Key Takeaway from SEC’s Proposed Climate Disclosure Rule

On March 21, 2022, the SEC published its highly-anticipated rule proposal requiring public companies to make new climate-related disclosures...

On March 21, 2022, the Securities and Exchange Commission (SEC) published its highly-anticipated rule proposal requiring public companies to make new climate-related disclosures. The new disclosures in registration statements and periodic reports would include information about climate-related risks that are reasonably likely to have a material impact on the filer’s business, results of operations, or financial condition. Certain climate-related financial statement metrics will be required in a note to the company’s audited financial statements.

In support of the new disclosure requirements, the SEC notes that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions. Although many companies have begun to provide some climate-related disclosures in response to investor demand and in recognition of the potential financial effects of climate-related risks on their businesses, the SEC views current disclosure practices as fragmented and inconsistent. “I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers,” SEC Chair Gary Gensler said in a press statement. 

Disclosures Regarding Climate-related Risks

The SEC’s proposed rules would require registrants to disclose information about:

• 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 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;
• Description of 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;
• Registrants who have adopted a transition plan as part of its climate-related risk management strategy, should describe the plan, including the relevant metrics and targets used to identify and manage both physical and transition risks;
• Registrants use 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; and
• 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.

Disclosures Regarding Climate–Related Targets

If the Registrant has publicly set climate-related targets or goals, the following information disclosures include: 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; and 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.

Disclosures Regarding Direct Greenhouse Gas Emissions 

The SEC’s proposed rules also would require a Registrant to disclose information about its (a) direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2), (b) disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions. The proposed rules would provide a safe harbor for liability from Scope 3 emissions disclosure and an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies.

The SEC believes that proposals for GHG emissions disclosures would provide investors with decision-useful information to assess a registrant’s exposure to, and management of, climate-related risks, and in particular transition risks.

Proposal Rule Comments are Being Accepted

The SEC is accepting comments on its rule proposal. The comment period 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.

Should the rules become final, many of the disclosure requirements would become effective in phases, with the earliest compliance deadline scheduled for one fiscal year from the rules’ effective date for the GHG Scope 1 and Scope 2 requirements​​​​.

Accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering Scopes 1 and 2 emissions disclosures, with a phase-in over time. Additionally, the proposed rules include a phase-in period for all registrants, with the compliance date dependent on the registrant’s filer status, and an additional phase-in period for Scope 3 emissions disclosure.

Conclusions

Registrants who expect to be covered by the new proposed Climate Disclosure Rules should consider making their positions known to the SEC now.

If you have questions, please contact us

If you have any questions or if you would like to discuss these issues further,
please contact Paul A. Lieberman or the Scarinci Hollenbeck attorney with whom you work, at (201) 896-4100.