The SEC Adopts More Stringent Rules on Climate-Related Disclosures for Public Companies

More and more, investors are focusing on climate risk. Indeed, according to some experts, climate risk for companies is investment risk for investors. 

What does this mean, exactly?

It means that climate risk for companies has become a central issue of concern for investors. To properly assess the costs and risks of an investment, accredited investors must consider all aspects of a particular investment. For example, an investor who invests in oil today needs to consider whether that investment will still be a good investment years from now. Because of climate change, environmental pressures, and policies that may render oil and other fossil fuels obsolete in the near future,  investing in oil now may not pay off. 

Similarly, investors must consider how companies are addressing — or not addressing — their climate change risks. How well (or how badly) a company handles these risks can ultimately affect shareholder value in the future. Thus, climate change, and the impact that climate change policies will have on companies, have become a central factor in determining the long-term value of investments for both investors and companies.

Understanding that climate change risks, both physical (e.g., floods and natural disasters) and transitional (e.g. regulatory requirements), can have a material impact on, among other things, an issuer’s costs, profits and strategy — and thereby can directly affect an investor’s ability to assess the risks of investment — on March 6, 2024, the Securities and Exchange Commission (SEC) adopted more stringent rules concerning the types of climate-related disclosures that must be made by public companies and in public offerings.

New Rules for Climate-related Disclosures 

To better protect investors by providing a more consistent and reliable means of providing information on the financial effects of a registrant’s climate-related risks and how it handles those risks, the SEC has adopted more robust climate-related disclosure rules for public companies and public offerings.

The new rules will require registrants to provide more detailed information about their climate-related risks in their SEC registration and annual reports. Among other things, registrants are now required to disclose information related to:

• material climate-related risks,

• activities undertaken to mitigate those risks,

• information concerning the oversight of climate-related risks by the registrant's board of directors,

• the extent of management’s role in managing material climate-related risks, and 

• information concerning climate-related targets or goals that are material to the registrant's business, the results of operations, or the company’s financial condition.

In creating and implementing these new rules, the SEC has stressed how important the disclosure of climate-related risks is for investors to allow them to fully assess their risks of investment.

The new rules are aimed at requiring more qualitative and quantitative disclosures about an issuer’s climate-related risks and expenditures. For example, registrants must disclose in the footnotes of their financial statements:

• specific financial statement effects (expenses and losses incurred) of severe weather conditions and natural disasters (e.g., floods, hurricanes, etc.),

• certain carbon offsets and renewable energy certificates, and 

• the material impacts on financial estimates and assumptions caused by severe weather events and other natural conditions or on disclosed climate-related targets or transition plans. 

Since these disclosures will be required to be in the footnotes to financial statements, they will be subject to existing audit requirements for financial statements, thus making the information more reliable for investors.

The final rules are quite specific as to what, exactly, must be disclosed with regard to climate risks and a company’s handling of those risks. 

The new rules vary from the proposed rules, and they are lengthy and complex. Thus, anyone subject to these rules should enlist the assistance of legal and other professionals to ensure compliance with the new requirements. Enlisting the help of professionals, like attorneys, accountants, an accredited investor verification service, or a third party that can verify accredited investors, is always a good idea for both issuers and investors.

When is Compliance with the New Climate-related Disclosure Rule Required?

The rules will take effect on May 28, 2024.

However, because the new rules are so stringent and so complex, the SEC has incorporated directly into the final rules a “phased-in” compliance period for all registrants. Again, the final rules, including compliance requirements and dates, are extensive and complicated, so be certain to consult with all appropriate professionals as necessary.

The SEC anticipates that these more stringent climate-related disclosure rules for public companies will result in a more standardized approach to climate-related disclosures for all registrants, while at the same time providing more protection for investors.

Here at VerifyInvestor.com, we stay up-to-date on the needs of both issuers and investors in regard to compliance in the private equity space. That is why we pride ourselves on our ability to provide world-class customer service along with our gold-standard compliance solutions.  In addition to our well-known accredited investor verification services, we also provide qualified client and qualified purchaser verification with the same fast, confidential, and reliable service we have been providing for over ten years.