SEC Unveils Higher Threshold for Reporting on Climate Costs - Bloomberg Law

SEC Unveils Higher Threshold for Reporting on Climate Costs

Public companies for the first time will have to disclose in US securities filings the financial impact to their revenues and balance sheets from wildfires, hurricanes and other climate-related events as part of a pared-down rules package the SEC is poised to finalize on Wednesday.

The Securities and Exchange Commission’s final climate reporting plan would set a higher bar than a two-year-old draft for when companies would have to report costs from climate events as a footnote in their financial statements. The plan would also would require companies to tally significant costs associated with transitioning to greener product lines and energy sources as part of management’s climate discussion, rather than the financial statements as proposed, according to SEC officials.

The accounting changes are part of the commission’s landmark expansion of corporate reporting to mandate disclosure of how companies address climate risks. Under the new rules, companies will detail their certain direct and indirect greenhouse gas emissions and the largest companies will have to bring in outside auditors or engineers to vet those figures.

Among the requirements, companies would have to tally expenses related to severe weather if the costs reach certain thresholds based on the company’s financial condition.

Costs or losses related to carbon offsets or renewable energy credits if they constitute a material part of any climate commitments and material impacts to estimates and assumptions must also be disclosed as a note to the audited financial statements.

Most of the headlines and controversy about the commission’s initial climate proposal focused on a since-discarded requirement that companies report emissions down their supply chain, known as Scope 3. Companies, auditors and some investors, however, also panned a low threshold of reporting weather and transition costs worth 1% of any line item in the financial statements from debt to costs of goods sold, which was included in the commission’s 2022 proposal. Opponents called the trigger unworkable and inconsistent with existing accounting standards.

They urged the SEC instead to adopt a broader materiality threshold, which considers both the dollar amount and other factors that investors would view as significant, in lieu of the 1% bright line requirement.

The final rule, portions of which would take effect as soon as 2025 for the largest companies, scraps that line-by-line reporting plus certain financial impact metrics.

Investors have long argued that financial statement disclosures are needed to connect commitments to curb harmful emissions and what related operational changes could mean for revenues or asset values and a company’s future outlook.

“This is about transparency, this is about consistency,” Clara Miller, former president of institutional investor The F.B. Heron Foundation, said in anticipation of the SEC rule’s final approval.

The effect of a 1% line-by-line reporting threshold would have been pervasive, hitting everything from research and development to costs of goods sold. Companies such as

The 1% proposal would have been a fundamental shift in accounting disclosures, requiring metrics than many companies don’t track, said Alan Wilson, partner at Wilmer Hale, ahead of the final rules.

Emissions Assurance Phased-In

Under the final rule, large US-listed companies also must report their direct and indirect greenhouse gas emissions—known as Scope 1 and Scope 2—for vetting by an outside auditor or engineering firm. Those third-party reviews are intended to ensure investors could rely on the new metrics.

Initially large and mid-tier companies, what are considered large accelerated SEC filers and accelerated filers, must acquire limited assurance over those metrics. Eventually top stocks will face a higher level of scrutiny for their greenhouse gas reporting known as reasonable assurance.

Smaller companies would be exempt from reporting on their carbon emissions.

The SEC also phased in those assurance requirements giving the largest companies until fiscal years beginning in 2029 to prepare for third-party vetting and mid-tier companies until 2031.

Newly created California and European climate reporting laws, which are being phased in over the next two years, also require outside review of greenhouse gas metrics.

—With assistance from Nicola M. White

To contact the reporter on this story: aiacone@bloombergtax.com

To contact the editors responsible for this story: jharrington@bloombergindustry.com; agrubercohn@bloombergindustry.com

Learn more about Bloomberg Tax or Log In to keep reading:

Learn About Bloomberg Tax

From research to software to news, find what you need to stay ahead.

Already a subscriber?

Log in to keep reading or access research tools.