On March 6, 2024, the Securities and Exchange Commission (SEC) announced the adoption of a new climate disclosure rule. To enhance and standardize public companies’ disclosures relating to climate change, these recently implemented regulations have been embraced. The facilities will be required by the regulations to disclose information about their financial risks associated with climate change, including greenhouse gas emissions.

The SEC is a federal organization that protects investors from many kinds of market fraud. What is the purpose of the new climate disclosure rule, and how will public firms be affected by it? Continue exploring the blog as each section has something important to know about.


What is SEC and its Roles


This independent federal agency plays a vital role in protecting investors. Besides, this agency keeps its eyes on maintaining the proper and orderly functioning of the securities market. Moreover, it’s also responsible for capital formation. This organization also can bring civil actions against any lawbreakers. Moreover, it works closely with the justice department on criminal cases. 


How the SEC Works


The key role of this agency is to observe various organizations and investors participating in the securities market. Apart from investment firms it also monitors securities exchanges, brokerage firms, dealers, etc. But how does the agency function? The following points will help you understand, so take a look.


1) Promotes Disclosures: 


Through the enforcement of existing securities laws and regulations, this agency is in charge of encouraging disclosures and the sharing of information connected to the market. It helps with fair dealing and protection against fraud. With its help, investors can get access to registration statements. This agency also helps by giving access to periodic financial reports, and other relevant securities forms.  


2) It’s Members: 


To understand how this agency works, knowing a little bit about its members will help. The agency functions with a total of five divisions and 23 offices. Interpreting and enforcing securities laws are the goals of each department. Additionally, they aim to coordinate regulation across various governmental levels and issue new rules.


3) Authority to Take Civil Actions: 


Additionally, the SEC is only permitted to file civil lawsuits before administrative judges or in federal court. Additionally, this organization collaborates with the Department of Justice to provide evidence and support legal actions. 


4) Provides Rewards: 


This agency comes with an office of the whistleblower which is different from its other departments. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was the primary catalyst for the creation of this department. The organization pays qualified people who come forward with accurate information through its whistleblower program.


What’s the New Climate Disclosure Rule?


Before we discuss the rules and get into more details let’s know a little bit about its beginning. This rule was adopted two years after the commission published its proposed climate disclosure rule in 2022. Big firms and investors have begun to take climate risk into account when making financial decisions in recent years. Furthermore, they have come to understand that climate threats have an immediate effect on a company’s future. As a result, investors now consider climate concerns seriously when making investment decisions.


Several frameworks and criteria for disclosing climate risk have developed. On the other hand, it was noted that each regulation lacked uniformity. As a result, government authorities started to create and execute mandatory disclosure laws. The purpose here is to harmonize the climate risk disclosure, the investors receive from public companies. 


This is how the new climate disclosure rule was introduced. According to the SEC Chair Gary Gensler, the final rules will benefit both the investors and also the issuers. It will provide investors with consistent, comparable, and decision-useful information. Issuers can expect clear reporting requirements from it.


They will specify exactly what information businesses have to provide. As a result, investors will also get more pertinent information than previously. They will also mandate that a company’s SEC filings contain statements about climate risk. For example, rather than being on business websites, it must be contained in annual reports and registration statements. As a result, increasing reliability will be achievable. 


What will Companies Need to Disclose?


Due to the new rules and their requirements, the registrant must disclose certain certain information. What are they? The following points have all your answers. So, take a look at them.


  • Businesses must share information on climate-related risks if those may have a significant impact on their business strategy, results of operations, or financial condition. 


  • Sharing the impacts of any possible climate-related risks on the registrant’s strategy, business model, and outlook is a must.


  • If a registrant has taken action to mitigate a material risk associated with climate change, it shall report the expenses and results of that effort. This covers any impact on financial estimations or assumptions along with the actual financial costs.


  • Disclosure of the board of directors’ supervision over climate-related risks as well as management’s part in their assessment and management is compulsory. This includes any involvement by management in this process of assessments. 


  • The registrant should disclose any processes it has chosen for identifying, assessing, and managing material climate-related risks. The registrant must also share some additional information in case they are actively managing these risks, it should also disclose whether and how these processes are integrated into its overall risk management system or procedures.


  • The registrant should provide information about any climate-related targets or goals it has set, if applicable. This includes targets or goals that have had a material impact or are likely to have a material impact on the registrant’s business. While sharing details the registrant must cover material expenditures and impacts on financial estimates and assumptions resulting directly from the target or goal. It also includes sharing the details of the actions taken to achieve the goals. 


  • Large accelerated filers (LAFs) and accelerated filers (AFs) must disclose material Scope 1 emissions. They must also share details about the material Scope 2 emissions.


  • For entities mandated to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level should be provided. 


  • A note to the financial statements must reveal the capitalized costs, expenses expensed, charges, and losses resulting from extreme weather events and other natural factors. These events include hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise. 


  • Registrants must share the details of the costs and losses associated with carbon offsets and renewable energy credits (RECs) used to achieve climate-related targets or goals. This information should be included in a note to the financial statements, according to the agency.


  • If the estimates and assumptions used by a registrant to prepare financial statements were significantly affected by risks related to severe weather events, natural conditions, or disclosed climate-related targets, this impact must be described qualitatively. The agency makes it mandatory to describe the details in a note to the financial statements.


Staying Compliant with SEC: What Businesses Need to Take Care of


Businesses need perfect preparation to ensure compliance with the new climate disclosure rule. But how should they start the process? Take a look at the points below for better understanding.


1) Understanding the Rules:  


Companies must understand the regulations prepared by the Securities and Exchange Commission (SEC) regarding climate disclosure and reporting requirements. This will help them know what are the details that they must share.


2) Conducting Comprehensive Assessment: 


The right preparation method also makes it crucial for businesses to assess their current practices and procedures. This will help ensure compliance with SEC regulations related to climate disclosure.


3) Choosing Robust Reporting Mechanism:  


To ensure compliance with the new climate disclosure rule businesses must not make any mistakes. For this reason, companies should establish robust reporting mechanisms. This helps accurately track and report climate-related data, including greenhouse gas emissions and climate-related risks easily. That’s why, companies should choose reliable software to utilize their centralized database.

4) Engage Stakeholders: 


For an impactful preparation, businesses should actively engage with stakeholders. The list includes interactions with the investors, regulators, and the public, to communicate their efforts towards climate risk disclosure. This is another way to stay compliant with the newly released rules that the SEC adopted. So, businesses must make a list of the stakeholders first.


5) Staying Updated:


 Regulatory authorities do indeed make small changes to all the newly adopted rules. That’s why, staying updated with the smaller changes is crucial for businesses. Thus companies will not make any mistakes while disclosing the required details. Due to this, companies must check all the updates that the SEC shares.


Final Words:

SEC has also declared that the climate disclosure rule will become effective sixty days after it was published in the Federal Register. This makes it clear that the rule has not yet been officially published in the federal register. Therefore, businesses must start being familiar with these new requirements that they will have to follow. Moreover, to avoid compliance issues, taking the help of advanced software will always help. So, choose a solution that allows you to enjoy the flexibility of easy reporting without making any mistakes. After all, staying compliant should always be the priority of every business.