ESG & Diversity

The SEC climate disclosure rules: What boards should know

March 13, 2024

Last week, the SEC announced long-anticipated rules aimed at improving and standardizing climate-related disclosures. In this episode of Inside Today’s Boardrooms, Tracey-Lee Brown, Director at PwC's Governance Insights Center, delves into the final ruling and its implications for today's corporate governance landscape.

  • What differentiates the final rule from the proposal?
  • What governance obligations should boards be mindful of considering the new rules?

Related resources

Read the full interview

Prefer to read instead of watch? Check out the full transcript of Dottie and Tracey's conversation below:

Dottie Schindlinger: Hello and welcome to this week's edition of Inside Today's Boardrooms, presented by Diligent Institute, your source for the latest and greatest in corporate governance, all in 10 minutes. I'm Dottie Schindlinger, executive director of the Diligent Institute, and I'll be standing in for Lisa Edwards today as your guest host. Today, I'm joined by Tracey-Lee Brown, director at PwC’s Governance Insights Center. Tracey, thank you so much for joining us today.

Tracey-Lee Brown: Dottie, thank you for having me. I'm excited to be here with you today.

Dottie Schindlinger: Me too, because this interview has been two years in the making. So we had a big announcement last week from the SEC, with their final rules on climate disclosures. And that really has been two years in the making. So let's get started with the highlights of what was in and what was out.

Tracey-Lee Brown: Sure. So maybe before I get started, I'll just highlight that the final rules are a scaled-back version of the proposal that we saw back in March of 2022. So I’m going to bucket some of the highlights. And the first bucket I'll just call a general bucket: The final rules established a safe harbor for climate-related disclosures pertaining to certain forward-looking statements related to scenario analysis, internal carbon prices, and goals and targets.

Now, this safe harbor wasn't in the proposal. This is an important addition because of the risk related to projecting in an uncertain future. So that's one highlight that I'll call out in the general bucket. And then another highlight is that the final rule calls for the process around identifying, assessing and managing climate-related risk to be disclosed, along with how those processes are incorporated into the overall risk management process.

Now, this may sound familiar, and the overarching disclosure principle or requirement is consistent with that of the proposal. However, the final rule did eliminate certain specific disclosure requirements when identifying and assessing climate-related risks, such as considering customer regulatory and technological factors, for example. So that's what I'll call just in the general bucket. The next bucket is for greenhouse gas emissions.

So in the final rule, the large and accelerated filers will be required to disclose Scope 1 and/or — I want to emphasize the ‘and/or’ — Scope 2 emissions, if they are material. Now, this differs from the proposal in that the proposal calls for all registrants to disclose both Scope 1 and Scope 2. The other greenhouse gas emissions — the infamous Scope 3 — have been eliminated from the final rule and from the proposal, where it was going to be required under certain circumstances.

The final bucket I'll highlight is just around financial statements. And so the final rule does call for disclosures with the footnote around the impact of severe weather events and natural conditions, subject to a 1% of stockholders' equity for the balance sheet and 1% of pre-tax income for the income statement.

Now, how this differs from the proposal is that that 1% is now subject to larger amounts. And then the final rule also introduced a de minimis disclosure threshold as well. So that was 800, almost 900, pages, Dottie. But I think those are the highlights that I tried to just condense right there.

Dottie Schindlinger: One of the things I know boards have been keenly watching and paying attention to is what would be the governance requirements around the climate disclosures. So what would be some of the things that boards and committees need to be aware of that came out in the final ruling? Were there any major changes there from the proposal?

Tracey-Lee Brown: Sure. So we do have a couple of changes here. And the first is that the final rule calls for disclosure on the board committee or committees that oversee climate-related risks. And this differs from the proposal, which called for the disclosure of specific board members overseeing climate-related risk, or the committee. So that specificity of the board members has been removed from the final rule.

