SEC Proposed Rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors

By April 22, 2022ESG

Overview

Many investors are concerned about the potential effects of climate-related risks on individual businesses and industries. As a result, these investors actively seek out more information regarding environmental, social, and governance (“ESG”) related disclosures to inform their investment decision-making. While many companies already make these types of disclosures in their proxy statements, sustainability reports, and websites, the Securities and Exchange Commission (“SEC”) has observed that these reports vary widely in content and format and have not met the existing, and growing, need for climate-risk related disclosures.

On March 21, 2022, the SEC proposed a new set of rules that would require public companies to include climate-related disclosures in their registration statements and periodic SEC filings. The proposed regulations are more prescriptive in nature than the principles-based approach currently used by many companies and industries, and would require integration with the registrant’s internal controls, audit, and oversight functions. 

The SEC believes that the proposed rules provide for “consistent, comparable, and decision-useful information for [investors, and] would provide consistent and clear reporting obligations for issuers.”1 The SEC further states that because “climate-related risks can affect a company’s business and its financial performance and position in a number of ways… [the proposed disclosures] on the material climate-related risks public companies face would serve both investors and capital markets.”2

The Proposed Disclosures

The proposed disclosures are modeled, in part, after frameworks that many companies already use, such as the Task Force on Climate-Related Financial Disclosures (“TCFD”) and the Greenhouse Gas Protocol.3 The SEC’s proposed disclosure framework would apply to both domestic registrants and foreign private issuers and would require the following:4

  • The oversight and governance of climate-related risks by the registrant’s board and management
  • How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term
  • How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook
  • The registrant’s processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes
  • If the registrant has adopted a transition plan as part of its climate-related risk management strategy, a description of the plan, including the relevant metrics and targets used to identify and manage any physical and transition risks
  • If the registrant uses scenario analysis to assess the resilience of its business strategy to climate-related risks, a description of the scenarios used, as well as the parameters, assumptions, analytical choices, and projected principal financial impacts
  • If a registrant uses an internal carbon price, information about the price and how it is set
  • The impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as the financial estimates and assumptions used in the financial statements
  • The registrant’s direct greenhouse gas (“GHG”) emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2), separately disclosed, expressed both by disaggregated constituent greenhouse gases and in the aggregate, and in absolute terms, not including offsets, and in terms of intensity (per unit of economic value or production)
  • Indirect emissions from upstream and downstream activities in a registrant’s value chain (Scope 3), if material, or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions, in absolute terms, not including offsets, and in terms of intensity
  • If the registrant has publicly set climate-related targets or goals, information about:
    • The scope of activities and emissions included in the target, the defined time horizon by which the target is intended to be achieved, and any interim targets
    • How the registrant intends to meet its climate-related targets or goals
    • Relevant data to indicate whether the registrant is making progress toward meeting the target or goal and how such progress has been achieved, with updates each fiscal year
    • If carbon offsets or renewable energy certificates (“RECs”) have been used as part of the registrant’s plan to achieve climate-related targets or goals, certain information about the carbon offsets or RECs, including the amount of carbon reduction represented by the offsets or the amount of generated renewable energy represented by the RECs

Presentation of the Proposed Disclosures

The proposed rules would require registrants, both foreign and domestic, to provide the climate-related disclosures, including proposed financial metrics, in the following filings and documents with the SEC:5

  • Registration statements and Exchange Act annual reports, for example, on Form 10-K
  • Regulation S-K mandated climate-related disclosure in a separate section of its registration statement or annual report
  • Regulation S-X mandated climate-related financial statement metrics and related disclosure in a note to the consolidated financial statements
  • Electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL
  • Attestation reports from an independent attestation service provider, if considered an accelerated or large accelerated filer

Attestation of the Proposed Disclosures

The SEC’s proposed framework would require registrants, including foreign private issuers, to include an attestation report from an independent attestation service provider covering, at a minimum, Scopes 1 and 2 emissions disclosure.6 This new attestation requirement for non-financial, climate-related data is a departure from the typical SEC disclosure requirements as registrants are not currently required to obtain assurance over non-financial data presented in their periodic SEC filings.

