SEC Proposes Changes to Climate Disclosures

SEC Proposes Rules to Require Disclosure of Climate Impacts of Publicly Traded Companies 

After months of speculation, on March 21st, the Securities and Exchange Commission (“the SEC” or “the Commission”) announced proposed amendments to existing rules that would require additional disclosures on climate-related risks and their potential impacts, greenhouse gas emissions, climate-related targets and goals, and other climate-related information. Named “The Enhancement and Standardization of Climate-Related Disclosures for Investors” the proposal would impact all foreign and domestic registrants (firms subject to reporting requirements of the Securities Exchange Act of 1934). 

The SEC voted in favor of proposed amendments that enhance and standardize registrants’ disclosures and require periodic reporting on the climate impacts and greenhouse gas emissions of companies. During the Commission’s testimony on the proposed rule amendments, SEC Chair Gary Gensler noted that, “investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions. Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do".

Background

Since the 1970s, the SEC has worked to provide investors with greater information and transparency about the environmental risks that face investors. However, since the SEC’s last environmental-related guidance was released in 2010, investors are increasingly interested in risks company’s face as a result of climate change, and the potential material impact they have on their investment strategies.

Because of this increased investor interest in climate-related matters, companies are increasingly likely to provide information on their climate strategy, climate risks, and transition plans. However, without standardized rules and reporting requirements, these current disclosures often provide fragmented or inconsistent information. The SEC’s proposed amendments seek to remedy this problem and provide investors with more decision useful climate-related information about companies, that is comparable, consistent, and reliable.  

Proposed Requirements

Key requirements addressed in the proposed rules include:

Required Disclosures 
The proposed rules would require a registrant to disclose:  

• Scope 1 and Scope 2 Greenhouse Gas (GHG) Emissions – For the first time, registrants will be required to disclose direct GHG emissions (Scope 1) and indirect emissions related to energy consumed by the company (Scope 2). If a registrant has material indirect emissions within their supply chain, those GHG emissions (Scope 3) must also be reported.  
• Information about Climate Related Risks – Companies must report how climate-related risks are identified and if these risks have, or could have, a material impact on the company’s financial statements. This also includes the process for modeling climate-related risks, scenarios used as part of the company’s strategy and resiliency planning, and oversight of climate-related risks by the company’s board and management.
• The Impact of Climate-Related Events – The impact of severe weather and other climate-related events and transition activities on the company’s financial statements and estimates.
• Information on Publicly Set Climate Targets – For companies that have set climate-related targets or goals, they will need to disclose: the scope of activities included in the goals; how the registrant plans to meet those goals; data used to determine progress towards the goals; and if carbon offsets or renewable energy certificates have been used to achieve the goals. 

Required Reporting 
The proposed rules would require a registrant to:

• Update Annual Reports and Filings – This includes providing climate-related disclosures in registration statements and Exchange Act annual reports and include the Regulation S-K mandated climate-related disclosure in a separate registration statement or annual report.
• Update Financial Statements – Provide the Regulation S-X mandated climate-related financial statement metrics and related disclosures in a note to its consolidated financial statements and electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL. 
• Attestation of Scope 1 and 2 Emissions – If the company is an accelerated or large accelerated filer, Scope 1 and 2 emission disclosures must be independently verified by an attestation service provider.

Timeline for Implementation and Compliance 

The proposed rule would be implemented in phases, with large accelerated filers having to report on all proposed disclosures, including Scope 1 and 2 for fiscal year 2023 (assuming the rule is adopted by the end of 2022) in their 2024 filings, and Scope 3 emissions for fiscal year 2024 in the their 2025 filings. Smaller filers would have until their 2026 filings to comply with rule and would be exempt from reporting on Scope 3 emissions. 

Next Steps

The proposal will now move to the comment period, which will remain open for 30 days after the proposal has been published in the Federal register, or 60 days from the publication of the proposal on the SEC’s website, whichever is longer. Comments may be submitted to the SEC, through their website.

How We Can Help

Our ESG Advisory Practice will continue to monitor the SEC’s proposed amendments. If you have any questions about what we covered here or would like to learn more about our services, please contact our ESG Advisory Practice.