The Security and Exchange Commission Climate Disclosure Rule: Top Five Questions for Canadian CPAsThe Security and Exchange Commission Climate Disclosure Rule: Top Five Questions for Canadian CPAs

The Security and Exchange Commission Climate Disclosure Rule: Top Five Questions for Canadian CPAs

On March 6, 2024, the Securities and Exchange Commission (SEC) approved its revised Climate Disclosure Rule (Rule), with amendments to the initial Proposed Rule following the receipt of 24,000 comment letters. The Rule will take effect for certain companies starting from 2025, with others staggered thereafter. However, on April 4, 2024, the SEC issued a stay order of the Rule pending completion of litigation against the Rule. This action could have an impact on the timeline when the Rule will ultimately take effect. 

The approval of the Rule marks a major milestone in the development of sustainability standards and reporting on a global scale, and CPAs on this side of the border need to be aware of its impact and implications.

Here are the Top 5 Questions for Canadian CPAs on the SEC’s Climate Disclosure Rule:

Will the SEC Rule impact Canadian companies?

Some Canadian companies will be impacted.

Canadian companies that are registrants with the SEC that file using the Multi-jurisdictional Disclosure System (MJDS) and file their Exchange Act registration statements and annual reports on Form 40-F will not be subject to reporting under the Rule.

However, Canadian companies that are either U.S. domestic registrants that file their Exchange Act registration statements and annual reports on Form 10-K, or Foreign Private Issuers (FPI) that file their Exchange Act registration statements and annual reports on Form 20-F, will be subject to the Rule.

Additionally, a Canadian subsidiary of a company that is in-scope of the Rule (e.g., a Canadian subsidiary of a U.S. domestic filer) could find themselves in the position of needing to provide climate-related information required by the Rule to their parent company.

What disclosures will this Rule require?

On governance, the company must disclose:

  • A description of the oversight processes used by the company’s board of directors and management for evaluating and managing climate-related risks, and monitoring progress against any disclosed climate targets, goals or transition plans.

On strategy, risk management, business model and outlook, the company must disclose:

  • The actual and potential material impacts of any identified climate-related risks on the company's strategy and business model, and how those climate-related risks have materially impacted or are likely to materially impact its business strategy, financial performance or financial condition in the short and long term.
  • How the company is identifying, assessing and managing material climate-related risks, and whether any of the processes have been integrated into the company's overall risk management system or processes.
  • The scenarios and assumptions used, and the estimated financial impacts, where scenario analysis is used.   
  • Description of a climate transition plan, if one has been adopted by the company to manage a material climate transition risk. 
  • If the company uses carbon price set internally to account for and manage carbon costs as a tool for evaluation and managing a material climate-related risk, the company must disclose the price used and certain other information.

On targets and goals, the company must disclose:

  • Any climate-related target or goal if such target or goal has materially affected or is reasonably likely to materially affect the company’s business, financial performance or financial condition. If a climate-related target or goal is required to be disclosed, the company’s disclosure must include information on time horizon, baseline level and baseline period among others.

On greenhouse gases (GHG), the company must disclose, if material:

  • If a Large Accelerated Filer (LAF) or Accelerated Filer (AF) has material GHG emissions, the company must disclose: Scope 1 and Scope 2 emissions, based on metric tons of carbon dioxide equivalent.
  • The company must provide separate disclosure for each constituent gas if individually material.

On required financial statement disclosures, the company must disclose:

  • How severe weather events and natural conditions impacted estimates and assumptions, including whether disclosed climate targets or transition plans materially affected the estimates and assumptions in the financial statements.
  • The impacts from severe weather events and other natural conditions in a footnote to the audited financial statements if they relate to capitalized costs and charges, and expenditures expensed as incurred losses, subject to a materiality threshold and de minimis threshold for each.
    • For both capitalized costs and expenditures, the aggregate amounts determined above are to be calculated before any recoveries, which would be disclosed separately.    
  • Which financial statement line items were impacted by the severe weather events and other natural conditions. Companies must provide a roll-forward disclosure showing the beginning and ending balances of carbon offsets and Renewable Energy Credits (RECs).
    • The company must also disclose the accounting policy for carbon offsets and RECs, and which financial statement line items were impacted in the relevant fiscal year. 

What were some of the key changes from the Proposed Rule?

The most significant change from the Proposed Rule is that the SEC eliminated the requirement to disclose Scope 3 emissions (or emissions from the value chain).

The SEC also made the following amendments to the initial proposed Rule:

  • Reduced the scope of companies required to disclose Scope 1 and 2 greenhouse gas (GHG) emissions to only LAFs and AFs and only if they are material.  
  • Introduced an exemption to the disclosure of Scope 1 and 2 GHG emissions for Smaller Reporting Companies (SRCs) and Early Growth Companies (EGCs).  
  • Eliminated the requirement to consider their value chains in the assessment of material climate-related risks. 
  • Simplified the time horizons of disclosure by aligning the requirements to the MD&A requirements (short-term: 12 months, long-term: over 12 months). 
  • Revised to only require aggregate GHG emission disclosure in CO2 equivalent, unless any specific constituent gas is material, it must disclose such constituent gases disaggregated from other gases. 
  • Removed the requirement to evaluate the impacts of climate-related events and transition activities on the company’s financial statements on a line-by-line basis. 
  • Changed to only require disclosure of a company’s transition plan if it has adopted a transition plan to manage a material transition risk. 
  • Removed the requirement to disclose if a company director has expertise on climate-related risks.
  • Added a materiality qualifier in determining the targets and goals requiring disclosure such that the only targets and goals that require disclosure are ones linked to a material climate-related risk.

When does the Rule take effect?

There is no one date for the effective date. Please see the table below for a summary of effective dates as currently understood.

Disclosures and financial statement effects

This is a table associated with the information above
LAFsFYB 2025
AFs, other than SRCs and ECGsFYB 2026
SRCs, ECGs and non-accelerated filersFYB 2027

GHG Emissions and Assurance

This is a table associated with the information above
LAFsFYB 2026FYB 2029FYB 2033
AFs, other than SRCs and ECGsFYB 2028FYB 2031N/A
SRCs, ECGs and non-accelerated filersN/AN/AN/A
FYB refers to the fiscal year beginning in the calendar year listed.

What’s next for the Final Rule?

The SEC announced that the Rule is set to take effect for the companies outlined on the timetable above.

Following the announcement, lawsuits were filed against the SEC in respect of the Rule. Ten US states have filed lawsuits against the SEC. Environmental activists are also considering legal action against the Rule. In response to the pending litigation against the Rule, on April 4, 2024, the SEC issued a stay order of the Rule, pending the completion of the judicial reviews.

In Summary:

The release of the SECs Disclosure Rule is an important step forward, but it is in no way the end. While the Rule itself may require further amendments based on the outcome of the courts, the shape and depth of the impact it will have on Canadian companies who are required to disclose in the United States will be far-reaching.

That is why Canadian CPAs need to prepare themselves today. Bookmark CPA Ontario's Sustainability Simplified Knowledge Hub to stay up to date on the latest sustainability developments.

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