Proposed SEC Climate-Related Disclosure Requirements

On March 21, 2022, the Securities and Exchange Commission (“SEC”) at a virtual open meeting proposed rules to expand and standardize issuers’ climate-related disclosures. The proposed rules would utilize mandatory, prescriptive disclosures in periodic reports and registration statements to address topics related to greenhouse gas (“GHG”) emissions and global climate change. The Commission acknowledged that in 2010, the SEC required disclosure of climate-related impacts on issuers’ businesses but since then, awareness of climate-related incidents, GHG emissions and climate change has grown and investors are seeking more consistent disclosure from public companies. Additionally, the SEC identified that about one-third of public companies include some degree of climate-related disclosure in their annual reports while a larger portion publish some sort of a sustainability report outside of its public filings that include some degree of climate-related disclosure. The SEC is seeking to standardize the disclosure to create a transparent and consistent climate-related benchmark for investors. Whether or not the SEC finalizes this rule, the demand for climate-related financial risk disclosure is unlikely to subside. As a result, companies may want to begin to think about possible actions to implement, particularly around the processes for gathering and disclosing information regarding GHG emissions.

The proposed rules would require public companies to disclose:

  • the company’s oversight and governance of climate-related risks and risk management process;
  • the company’s climate-related risk and their actual or likely material impacts on the company’s business, strategy and outlook and on the company’s financial statements over the short, medium and long-terms;
  • the impact of climate-related events, such as severe weather events, and climate transition activities on the audited consolidated financial statements at a line-item level, as well as the climate-related estimates and assumptions used in the financial statements;
  • the company’s Scope 1 (direct) and Scope 2 (indirect from production of energy used in the business) GHG emissions, with accelerated and large accelerated filers required to obtain, after a phase-in period, independent attestation at a reasonable assurance level of the accuracy of such emission disclosures;
  • to the extent material, or if the company has adopted a GHG emissions target or goal that includes Scope 3 (indirect from suppliers and customers) GHG emissions, the company’s indirect Scope 3 GHG emissions from upstream and downstream activities in the company’s value chain (the proposed rule excepts smaller reporting companies from this requirement); and
  • details regarding any climate-related targets and goals, climate transition plans, scenario analysis or internal carbon price used by the company in connection with its climate-related risk management, including data on the company’s progress against publicly-stated goals, and any carbon offsets used as part of those plans.

The SEC proposal would require registrants to provide the climate-related disclosures in its Regulation S-K disclosures (i.e., Form 10-K) including an appropriately captioned section of its registration statement or annual report as well as Regulation S-X disclosures (i.e., notes to financial statements). The proposal identified a compliance deadline of early 2024 for fiscal year 2023 disclosures, with phase-in requirements for certain filers and a longer compliance period for Scope 3 emission disclosures.

The SEC proposal passed along party lines. The comment period for the proposed rules will remain open for 30 days after publication in the Federal Register, or May 20, 2022, whichever is longer.

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