SEC Sharpens Focus on Climate and ESG Disclosures

- The SEC's final climate rule, adopted in March 2024, was stayed in April 2024 pending judicial review due to numerous legal challenges. In March 2025, the SEC announced it would no longer legally defend the rule, leaving its future uncertain and placing the litigation in abeyance. - While the final federal rule dropped the requirement for Scope 3 (supply chain) emissions disclosure, manufacturers still face this mandate from other jurisdictions. California's SB 253 and the European Union's Corporate Sustainability Reporting Directive (CSRD) both require Scope 3 reporting, impacting companies with operations or large sales in those markets. - The stayed SEC rule would have required new, specific financial statement footnote disclosures, including the aggregated costs and losses from severe weather events if they exceed a 1% threshold of pre-tax income or stockholders' equity. It also mandated disclosure of material spending on carbon offsets and renewable energy credits (RECs). - Under the paused rule, larger public companies (Large Accelerated Filers) were scheduled to begin disclosing Scope 1 and Scope 2 greenhouse gas emissions in their fiscal year 2026 filings, with smaller companies having until 2028. - Geopolitical shifts, such as U.S.-China trade tensions and the trend of supply chain diversification to countries like Vietnam, India, and Mexico, are creating material risks for manufacturers. These disruptions, costs, and strategic changes are central to the risk disclosures the SEC is scrutinizing. - Despite the new rule's halt, the SEC's 2010 guidance on climate-related disclosures remains in effect and has been cited in enforcement actions. The agency continues to pursue companies for misleading ESG-related statements, as seen in a 2024 settlement with WisdomTree Asset Management over its ESG investment processes. - The increasing complexity of ESG regulations is elevating the role of internal audit, which is now expected to provide independent assurance over the effectiveness of ESG risk management, the accuracy of sustainability data, and the internal controls for regulatory reporting.