Climate-Related Disclosure Rules

Background

ESG reporting, while still a relatively new regulatory phenomenon, has become a hotly contested issue in the United States. The regulatory landscape is still developing and several states have adopted an “anti-ESG” posture, while others have embraced the issue and are moving ahead to develop the scope and breadth of the reporting requirements. At the federal level, the Securities and Exchange Commission (SEC) recently adopted long-anticipated rules governing public company disclosure of climate-related risks, strategy, governance, targets and other metrics. At the state level, Governor Gavin Newsom signed two bills into law, the California (CA) Climate and Corporate Data Accountability Act (SB 253) and the CA Greenhouse gases: climate-related financial risk (SB 261). In addition, in the European Union, the European Sustainability Reporting Standards were recently finalized.

U.S. Securities and Exchange Commission’s Final Climate-related Disclosure Rules

On March 6, 2024, the United States Securities and Exchange Commission (SEC) voted three to two to adopt final climate-related disclosure rules nearly two years after the proposed rules were introduced. The amendments to its rules under the Securities Act of 1933 (Securities Act) and Securities Exchange Act of 1934 (Exchange Act) will require registrants to provide certain climate-related information in their registration statements and Exchange Act annual reports.

Disclosure of material climate-related risks; impacts of such risks on strategy, business model, and outlook; financial statement metrics; information about oversight of climate-related risks by the board of directors and the role of management; information on any climate-related targets or goals that are material to the registrant’s business, results of operations, or financial condition; and material GHG emissions data will be required under the final rules.

The final rules will become effective on May 28, 2024, and include a phased-in compliance period for all registrants according to the registrant’s filer status and the content of the disclosure.

California Climate Disclosure Rules – CA SB 253 and SB 261

On October 7, 2023, Governor Newsom signed two bills into law, the California (CA) Climate and Corporate Data Accountability Act (SB 253) and the CA Greenhouse gases: climate-related financial risk (SB 261). SB 253 requires companies with greater than $1 billion in annual revenues to file annual reports publicly disclosing their direct, indirect, and supply chain GHG emissions, verified by an independent and experienced third-party provider. SB 261 requires companies with $500 million in annual revenues to prepare biennial reports disclosing climate-related financial risk and measures they have adopted to reduce and adapt to that risk, with the first report due by January 1, 2026. Both laws apply to businesses that meet the financial threshold that are doing business in the state of California, whether they are publicly held or privately held.

European Union (EU) Corporate Sustainability Reporting Directive and Implementing Standards

In addition to SEC’s Climate-related Disclosure Rules and CA climate reporting laws, the EU adopted the Corporate Sustainability Reporting Directive (CSRD) at the end of 2022 and the standards implementing it were released in July 2023 (the European Sustainability Reporting Standards, or ESRS). The CSRD and the implementing standards require comprehensive, detailed disclosures covering a broad spectrum of sustainability topics. EU companies as well as non-EU companies operating in the EU are required to make disclosures.

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