Phase-In Periods

The proposed rules regarding the new climate-related disclosures would include a phase-in period for all registrants, with the compliance date being dependent upon the individual registrant’s filing status, and an additional phase-in period for disclosure of Scope 3 emissions.7

Accommodations

The SEC’s proposal explains that “unlike Scopes 1 and 2 emissions, Scope 3 emissions typically result from the activities of third parties in a registrant’s value chain and thus…calculating these emissions would potentially be more difficult than for Scopes 1 and 2 emissions.”8 Therefore, the proposed rules regarding the new climate-related disclosures also include a series of accommodations to alleviate concerns that registrants might have regarding their disclosure obligations:9

  • A safe harbor for liability for Scope 3 emissions disclosure
  • An exemption from the Scope 3 emissions disclosure requirement for smaller reporting registrants
  • Forward-looking statement safe harbors, under the Private Securities Litigation Reform Act, to the extent that proposed disclosures would include forward-looking statements

The SEC expects that the need for accommodations regarding Scope 3 related disclosures will diminish over time. This will be especially true as more companies make their Scope 1 and 2 emissions available to the public, and large companies continue to voluntarily disclose their Scope 3 emissions which could allow smaller registrants that use the same suppliers to gain access to these methodologies and practices.10

Conclusion

The SEC’s proposal will likely receive many significant comments from registrants over the next few weeks that could change the details of the required disclosures before being finalized. Many comments are to be expected from industries and individual registrants that believe climate-related disclosures are out of the SEC’s statutory authority. Nevertheless, bringing climate-related disclosures to the forefront of business and the largest publicly traded companies in the world is likely to cause serious reflection and analysis of current climate-related governance and strategy. Additionally, these proposed changes will continue to influence the expectations and demands of investors, especially those who are sustainability focused. The proposed disclosures are open to public comments through at least May 20, 2022.



Footnotes

  1. “SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors.” U.S. Securities and Exchange Commission, 21 Mar. 2022, https://www.sec.gov/news/press-release/2022-46.
  2. “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” U.S. Securities and Exchange Commission, 21 Mar. 2022, https://www.sec.gov/rules/proposed/2022/33-11042.pdf.
  3. “Fact Sheet – Enhancement and Standardization of Climate-Related Disclosures.” U.S. Securities and Exchange Commission, 21 Mar. 2022, https://www.sec.gov/files/33-11042-fact-sheet.pdf.
  4. “Fact Sheet – Enhancement and Standardization of Climate-Related Disclosures.” U.S. Securities and Exchange Commission.
  5. “Fact Sheet – Enhancement and Standardization of Climate-Related Disclosures.” U.S. Securities and Exchange Commission.
  6. “Fact Sheet – Enhancement and Standardization of Climate-Related Disclosures.” U.S. Securities and Exchange Commission.
  7. “Fact Sheet – Enhancement and Standardization of Climate-Related Disclosures.” U.S. Securities and Exchange Commission.
  8. “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” U.S. Securities and Exchange Commission.
  9. “Fact Sheet – Enhancement and Standardization of Climate-Related Disclosures.” U.S. Securities and Exchange Commission.
  10. “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” U.S. Securities and Exchange Commission.
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Author Nathan Clark

Nathan is from Bloomfield Hills, Michigan but also spent time in Beijing, Shanghai, and Philadelphia while growing up. He enjoys the outdoors, specifically spending time waist-deep in the water while fly fishing. He also enjoys traveling with his wife and learning about different cultures and traditions. Professionally, he aspires to understand, problem solve, lead, and most importantly, help. After graduation, Nathan will be joining PwC in Dallas in their Trust Solutions group.

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