Now that the U.S. Securities and Exchange Commission has adopted the final climate-related disclosure rule, public companies have a road map to adoption and compliance—albeit one featuring swaths of relatively uncharted territory.

Strengthening compliance processes will be a steeper challenge for some companies than others, partly because their respective capabilities for reporting climate data vary in maturity and sophistication. Some companies already adhere to other reporting standards or report voluntarily to satisfy stakeholder interests. Meanwhile, for others, the SEC climate rule is an impetus for first steps.

Either way, the disclosure requirements present compliance challenges against which companies will seek to balance the need for comprehensive reporting with their desire for efficiency and simplicity.

Take action now and move toward adoption by embracing the following considerations that the final rule has brought to light.

Comparison of climate-reporting standards

The final SEC climate rule is just one piece of a mandatory corporate climate-reporting puzzle that continues to come together. Prior to the SEC’s vote in March 2024 to adopt the final rule, other standards had signaled a broader, more stringent regulatory environment globally, including:

• The European Union's Corporate Non-Financial Reporting Directive and its subsequent Corporate Sustainability Reporting Directive (CSRD)
• Recommendations by the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas (GHG) Protocol, both of which the SEC cites in its final disclosure requirements
• California’s climate-related disclosure requirements, which apply to public and larger private companies, signed into law in October 2023

Some standards require more detailed disclosures than others. Some require an elevated level of assurance or a report attesting to the accuracy of certain emissions disclosures.

A global company, for example, might find the CSRD’s requirements more extensive than the SEC’s. In the U.S., California’s disclosure requirements include Scope 3 emissions—emissions from upstream and downstream activities in a company’s value chain. Conversely, the SEC omitted Scope 3 requirements from its final rule.

With the final SEC climate rule in hand, evaluating how the various standards apply to your organization will enable you to structure compliance policies, processes and controls accordingly—and potentially find efficiencies in your approach.

There is plenty of interoperability between reporting requirements, which should be evaluated closely to avoid redundancies. This underscores the importance of designating a team member with broad reporting experience and knowledge to perform that evaluation.

Materiality

The SEC established materiality as the criteria for most climate-related disclosures. Just as there are qualitative factors affecting materiality for financial reporting, so, too, are there for materiality in the context of climate reporting.

The final SEC climate rule introduced a materiality qualifier and definition into many of the disclosure requirements that was not present in the proposed rule. That definition is consistent with other SEC rules and regulations.

Specifically, the SEC defines materiality on page 105 of the final rule as follows:

"A matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote or such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available."

The SEC goes on to acknowledge that the materiality determination is fact-specific and requires quantitative and qualitative considerations.

Companies now must work through the inherent subjectivity. To prepare a framework for materiality assessments, consider how your company will define “material” for your investors. This may include determining the metrics and disclosures that are most significant to your business, while considering such factors as your industry, jurisdiction, unique stakeholder group and business profile.

Disclosure requirements

The SEC climate rule requires disclosures about an array of climate-related risks that a registrant deems material, as well as oversight and management of those risks. The requirements cover any transition plans, scenario analyses and climate-related targets or goals—again, a mix of quantitative and qualitative components.

Additionally, some information must be disclosed in a registrant’s financial statements, meaning it is subject to audit and their internal control over financial reporting. Those disclosures include:

• Financial impacts related to severe weather events, carbon offsets and renewable energy credits
• Qualitative descriptions of how risks and uncertainties associated with severe weather events materially impact the estimates and assumptions a registrant uses to produce financial statements.

As is the case for any new required disclosures in your financial statements, thinking strategically about policies and procedures for accumulating the necessary information may help your company streamline compliance efforts.

Similarly, to the extent your company already has an enterprise risk management function, consider how it may be expanded or adapted to handle climate components, including reporting. Also, compare required disclosures to those of your direct peers, and keep an eye out for sample disclosures from the various rulemaking bodies.

Assurance and attestation requirements

The final climate rule requires companies to subject certain information to third-party assurance, which underscores the importance of accurate and complete information. Organizations can prepare for this higher level of scrutiny by thinking critically about relevant data and controls, and by establishing processes to gather and verify information.

The assurance requirement raises such questions as: What is the nature of testing needed for assurance engagements? What documentation is involved? Do gaps exist that prevent you from providing assurance-ready information?

Additionally, in the final rule, the SEC did not prescribe one attestation standard but instead referred to multiple “prevailing” standards, including those of the following entities:

• American Institute of Certified Public Accountants (AICPA)
• International Auditing and Assurance Standards Board (IAASB)
• Public Company Accounting Oversight Board (PCAOB)
• International Organization for Standardization (ISO)

Given all the assurance and attestation considerations, engaging early with an independent, objective assurance provider may help both parties align expectations for the work required. A certified public accountant firm has a deep understanding of company financial records, internal controls and auditing standards—which it can apply in providing assurance on GHG emissions and the impact of climate-related factors on company financial statements.

Timeliness

Although the SEC final rule eased and extended the proposed rule adoption time frame—delaying and staggering compliance dates according to a registrant’s filing status—that should not diminish the urgency for your company to establish or adapt climate reporting policies, processes and controls.

The wide range of information that must be disclosed, in addition to the qualitative nature of many disclosures, could be overwhelming without a strategic approach to compliance. Regardless of how advanced your compliance capabilities might be, having the final climate rule in hand enables your company to take action now to address challenges in gathering information and data, assessing materiality, and disclosing risks.