SEC Proposes New Rules for Climate-Related Disclosures
John Lambo - Apr 06 2022Companies may be required to disclose climate-related risks and how performance is impacted
On March 21, 2022, the U.S. Securities and Exchange Commission (SEC) released a comprehensive set of proposed rules that would enhance and standardize a registrant’s climate-related disclosures in registration statements and annual reports for public companies (Proposed Rules) that are reasonably likely to have a material impact on its business. The Proposal is also meant to help investors assess climate-related risks.
The Proposed Rules borrow specific terms and concepts from generally accepted disclosure frameworks already existing in the marketplace, such as the “Task Force on Climate-Related Financial Disclosures” and the “Greenhouse Gas Protocol.”
Citing registrants that have made commitments concerning climate change (e.g., “net-zero”), the Proposed Rules seek more detailed disclosures about these commitments, including specific targets and the registrant’s related plans to satisfy those targets, in part to allow investors to assess the credibility of such commitments but also to provide information that can be compared across the market.
More specifically, the Proposed Rule requires a public company to disclose:
- The oversight and governance of climate-related risks by a company’s board and management; any board committees responsible for oversight of climate-related risks; whether any specific board member has climate-related risk expertise and, if so, a description of such knowledge; and how frequently the board committees discuss climate-related risks.
- Any climate-related risks identified by the company 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. Companies would be required to describe what they mean by “short, medium, or long term.” Companies also would be required to describe physical risks as either acute or chronic and would have to provide the ZIP code location of the properties or operations subject to physical risk
- How any identified climate-related risks have affected or are likely to affect the company’s strategy, business model, and outlook. Companies would need to disclose how these risks affect their consolidated financial statements. If companies use carbon offsets or renewable energy credits in their emissions reduction strategies, they would need to disclose the short- and long-term risks associated with such offsets and credits. If companies use an internal carbon price to evaluate climate risk or determine climate strategy, they must disclose how such a price was determined, including the cost per metric ton of carbon dioxide. If companies describe the resilience of their business strategy, they would need to describe any analytical tools, such as scenario analyses, that they used to evaluate the impact of climate risks. The use of scenario analyses will require a complete description of the assumptions and parameters of such studies.
- The company’s processes for identifying, assessing, and managing climate-related risks and whether any such functions are integrated into the company’s overall risk management system or processes.
- Reporting on the impact of climate-related events on the line items of the company’s consolidated financial statements and related expenditures, and disclosure of financial estimates and assumptions impacted by such climate-related events and transition activities, including severe weather risks and other natural phenomena, physical threats, and transition activities.
- Disclosure of GHG emissions and intensity produced by filing company (Scopes 1), GHG emissions and intensity created by suppliers (Scopes 2), and GHG emissions and intensity created in the value separately (scopes 3).
- The company’s climate-related targets or goals and fiscal year transition plan, if any. Any transition plan discussion would need to address relevant metrics and targets.
When responding to any of the Proposed Rule’s provisions concerning governance, strategy, and risk management, however, a company may also disclose information concerning any identified climate-related opportunities such as resource efficiency and cost savings, the adoption of low-emission energy sources, the development of new products and services, access to new markets, and building resilience along the supply chain.
Prior to the Proposed Rules, the SEC had most recently published interpretive guidance regarding climate change disclosure matters in 2010.
The 2010 Guidance came after several years of mounting pressure from state attorneys general, environmental groups, institutional investors, and others to clarify climate change disclosure requirements under existing SEC rules.
Notwithstanding that prior guidance, given the intensive public discourse surrounding climate change and the increased demand from certain investors for more consistent, comparable, and reliable information about climate-related risks, the SEC believes improved disclosures by registrants regarding climate-related impacts are warranted. Accordingly, the Proposed Rules aim to enhance and standardize disclosures so that a registrant may more effectively and efficiently disclose climate-related risks that may have material impacts on the registrant’s business or financial results. The Proposed Rules borrow certain terms and concepts from generally accepted disclosure frameworks already existing in the marketplace, such as the “Task Force on Climate-Related Financial Disclosures” and the “Greenhouse Gas Protocol.”
Citing registrants that have made commitments concerning climate change (e.g., “net-zero”), the Proposed Rules seek more detailed disclosures about these commitments, including specific targets and the registrant’s related plans to satisfy those targets, in part to allow investors to assess the credibility of such commitments but also to provide information that can be compared across the market.
The proposed amendments will be open for public comment until later of May 20, 2022, or 60 days after publication in the Federal Register.
After the comment period, the proposed amendments may be revised before another vote. Regardless of the outcome, companies should review their climate-related disclosure policies and ensure that they are prepared to meet heightened disclosure thresholds if needed.
The proposed new rules constitute a significant step toward a less discretionary, rules-based ESG disclosure regime and a signal from the SEC that the discretionary disclosure regime in effect to date may not have provided sufficient material and transparent information upon which investors can rely.
Yet the biggest hurdle for a final SEC rule on climate disclosure will be on how the eventual regulation handles Scope 3 indirect emissions traced back to individual members of the supply chain.
During the agency’s information-gathering period, companies voiced concerns that they could face lawsuits over emissions outside of their direct control. However, under the proposal, registrants would only have to report Scope 3 emissions if they are material or companies have set reduction goals that include Scope 3. The proposal contains a broad safe harbor from liability for Scope 3 emissions disclosure and an exemption for smaller issuers.