SEC Unveils Landmark Proposed Rules on Climate Change Disclosures

On March 21, the U.S. Securities and Exchange Commission (SEC) unveiled its long-anticipated draft proposed rules for mandatory climate disclosures that would align the United States with other developed economies, particularly the EU and the UK, which have focused on financial disclosures related to climate change as a useful tactic to promote environmentally-conscious policies.

At an open meeting, the SEC proposed rules to significantly expand and standardize registrants’ climate-related disclosures for investors. The proposed rules would employ mandatory, prescriptive disclosures in periodic reports and registration statements to address topics related to greenhouse gas (GHG) emissions and global climate change.

Under the proposed rules, companies would disclose their own direct and indirect GHG emissions, known as Scope 1 and Scope 2 emissions. The rules would also require companies to disclose GHG generated by suppliers and partners, known as Scope 3 emissions, if they are material or included in any emissions targets the company has set.

While materiality remains a touchstone for the majority of the proposed rules, certain disclosures—including GHG emissions—are now mandatory regardless of the circumstances. These disclosures are required to be incorporated into existing SEC filings, rather than a separate climate-focused document. The SEC has also provided for an extended roll-out of the rules (see below), with full compliance not expected for several years, and has also incorporated safe harbor provisions related to certain disclosures, notably for Scope 3 GHG emissions.

SEC chair Gary Gensler said the agency was responding to investor demand for consistent information on how climate change will affect the financial performance of companies they invest in. The proposed rule would require disclosures on Form 10-K about a company’s governance, risk management, and strategy with respect to climate-related risks. Moreover, the proposal would require disclosure of any targets or commitments made by a company, as well as its plan to achieve those targets and its transition plan, if it has them.

See below highlights of the proposal, which are subject to public comment.

CLIMATE-RELATED RISKS

The proposed rule requires U.S.-listed companies to disclose climate-related risks and their “actual or likely material impacts” on the company’s business, strategy and outlook. This could include the physical risks posed by climate change, such as flooding or wildfires, but also risks that may result from government policies aimed at mitigating climate risks, such as a carbon tax or other new regulations.

CLIMATE RISK GOVERNANCE

Companies will also have to disclose their governance processes and framework for managing climate-related risks, including, for example, the risk-management controls and processes they have in place; what the board is doing to oversee those processes; and the company’s “processes for identifying, assessing, and managing climate-related risks.”

GREENHOUSE GAS EMISSIONS

Under the proposed rules, companies will have to disclose the GHG emissions they generate both directly and indirectly from purchased electricity and other forms of energy, known as Scope 1 and Scope 2 emissions, respectively. They will also have to disclose the indirect emissions from upstream and downstream activities in their value chains, known as Scope 3 emissions, “if material” or if they have a greenhouse gas emissions target that includes Scope 3 emissions. Smaller companies will be exempt from this requirement.

GHG emissions data are increasingly being used as a quantitative metric to assess a company’s exposure to—and the potential financial effects of—climate-related transition risks. Those risks could include regulatory, technological, and market risks driven by a transition to a lower greenhouse gas emissions economy, with potential financial impacts on revenues, expenditures, and capital outlays.

In short, all filers would be required to disclose their Scope 1 and Scope 2 GHG emissions—emissions that “result directly or indirectly from facilities owned or activities controlled by a registrant.” Moreover, the proposal would phase in Scope 3 disclosures after Scopes 1 and 2; a new safe harbor would be available for Scope 3 disclosures; and smaller reporting companies would be exempt from Scope 3 disclosures.

The core elements of the proposed rules also would apply to international filers on Form 20-F.

CLIMATE TARGETS, TRANSITION PLANS

Companies that have publicly declared climate-related targets or goals must provide details, including “the scope of activities and emissions included in the target,” the deadline, any interim targets, and how they plan to meet their goals. If the company has adopted a transition plan as part of its climate-related risk management strategy, it must disclose “a description of the plan, including the relevant metrics and targets used to identify and manage any physical and transition risks.”

CLIMATE FINANCIAL REPORTING

The proposed rules also would require a company to disclose “certain disaggregated climate-related financial statement metrics that are mainly derived from existing financial statement line items” in a note to its financial statements. This would include the impact of the climate-related events and transition activities on the company’s consolidated financial statements. The disclosures would be included in companies’ registration statements and annual reports, as well as in a note appended to consolidated financial statements.

PHASE-IN PERIOD

The proposed rules would include a phase-in period with compliance dates dependent on the registrant’s filer status as follows:
Large Accelerated Filers:
Fiscal year 2023 (filed in 2024) for all proposed disclosures excluding Scope 3 GHG emissions
Fiscal year 2024 (filed in 2025) for (i) Scope 3 GHG emissions disclosures (if required) and (ii) limited assurance attestation of Scope 1 and Scope 2 GHG emissions disclosures and
Fiscal year 2026 (filed in 2027) for reasonable assurance attestation of Scope 1 and Scope 2 GHG emissions disclosures.
Accelerated and Non-Accelerated Filers:
Fiscal year 2024 (filed in 2025) for all proposed disclosures excluding Scope 3 GHG emissions
Fiscal year 2025 (filed in 2026) for (i) Scope 3 GHG emissions disclosures (if required) and (ii) for accelerated filers only, limited assurance attestation of GHG emissions disclosures (non-accelerated filers would be exempt from the attestation requirements) and
For accelerated filers only, fiscal year 2027 (filed in 2028) for reasonable assurance attestation of GHG emissions disclosures.
Smaller Reporting Companies:
Fiscal year 2025 (filed in 2026) for all proposed disclosures other than Scope 3 GHG emissions disclosures (smaller reporting companies would be exempt from the requirements to provide Scope 3 GHG emissions disclosures or independent attestation).

See SEC Fact Sheet, Enhancement and Standardization of Climate-Related Disclosures (March 22, 2022).

CONCLUSION

The proposed rules draw on our existing rules and guidance governing climate-related disclosures, as well as from the Task Force on Climate-related Financial Disclosures, an international framework that many companies and countries already have started to adopt, including Brazil, the European Union, Hong Kong, Japan, New Zealand, Singapore, Switzerland, and the United Kingdom. See, SEC Chair Gensler on Proposed Mandatory Climate Risk Disclosures, Comment, Columbia Law School Blue Sky Blog (March 22, 2022)

The comment period for the proposed rules will remain open for 30 days after publication in the Federal Register, or 60 days after the date of issuance and publication on sec.gov, whichever period is longer.

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