The SEC’s Final Climate Disclosure Rule Has Arrived: What Does it Mean to You?

The SEC’s Final Climate Disclosure Rule Has Arrived: What Does it Mean to You? 

The recent legal challenges to the U.S. Securities and Exchange Commission’s (SEC) climate disclosure rule should not suggest a course change in in climate reporting and disclosure planning for investors. It remains important to understand the scope of the ruling as one of several emerging frameworks for oversight facing U.S. investors alongside parallel local laws such as in California and New York. While the SEC’s ruling is less rigorous than the state-level laws, it will require that investors action climate risk assessments, notably of the material physical climate risks to their business.   While much of the dialogue about the new rule has focused on greenhouse gas (GHG)  emissions, disclosures related to the potential material impacts of physical climate risks are also included. Such risks, which include climate-related hazards like wildfires, hurricanes, rising sea levels, floods, and  heat stress, can have financially significant effects on sectors like the U.S. real estate market – which is experiencing increasing damage and financial loss each year due to climate events. Also, any damage or disruption in supply chains due to physical risk is directly linked to business risk, ultimately hurting the financial health of those companies. Physical climate risks are manifesting in increasingly costly  weather-related events, with damages exceeding $90 trillion in 2023 alone and are a looming threat to the United States' $100 trillion real estate market.

Key highlights 

The SEC updated and approved the issue of a final climate disclosure rule in March 2024, two years after the initial proposal; however, in early April, the Commission announced a stay pending the completion of judicial review of the petitions in circuit court. It is still important to understand the key changes from the initial proposal include:

1. Exclusion of Scope 3: this means no disclosure of financed emissions for financial institutions  nor supply chain emissions for corporates
2. Reporting of Scope 1 and 2 limited to LAFs (large accelerated filers) and AFs (accelerated filers): 
3. Scaled-down line-by-line disclosure: materiality threshold is applied to aggregate amounts for disclosure while removing the line-by-line requirement 
4. Phase-in approach: longer timeline for compliance with all requirements over 2-6 years depending on the registrant type 
5. Further exemptions for smaller institutions: SRCs, EGCs, and NAFs are exempt from reporting scope 1 and 2 

Despite the changes, the climate disclosure rules' fundamental purpose remains the same.  The disclosure will still “provide investors with consistent, comparable, and decision-useful information for making their investment decisions,” according to SEC Chair Gary Gensler, as climate-related risks may have a material impact on business, results of operations and financial conditions. The key components of the final climate disclosure include the following: 

The SEC disclosure still reflects many of the Task Force on Climate Related Financial Disclosures (TCFD) recommendations with some level of consistency with climate disclosure requirements in other countries and internationally recognized sustainability reports.  

Who and When 

The SEC has lengthened the overall timeline and taken a phase-in approach where the compliance timeline can range from 2-6 years, depending on the registrant’s filing status. 

→    LAF: large accelerated filers
→    AF: accelerated filers 
→    NAF: non-accelerated filers 
→    EGC: emerging growth companies
→    SRC: smaller reporting companies

How Moody’s can help 

Moody’s is a leading provider for climate risk data and analytics to assess the potential impact of climate risk on institutional assets and operations.  Moody’s capabilities around climate risk can support the following contents of the SEC disclosure rules and meet the expectations of comprehensive risk management.   

Why Moody’s

The foundation and value of Moody’s climate capabilities comes from its reliable and transparent approach to financial quantification of climate risk by providing physical risk, transition risk, and interconnection to financial risk.  Moody’s continues to improve and expand climate risk capabilities with a focus on:

1. Global context to capture interconnections of physical and transition risks to economic and financial risks
2. Increasing transparency by providing detailed methodology papers
3. A portfolio-level perspective to help drive business strategies and risk management practices with the true view of climate risk 
4. Asset-level details to identify risk drivers and opportunities 

What should you do? 

With the SEC disclosure finalized with the expected timeline, institutions should consider the following:

• Begin preparations early
  • There is never enough time when it comes to compliance.  Identify what is required for your institution and what timeline to meet 
• Establish appropriate working groups and centralized oversight 
  • As noted in the SEC climate disclosure rules, establish working groups and governance framework and provide appropriate training so everyone is aware of what climate risk really means to your institution 
  • Conduct ad hoc analysis to understand if there are some significant concentrations and provide internal stakeholders with a summary of that exposure  earlier on
• Identify capability gaps
  • Review current data and capabilities to support climate risk assessment 
  • Assess gaps in data, analytics, controls and reporting to meet the requirements to consider both internal and external options 
• Develop a detailed action plan
  • There’s nothing better than a detailed and effective action plan for a successful execution with clear responsibilities and priorities
  • Based on the materiality level of each climate risk, consider developing plans across asset classes or operation types
• Leverage data to inform decisions
  • Qualitative assessments are not enough to understand material exposure to climate risks
  • There are many public and private resources that can provide insights into best practices in analyzing and aggregating climate-related data

Other Resources

• https://cre.moodysanalytics.com/insights/cre-news/sec-climate-disclosure-rule-leans-in-on-physical-risk-while-scaling-back-challenging-data-requirements/
• https://www.moodysanalytics.com/regulatory-news/mar-07-24-sec-finalizes-climate-related-disclosures-rule