Climate-related disclosure rules have been under consideration in many countries around the world for the past few years, and regulations have begun to be implemented. Two years have passed since the U.S. Securities and Exchange Commission (SEC) issued a proposed rule to strengthen disclosure by public companies regarding the risks and impacts of climate-related issues. The final rule was adopted on March 6, 2024. The original proposal received more than 24,000 comment letters, leading to significant lobbying by stakeholders. Some believe that the final rule has relaxed the requirements compared to the original proposal. Regardless, public companies listed on U.S. stock exchanges will now be required to disclose information regarding the risks and impacts of climate-related issues.
The final rule includes climate-related risk and risk management disclosures for all public companies, both domestic filers and foreign private issuers, as well as disclosures about the board and management’s governance of climate-related risks. Additionally, audited financial statements must disclose the financial impacts of severe weather and other natural conditions. Larger filers will also be required to disclose information about greenhouse gas emissions, which will be subject to progressive assurance.
The final rule represents a relaxation of the original requirements, which included detailed disclosure of the locations (e.g., zip codes) of physical risks due to climate change. This requirement has been eased to the disclosure of the general geographical location of assets or operations subject to physical risks. Additionally, the original requirement to disclose whether any director has expertise in climate change risks has been removed.
Non-financial statement disclosure（Regulation S-K）
Disclosure Requirements Affecting Annual Reports and Registration Statements
Climate-related disclosures required by Regulation S-K are based on materiality used within the existing federal securities law framework, consistent with other SEC rules and regulations.
Governance (Item 1501)
- The role and extent of management’s involvement in assessing and managing climate-related risks
- The board of directors’ oversight of these risks
Strategy (Item 1502)
- Climate-related physical and transition risks that have had, or are likely to have, a material impact on the company’s strategy, operations, or financial condition over the short term (within 12 months) and long term (beyond 12 months)
- Transition plans to manage transition risks
- Scenario analysis and internal carbon pricing, if used for assessing and managing climate-related risks
Risk Management (Item 1503)
- Processes for identifying, assessing, and managing climate-related risks
- Whether and how climate-related risks are integrated into the company’s overall risk management process
Targets and Goals (Item 1504)
- Climate-related targets and goals
- Progress towards achieving these targets or goals, and how they are achieved
GHG Emissions (Item 1505)
Scope 1 and Scope 2 emissions, expressed in CO2e (carbon dioxide equivalent), disclosed in total if material (excluding the impact of any purchased or generated offsets)
Breakdown of constituent gases, if individually material
Explanation of the methodology, significant inputs, and significant assumptions used in calculating GHG emissions, including:
- Description of organizational boundaries
- Description of operational boundaries
- Explanation of protocols or standards used for calculating GHG emissions
- Explanation of estimates, underlying assumptions, and reasons for using estimates
Financial Statement Disclosure（Regulation S-X）
Disclosure Requirements Affecting Financial Statements
Impacts on Financial Statements:
Disclosures of Severe Weather Events and Other Natural Conditions (Rule 14-02(c) and (d))
- The impact of severe weather events and other natural conditions (including amounts reflected in the financial statements).
- Capitalized costs and expenses (excluding recoveries) if the amount exceeds 1% of the absolute value of shareholders’ equity or retained earnings for the fiscal year (unless the amount is less than $500,000).
- Expenses and losses expensed as incurred (excluding recoveries) if the amount exceeds 1% of the absolute value of pre-tax profit or loss for the fiscal year (unless the amount is less than $100,000).
- Disclosure thresholds are based on amounts that exceed 1% of specified amounts, unless they fall below certain de minimis thresholds.
Carbon Offsets and Renewable Energy Credits (Rule 14-02(e))
- Financial statement impacts if used as a material element of plans to achieve climate-related targets or goals.
Financial Estimates and Assumptions (Rule 14-02(h))
- Qualitative disclosures about financial estimates and assumptions significantly impacted by (1) severe weather events and other natural conditions, or (2) disclosed targets or transition plans.
