SEC Climate Disclosure Rule: 2024 Start Date Requires Dilution Of Contentious Elements

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SEC Climate Disclosure Rule: 2024 Start Date Requires Dilution Of Contentious Elements

Back in August, Verdantix predicted a multi-year delay to the original January 1, 2023 start date of the SEC’s proposed climate disclosure rule. This prediction is now coming to pass. Those still waiting for a final rule in October will be disappointed – a website technical error required the SEC to reopen the comment period, and as a result, the final rule will not be published in the Federal Register until the first quarter of 2023, at the earliest. Despite making climate disclosure one of his top priorities, SEC Chairman Gary Gensler has made no public comment on a new start date. This forced delay means that the final rule will be published after the mid-term elections on November 8, thus providing the SEC with clarity in terms of the political context. The contentious elements of the proposed rule will need to be diluted, due to three challenges: 1) opposition in Congress; 2) litigation; and 3) weight of comments.

Let’s take the first challenge. If the Republicans win both the House and Senate in the mid-term elections, they will likely aim to de-fund the SEC’s climate disclosure rule. The intention would be to tie a government shutdown to climate reporting. The likelihood of this happening is dependent on both who wins the mid-terms and the content of the final rule. A diluted climate disclosure rule would not merit the Republican party hitting the nuclear button on government funding. 

How about litigation? Irrespective of who wins the mid-terms, multiple attorney-generals of US states are lining up to challenge the SEC’s right to implement the climate disclosure rule. This  follows the successful appeal on the ‘major decisions basis’ by the Attorney-General of West Virginia, which resulted in the Supreme Court blocking the EPA’s plan to regulate power plant emissions. This legal threat creates an incentive for the SEC to dilute the proposed rule.

Finally, the SEC must take note of the weight of comments – more than 14,000 – on the proposed rule. Surprisingly, this is the biggest argument in favour of dilution. Hundreds of listed firms fed back to the SEC that the original rule would introduce excessive audit costs, require unjustifiable executive certifications and create serious legal risks. To avoid losing credibility with its own stakeholders, the SEC will need to amend key elements of the proposed rule. What’s likely to be on the chopping block?

The most contentious issue is the requirement for climate disclosures to be ‘filed’ in an annual report on Form 10-K. Opposition to this idea, as detailed, for instance, in the feedback from UPS, covers issues such as: inappropriate liabilities; GHG data not being prepared in the same way as financial data; climate disclosures being subject to wide-ranging subjective judgments; and the possibility of audit fees increasing by more than 50%. Europeans agree. The EU climate disclosure rule, coming into effect January 1, 2024, requires ‘limited assurance’ of climate disclosures – not the ‘reasonable assurance’ that is applied to financial audits.

Close behind the opposition to inclusion in Form 10-K is the 1% disclosure threshold. This clause requires firms to make a disclosure in the footnotes of the financial statement if climate risks or opportunities cause a 1% variance in any individual financial statement line item. This idea has created consternation even among accounting firms, as per the feedback from KPMG. The fundamental point expressed is that the idea is completely impractical. This concept is unique to the SEC and does not form part of the internationally agreed TCFD framework.

There is an obvious incompatibility between the accuracy and availability of Scope 3 emissions data and the ability of firms to apply SOX-quality internal controls that would merit executives signing a certification. Thus, either Scope 3 emissions disclosures must be cast aside, or they should not be ‘filed’ in Form 10-K. It is worth noting that the UK climate disclosure rule does not require Scope 3 data.

Ultimately, the SEC simply needs to drop its ‘world leading’ strategy and better align its climate disclosure rule with the internationally agreed TCFD reporting framework. Verdantix research on enterprise carbon management supports the feedback from listed US firms that businesses simply are not in a position to provide financial-audit-grade GHG emissions data and analysis in 2024.

David Metcalfe


David is the CEO of Verdantix and co-founded the firm in 2008. Based on his 20 years of experience in technology strategy and research roles he provides guidance on digital strategies to C-level executives at technology providers, partners at private equity firms and function heads at large corporations. His current focus is on helping clients understand their market opportunity tied to ESG investment trends and their impact on corporate sustainability strategies. During his 12 years running Verdantix – including 4 leading the New York office – he has helped dozens of clients grow their businesses through fund raising, acquisitions and international growth. David was previously SVP Research at Forrester and Head of Analysis & Forecasting at BT. He holds a PhD from Cambridge University and also worked as a Research Associate at the Harvard Business School.