Global Impacts of the SEC’s Required Climate-Related Reporting Rules

Key Takeaways

• After much delay, the Securities and Exchange Commission (SEC) has issued its decision to finalize new climate-related disclosure rules (the “rules”) to enhance the reporting of material climate risk from public companies.
• Other countries’ climate-related reporting consultations and considerations, particularly those in the G20, will signal the effect the SEC’s ruling will have on future ISSB-aligned standards uptake across regions and jurisdictions.
• Despite the near-immediate backlash from several Republican-led states challenging the regulation, U.S. companies should begin preparing processes to report along the phased-in approach but can expect the rules to be markedly challenged.

U.S. Takes First Steps to Regulate Corporate Climate Disclosures

On March 6, the SEC voted to finalize rules to standardize climate-related disclosures by public companies and in public offerings. The SEC initially proposed the rules in 2022 and faced significant pushback and threat of legal action over the proposed mandatory Scope 3 disclosures and overall audit requirements. In the weeks prior, rumors had circulated that the SEC would make the disclosures voluntary to mitigate potential legal challenges over the impact on non-regulated businesses. However, in keeping with most regulatory actions, the rules are less burdensome than vocal opponents had claimed they would be and less impactful than proponents had hoped.

At more than 800 pages, key highlights of the rules include:

• Absence of double materiality (materiality is defined as impacting business strategy, operations, or financial performance).
• Reporting requirement for Scope 1 and 2 emissions for large accelerated and accelerated filers, but only if deemed material.
• Removal of Scope 3 emissions reporting.
• Requirement of financial statement footnote disclosures for severe weather-related events.
• Inclusion of attestation and assurance for large accelerated and accelerated filers.
• Relaxed adherence for timing and phasing in.

While the final rules are significantly less stringent than the 2022 draft, this move represents a critical step for the U.S. and U.S. companies in providing a standardized requirement for the largest filers. 

The Jigsaw Puzzle of Corporate Climate Reporting

The last few years have ushered in a wave of corporate sustainability disclosure regulations around the world over concerns that investors were using this unregulated information to make investment decisions and pressure from investors to have comparable, standardized information to drive regulatory action globally.

There had been optimism and prepublication that the final rules would serve as a guiding hand in facilitating global interoperability and that the rules would become a center of gravity, particularly for multinational corporations (MNCs) that face disclosure requirements in multiple jurisdictions. 

Implications for Global Markets and MNCs

The European Union (EU) enacted the rigid Corporate Sustainability Reporting Directive (CSRD), which imposes extensive reporting requirements for businesses. Notably, the CSRD requires a so-called double materiality standard, extending beyond financial materiality to the impact materiality of a business’s activities. California, frequently a vanguard on climate issues, has also issued climate-related disclosure requirements for corporates, including requiring Scope 3 disclosures on certain businesses that operate within the state. 

Outside of the U.S. and EU, many jurisdictions, particularly in Asia-Pacific and Latin America, are considering implementing all or parts of the International Financial Reporting Standards Foundation’s (IFRS) voluntary standards under the International Sustainability Standards Board (ISSB) released in 2023, IFRS S1 and IFRS S2, (the “ISSB standards”). Since the announcement of the ISSB standards in 2023, at least 140 jurisdictions have taken measures to adopt the framework formally. Additionally, participating countries at the 18th G20 Summit hosted by India in 2023 pledged to develop corporate disclosure standards that align with or have interoperability with the ISSB standards.

This leaves MNCs, particularly those operating in the U.S., EU, Asia-Pacific, and Latin America, in the crosshairs, faced with a myriad of not-quite interoperable, not-quite-aligned disclosure requirements. Though many countries are allowing or considering allowing companies to use other climate reporting disclosures deemed equivalent, the SEC has explicitly declined to incorporate or align with the ISSB standards.

More than 3,000 U.S.-based companies are predicted to be subject to mandatory reporting requirements in the EU alone, and this number will only grow once countries aligning with the ISSB standards, such as Australia, Singapore, Brazil, and Japan, are added to the mix. One risk is that the U.S. states, disappointed with the limited scope of the final rules, will move to implement their own reporting standards in the same vein as California. At least 10,000 companies will soon be subject to the state’s climate disclosure requirements.   

The SEC Rules on the Global Stage

Much of the intergovernmental discourse and public consultations on climate-related disclosure are centered around country-specific amendments to the ISSB standards, as certain governments and regulators feel that the global baseline is not one-size-fits-all for local market contexts. Given these concerns, the SEC rules may provide a reason to ease or remove elements for individual country uptake, such as the entity level of reporting and lack of subsidiary exemption provisions, the size and type of companies that must report, Scope 3 inclusion, definitions of materiality, and requirements for disclosure of transition planning activities.

Ultimately, countries already implementing ISSB-aligned climate-related disclosure requirements will influence their regional peers, and though some countries’ lack of progress may drive their alignment with the SEC’s less intensive measures, countries will need to choose—do they follow suit with the trend of global ISSB-alignment or do they follow the U.S. and pursue a more relaxed policy framework?

Navigating the U.S. Political Landscape

Climate is increasingly an area of concern and consideration for investors and consumers globally, and the rules signal in the U.S. and globally that environmental action is feasible, reasonable, and politically viable while bolstering the U.S. commitment to its climate goals and position of climate being tied to fiduciary duty. However, the U.S. political landscape faces vastly skewed opinions on opposite ends of the spectrum regarding sustainability and ESG.

Implications for U.S.-Based Companies

The removal of Scope 3 emissions reporting from the standards reflects the complicated U.S. political climate. As the Republican party has highly contested climate-related disclosures, and the conservative-leaning Supreme Court presents a risk that could not be overlooked, the exclusion of Scope 3 does provide hope that the rule will face less backlash. Still, the possibility of a change in administration with the U.S. elections in November 2024 puts any form of this rule at risk, regardless of the more business-friendly final text.

Given the current high-stakes environment, further integration of climate action into national importance is likely to stumble, as the SEC’s decision will further galvanize the Republican party to push back against climate-related efforts in the name of overregulation and imposing of mores. Within a day of the final rules’ publication, a coalition of ten Republican states announced a lawsuit in the U.S. federal appeals court to block the implementation of the rules.

Notably, in anticipation of challenges, the Chair of the SEC, Gary Gensler, cited several examples of past SEC actions that use the same definition of materiality as the final climate-related disclosure rules to explain why the ruling is within the purview of the SEC’s regulatory authority. Still, U.S. companies can expect to see continued challenges to efforts to integrate climate risk into private sector decision-making. Up and down the ballot, Republicans may use this opportunity to challenge the Democratic party’s policy priorities.

About ASG

Albright Stonebridge Group (ASG), part of Dentons Global Advisors, is the premier global strategy and commercial diplomacy firm. As a multidisciplinary advisory firm, we help clients understand and successfully navigate the intersection of public, private, and social sectors in international markets. ASG’s worldwide team has served clients in more than 120 countries.

For questions or to arrange a follow-up conversation please contact Elizabeth Tate.