- Other quantitative and qualitative impacts on financial estimates and assumptions related to (1) activities to mitigate or adapt to climate-related risks, (2) transition plans, or (3) targets or goals.
Disclosures Required Outside Financial Statements
Effective Date
Registered Company Type | Disclosure of everything except GHG emissions | Scope 1 and Scope 2 Emissions Disclosure | Limited warranty | Reasonable assurance |
Large accelerated filing companies | Start year: 2025 or later | Start year: 2026 or later | Start year: 2029 or later | Start year: 2033 or later |
Early filing companies | Start year: 2026 or later | Start year: 2028 or later | Start year: 2031 or later | Not applicable |
Smaller reporting companies, EGCs, non-accelerated filers | Starting year: 2027 or later | Not applicable | Not applicable | Not applicable |
While the final rule incorporates some concepts from the disclosure framework developed by the Task Force on Climate-related Financial Disclosures (TCFD), it differs significantly from other regulations and standards, such as the European Union’s Corporate Sustainability Reporting Directive (CSRD), the International Financial Reporting Standards’ (IFRS) Sustainability Disclosure Standards (ISSB standards), and California’s Climate Disclosure Law. These differences result in a lack of interoperability, making it difficult to use disclosures prepared under other frameworks to meet the SEC’s requirements.
The SEC estimates that the annual average cost of compliance with the rule over the first ten years will range from less than $197,000 to more than $739,000. This may impose a significant burden, particularly on large registrants required to obtain reasonable assurance for greenhouse gas emissions. Additionally, even though there are compliance deadlines, smaller reporting companies, Emerging Growth Companies (EGCs), and non-accelerated filers may still face substantial costs in complying with the non-GHG emissions disclosures. This cost burden could become a new consideration for companies planning an IPO in the U.S. market.
Impacts on Non-Public Companies
While the SEC’s climate-related disclosure rule is directed at public companies, it will inevitably have broader economic implications, affecting non-public companies as well. The following impacts on non-public companies are anticipated:
Collection of Climate-Related Risk Data:
As public companies report significant climate change risks within their value chains, non-public companies within the supply chains of large public companies will likely become part of the ecosystem for climate data collection. They may be required to submit emissions data to public companies.
Standardization of Climate-Related Risk Disclosures:
The SEC’s mandatory disclosure of climate-related risks and impacts will set a new precedent for the type of information companies need to share. This SEC requirement, aligned with the TCFD, is expected to guide voluntary disclosures by non-public companies.
Differentiation from Competitors:
By actively disclosing climate-related risk information, non-public companies can differentiate themselves from competitors and appeal to a broader range of investors and consumers who prioritize sustainability.
Preparation for Public Listing:
Non-public companies that proactively adopt climate-related risk disclosures will likely find the process of going public in the U.S. smoother in the future.
Operationalization of Climate-Related Risk Disclosures:
The SEC’s establishment of disclosure rules for climate-related risks and impacts underscores the importance of such information. Although it may take time for the rules to become widely implemented and robust, this indicates that disclosing climate-related risks and impacts could become a standard practice for non-public companies as well.
Regarding trends in other countries, it is important to note that stricter rules apply in California, where many Japanese companies are active. U.S. corporations with sales exceeding a certain threshold are required to take action if they do business in California. Canada is also expected to implement stricter regulations than the U.S., possibly including Scope 3 disclosures. Furthermore, even stricter standards will be applied in the EU, with extraterritorial application. Companies with sales above a certain amount within the EU may be subject to EU regulations depending on specific conditions.
As such, climate-related disclosure is becoming a global trend, and Japanese companies need to be aware of the regulations in the countries and regions where they and their businesses are expanding.
Conclusion
At our company, we support Japanese companies in their efforts to list on Nasdaq. If you found this article informative and would like to learn more, please feel free to contact us. We look forward to hearing from forward-thinking individuals like you who are navigating the present with an eye on the future. We are committed to providing assistance based on the conversations we have with you, fostering connections that create synergistic relationships. Please do not hesitate to reach out to us through our CONTACT page.
