SEC Releases Final Climate Rule
March 12, 2024
The Securities and Exchange Commission (SEC) last week released its long-awaited climate disclosure rule, nearly two years after the proposal’s March 21, 2022 issuance. Click here for a Fact Sheet.
- The Commission voted along party lines, with the three Democratic commissioners in support and the two Republican commissioners opposing the final rule.
CREFC submitted its response to the proposal in June 2022, following deep engagement from its membership and in-depth meetings with SEC staff and leadership.
Key recommendations included:
- A longer implementation timeline;
- Development of industry-led best practices, particularly climate-related data fields that can be incorporated into the existing CREFC Investor Reporting Package™ (“IRP ™”)
- Industry-specific safe harbors and exemptions if Scope 3 disclosures are required for the CRE finance sector; and
- Appropriate timeline and verification considerations for CRE Scope 1 and 2 disclosure requirements.
CREFC also submitted – on behalf of partner real estate trade associations – a joint letter offering similar recommendations in response to the SEC proposal.
The key takeaways from SEC’s final climate disclosure rule include the following:
- Asset-backed securities issuers are exempt from the final rule.
- Scope 3 Nixed: The requirement to disclose Scope 3 emissions (i.e., indirect emissions from upstream and downstream activities in a company’s value chain) has been eliminated.
- Material Scopes 1 and 2: Disclosure of Scope 1 and Scope 2 emissions by large public companies on a phased-in basis is still required, but now only when those emissions are material. (The materiality standard is new and was not part of the proposed rule in 2022.) Additionally, smaller companies are no longer required to disclose their Scope 1 and Scope 2 emissions.
- Financial Statements: Reporting companies are no longer required to disclose severe weather event-related financial impact metrics. However, the final rules require the application of a 1% disclosure threshold to two categories of aggregate amounts: (1) expenditures expensed as incurred and losses; and (2) capitalized costs and charges, in both cases incurred as a result of severe weather events and other natural conditions.
- Expanded Safe Harbor: A new safe harbor now exists protecting companies from private liability for climate-related disclosures (excluding historical facts) with respect to transition plans, scenario analysis, internal carbon pricing, and climate-related targets and goals.
- Extended Timeline: The compliance dates for reporting the required disclosures have been extended to fiscal years beginning in (i) 2025-2026 for large accelerated filers, (ii) 2026-2028 for accelerated filers, and (iii) 2027-2028 for smaller reporting companies, emerging growth companies, and non-accelerated filers.
What’s Next? The two years between the release of the proposed and final rulemakings have seen heightened politicization around sustainability. Several CREFC Policy and Capital Markets Briefings have described “anti-ESG” developments, including:
- Lawsuits by certain states against financial institutions accused of being “woke” or discriminating against the fossil fuel industry;
- Anti-ESG bills introduced in Congress during “anti-ESG” month in 2023; and
- Continued litigation regarding the use of ESG measures in retirement account investment decisions.
Why It Matters: The SEC’s climate disclosure effort has been at the forefront of the political ESG swirl. Countless articles have been written and prognostications made on the content of the final rule, particularly in light of inevitable litigation and the potential ability of a new administration to undo the rule under the Congressional Review Act.
What we’ve seen to date:
- Immediately following the issuance of the rule, ten Republican-led states filed suit in the Atlanta-based 11th U.S. Circuit Court of Appeals;
- On March 8, the state attorneys general from Louisiana, Mississippi, and Texas also filed suit in the 5th U.S. Circuit Court of Appeals;
- Senator Tim Scott (R-SC) and Rep. Bill Huizenga (R-MI) indicated they will try to rescind the rule under the Congressional Review Act; and
- From the progressive side, the Sierra Club and Sierra Club Foundation, represented by Earthjustice, are considering challenging the SEC’s arbitrary removal of key provisions from the final rule.
CREFC is analyzing the final rule in detail and will share additional key findings with membership. We will also follow important developments related to potential litigation or other implementation hurdles.
Please contact Sairah Burki (sburki@crefc.org) with any questions.