What does the SEC want?

The SEC aims to increase transparency around the impact of material climate-related risks on a company’s business and strategy, and management’s plan to mitigate those risks (including material expenditures and impact of risk mitigation strategies). Companies are also required to provide a narrative description of how identified climate-related risks have affected or are likely to affect the company’s consolidated financial statements. Some additional details of the new rule include:

• Disclosure of material climate-related targets or goals (including material expenditures and impacts on financial estimates);
  
• Reporting of material scope 1 and/or scope 2 greenhouse gas (GHG) emissions on a phased-in reporting basis by certain larger registrants;
  
• The filing of an attestation report affirming the veracity of the required disclosure of each company’s scope 1 and/or scope 2 emissions, also on a phased-in basis; and 
  
• Disclosure of the use of carbon offsets and renewable energy credits, as well as any capitalized costs, expenditures expensed and losses incurred due to severe weather events and other natural conditions, in financial statement notes.¹
  

Rather than imposing a standard disclosure requirement on all issuers, the final rules instead requires that only large-accelerated filers (LAF) and accelerated filers (AF) need to make Scope 1 and Scope 2 emissions disclosures.

What should public companies do?

1. Define a process to implement a governance and risk management strategy to address climate risk.

Disclosure regarding the Board’s oversight of climate-related risks and the role of management in assessing and governing material climate-related risks is now required.

Rather than merely identifying the relevant expertise of board members and the specific members responsible for climate-related risk management, companies need to describe whether and how the board oversees progress towards publicly stated climate-related targets, goals, or transition plans under the new rule.

2. Develop a phased approach to establishing a mature climate strategy.

More than 80% of the S&P 500 companies disclose Scope 1 and Scope 2 emission but not all companies are in this phase of their environmental and climate management journey.² Companies with less mature climate-management processes can start to prepare for the SEC’s requirements by leveraging Aon’s Climate Maturity Curve to assess their current processes.

3. Prepare to disclose climate-related risks and scope 1 and 2 GHG emissions.

With some companies required to complete the new SEC mandates as early as 2025, extensive operational and governance coordination will be necessary to establish these new reporting processes as standard across the firm.

Climate Risk Analytics is a proactive step to accelerate a company’s ability to comply. Aon can help corporations understand current and future risks and produce a baseline of scope 1 and scope 2 emissions. These are essential foundations to meet the requirements and inform company decisions around climate-related targets and transition frameworks, regardless of the disclosure phase-in date that applies.

Additional Legislation

California’s Climate Corporate Data Accountability Act (SB 253) requires public and private U.S. corporations that operate in California with total annual revenue exceeding $1 billion to disclose scope 1, 2, and 3 emissions—with scope 1 and 2 required in 2026 and scope 3 following in 2027. In addition, the California Climate-Related Financial Risk Act (SB 261) was adopted in 2023 requiring corporations with annual revenues exceeding $500m to disclose climate-related financial risks consistent with the Task Force on Climate Related Disclosures (TCFD) framework and report measures to mitigate such risks.

In addition to the new SEC rule and California’s recent legislation, there are other climate-related rules and frameworks. The SEC rule leverages pre-existing, widely utilized reporting frameworks such as the TCFD, Greenhouse Gas Protocol (GHG Protocol) and the Partnership for Carbon Accounting Financials (PCAF). Larger companies continue to leverage the European Union’s Corporate Sustainability Reporting Directive (CRSD) as the most extensive climate-related disclosure requirements.

The impacts of multiple rules and frameworks on companies vary. Some face increased compliance costs, while others may seize the opportunity to differentiate themselves to stakeholders in an increasingly eco-conscious market.

Impact on D&O Exposure

It is possible that litigation against executives, companies, and their boards, alleging violations of securities laws and breaches of fiduciary duty regarding the board’s failure to manage, prepare or report on climate risk will materialize.

A board of directors’ expectation may be that a directors and officers (D&O) insurance policy covers such claims arising out of climate issues. However, many D&O policies have some form of exclusion for direct pollution-related exposures, including clean-up costs that, if broadly worded, could impact coverage for a D&O claim arising from climate-related issues. Other policy issues may be implicated, such as the breadth and scope of the investigation and claim definitions, the definition of loss, and more. Increased preparation and discussions of the new climate disclosure rule are recommended to help mitigate liability and prepare for D&O underwriting meetings as underwriters are likely to ask about climate disclosure and risk management.

How Aon Can Help

Aon has global resources and capabilities to help companies put a structure in place to make better decisions and implement these across a corporate framework. Importantly, Aon can also structure risk financing solutions to mitigate the risk for executives, the board and decision-makers by way of D&O Insurance.

Read more in “5 Things to Know About the New SEC Climate Ruling” and learn about how Aon helps clients make informed decisions around climate risk.

1. Fact Sheet
2. 2024IMPACT State of Corp Sust report V8.pdf (ucla.edu)

About Aon

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