The final rule has also removed the need to disclose whether any of the board members have climate expertise. That was just another change. I know there were a lot of comments on that item as well. And then the final rule calls for disclosure of the process by which the board is informed about climate-related risks. And this varies from the proposal, which called for disclosure of the process and the frequency by which the board discusses climate-related risks. So there's that little change there as well.

And then the last item that I'll just highlight under the governance section is around targets. So the final rule calls for disclosure of whether the company has a target in place, and whether and how the board actually oversees progress against that target. And in the proposal, a requirement was whether the board had set the target and how and whether there were any interim goals established against that target. So those are some of the governance highlights.

Dottie Schindlinger: So, Tracey I also think it would be helpful to share with our audience some of the effective dates for disclosure and assurance. Could you quickly kind of give us a rundown on who will be required to disclose what and when?

Tracey-Lee Brown: So I'll just start by saying that the SEC did extend the phase in periods, and Dottie I'm going to throw a lot of dates at you now. So if I need to go slow just let me know. But let's start with large accelerated filers. So they will be required to make their first disclosures on certain climate information in their 2026 10-K, on 2025 information.

Now, I've mentioned those Scope 1 and Scope 2 emissions, and if they are material. So the larger accelerated filers will need to make those disclosures, if they are material Scope 1 and Scope 2 emissions, in the 2027 10-K on 2026 information. And then there's also an assurance requirement on those Scope 1 and Scope 2 emissions. And it will start out with limited assurance that will need to be obtained on those greenhouse gas emission disclosures, and that will be on the 2030 10-K on 2029 information. Reasonable assurance will only be required four years later. Accelerated filers have a similar progression as the larger accelerated filers. However, they will make their first disclosures in 2027 10-K on 2026 information, and they will not require reasonable assurance at all.

And then all other registrants, our smaller reporting companies, emerging growth companies and non-accelerated filers, they will make their first disclosures in the 2028 10-K and 2027 information. So I threw a lot of dates out there. I hope you were keeping track.

Dottie Schindlinger: Well, we'll make sure that our audience gets links to some helpful charts so that they can keep track of the dates. But I do think a lot of observers really expect that the final rule is most likely going to end up in the courts and be challenged. So what should boards be doing right now? Are there some questions that they should be asking to get ready while things are being worked out?

Tracey-Lee Brown: Yeah. And so I think legal challenges are to be expected, but I'd say that companies should continue to prepare to comply with these disclosure rules. And so when I think of that, a couple of things come to mind for the board and some questions that the board can ask. And the first is how does management's current risk, identification and evaluation process in corporate climate-related risks, and what level of detail is the board getting?

Is that reporting robust enough? Is it frequent enough to allow the board to assess the impact of climate related risks on business strategy, and risk management as a whole? I mentioned a lot of dates in the prior question. And so for the board, understanding when is the company required to comply? But then also understanding the timeline and whether management has the necessary resources and skill sets to enable compliance with the required dates.

I talked about financial statements. This automatically brings the audit committee in there. So a couple of questions for the audit committee — understanding from management what are the controls, the processes, the procedures as well as the technology in place to help produce quality disclosures? The disclosure committee, what is their role? Do they have the necessary expertise and are they on par with these with new requirements and enabling disclosure of these new requirements as well?

And then the last one I'd say is just again, I’ve mentioned those dates and so for the audit committee to understand from management, when will they receive the first draft, how far in advance of the required disclosure date will they receive a first draft? And the reason I'm mentioning this is because it's going to be an iterative process with revisions, and so helping to prepare for that could go a long way. So I think those are some of the considerations.

Dottie Schindlinger: Well, Tracey, unfortunately, that's all the time we have. But I just want to thank you so much for giving us this breakdown.

Tracey-Lee Brown: Yeah, thank you. I appreciate being here with you today.

Dottie Schindlinger: You can learn more about this topic as it evolves at the PwC Governance Insights Center website. And I want to say thank you very much for Tracy Lee Brown for joining us today. Thank you so much for being here.

Tracey-Lee Brown: Thank you, Dottie.


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