases, greenhouse gas emissions originating from their operations.

While marking a major milestone in the growing movement for companies to provide sustainability-related reporting, the finalized SEC rule significantly scales back the requirements of the SEC’s initial proposal, most notably removing the requirement for companies to report on Scope 3 emissions, or those originating in their value chains, outside of their direct operations.

Reporting requirements under the new rules include disclosure of climate-related risks with a material impact on business strategy, operations or financials, quantitative and qualitative descriptions of material expenditures or financial impact of any plans to mitigate or adapt to climate-related risk, oversight by the board of directors of climate-related risks and management’s role in assessing and managing the risks, and any processes the company has for identifying, assessing, and managing material climate-related risks. Companies under the new rules are also required to report on expenses and losses resulting from severe weather events and other natural conditions, such as hurricanes, wildfires, floods and drought, and on the costs related to carbon offsets and renewable energy credits if they are used as a material component in the company’s plans to achieve climate-related goals.

The SEC released its proposed climate disclosure rules in March 2022, with disclosure requirements under the draft rules including information about the oversight and governance of climate-related risks by the company’s board and management, how identified climate related risks impact strategy, business model and outlook, and the process used by the company to identify, assess and manage these risks.

The initial proposal included requirements for companies to report on their Scopes 1 and 2 emissions, or those from direct operations and those created indirectly through energy purchases, respectively, as well as Scope 3 emissions for larger companies if material, or if the company has a stated emissions reduction goal that includes Scope 3.

In his remarks announcing the release of the finalized rules, SEC Chair Gary Gensler noted the significant feedback that the proposal received, including 24,000 comments from companies, investors and other stakeholders, leading to the changes in the final requirements, aimed at addressing the concerns of many of the comments about the costs of complying with the new reporting rules.

One of the most significant changes is the removal of requirements by any filers to report on Scope 3 emissions. Additionally, the SEC rule scales back Scope 1 and 2 emissions requirements, which will apply only to large filers, and only when they are deemed to be material. For companies that are required to report on emissions, the rules also provide more time, allowing for reporting to be made with the second quarter financial report, instead of with the annual report. These changes come despite recent comments by Gensler in October, indicating that investor comments were broadly supportive of Scope 1 and 2 emissions reporting, and many had also backed Scope 3 reporting, although many companies were wary of the Scope 3 requirements.

The final rule also pushes back the timing ot Scope 1 and 2 reporting, when required, to 2026, and eases and phases in assurance requirements, which will also only apply to large companies.

Additional changes included replacing a requirement for line item-level financial impact reporting of severe weather events with less burdensome disaggregated cost reporting.

While the new SEC rule won’t require some companies to report Scope 1 or 2 emissions, or any companies to report Scope 3, Gensler noted that many companies will be required to disclose on these areas to comply with reporting requirements being introduced in other jurisdictions. The EU’s Corporate Sustainability Reporting Directive (CSRD), for example, extends the reporting requirements to non-European companies that generate over €150 million in the EU, and also includes Scope 3 reporting. Similarly, California Governor Gavin Newsom recently signed a bill into law which will effectively require large U.S. companies that do business in the state to disclose their full value chain emissions.

Following the approval of the new rules, Gensler said:

“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”