SEC Final rules: carbon pricing and transition to a lower carbon economy.

Today is Monday, March 11 2024.

Last Wednesday, SEC voted 3-to-2 to adopt its final climate-related disclosure rules, originally proposed in March 2022. With this step taken, many big US companies will be subject locally to similar regulations that are already facing in other regions, such as Europe.

If in one hand SEC alleviated certain aspects of the rules - like Scope 3 reporting - in general there is a significant expansion of climate-related disclosures.

“The final rules will require information about a registrant’s climate-related risks that have materially impacted, or are reasonably likely to have a material impact on, its business strategy, results of operations, or financial condition. In addition, under the final rules, certain disclosures related to severe weather events and other natural conditions will be required in a registrant’s audited financial statements.”

See for example the post we shared yesterday on LinkedIn. It mentions that the most recent annual report of the North American energy distribution company PacificCorp, linked to Warren Buffet’s Berkshire Hathaway, the expression "forest fire" was mentioned 300 times. As a reference, in the same report from 2018 that expression did not even appear once.

SEC rules will specifically require a registrant to disclose the capitalized costs, expenditures expensed, charges and losses:

• incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise;

• related to carbon offsets and renewable energy credits or certificates (RECs) used as a material component of plans to achieve climate-related targets or goals.

Some other key information also must be reported, among which:

• Scope 1 and/or Scope 2 greenhouse gas (GHG) emissions;

• Activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices;

• Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;

The final rules will include some safe harbor from private liability for certain information and will be phased in gradually, basically from 2025 to 2031.

Foreign private issuers also have to comply with these rules in their Form 20F reports.

Click here for a factsheet and at the image below for the full document, with close to 900 pages of rules and discussions (about 16,000-plus comment letters were processed).

As an example, on page 487 there is a chapter about “Carbon Offsets and Renewable Energy Credits (RECs)” and then on page 495 an example were it reads:

“Carbon offsets and RECs are presented in the Intangible Assets line item on the balance sheet and expensed in the General and Administrative line item on the income statement. (a)

(a). As noted above, there is diversity in practice in accounting for carbon offsets and RECs. See supra note 2110 and accompanying text. In this example, the entity capitalizes all of its costs of carbon offsets and RECs and presents these amounts within the intangible assets line item. We are providing this example for illustrative purposes only and this is not meant to indicate a preferred method of accounting or presentation. Registrants should consider their specific facts and circumstances when determining the appropriate accounting treatment and disclose their accounting policy in accordance with 17 CFR 210.14-02(e)(2).”

Such note 2110 (page 490) brings some great links to IFRS and FASB documents. If interested, give a look.

SEC has estimated that compliance costs of this rule in the first year would be around $640,000 for larger companies, followed by annual costs of $530,000. Plus assurance costs estimated between $75,000 and $145,000. Click here for a comment letter that Columbia University sent to SEC on purpose of this topic.

Last but not least, there are already lawsuits, obviously, against these final rules filed by certain parts, among them a group of state attorneys general. Argument is basically that SEC is exceeding its authority. To have an idea, recall this older post “Florida Governor launches 18-state alliance to ban ESG investing”.

#climatechange

#corporatereporting

#riskmanagement

www.carboncreditmarkets.com

United States SEC Securities and Exchange Commission. FACT SHEET The Enhancement and Standardization of Climate-Related Disclosures Final Rules