On March 21, 2022, the Securities and Exchange Commission approved a rule proposal for new climate change disclosure requirements for both U.S. public companies and foreign private issuers. The SEC has posted the 500+ page Proposing Release and issued a Press Release and a Fact Sheet summarizing notable provisions. Not surprisingly, the rule proposal was approved along party lines.
These disclosure requirements, which are largely aligned with the Taskforce on Climate-related Financial Disclosures reporting framework and the Greenhouse Gas Protocol, would phase in over time based on a company’s filer status and would apply to annual reports on Forms 10-K and 20-F, with material changes to be reported quarterly on Form 10-Q, and would even apply to IPO and merger registration statements.
A brief summary of the proposal appears below, and we anticipate issuing a more detailed analysis of the rule proposal in the near future.
Reg S-K Amendments
The proposed climate change disclosure requirements would amend Regulation S-K to require a new, separately captioned “Climate-Related Disclosure” section in those SEC filings listed above that would cover a range of climate-related information, including:
- How any climate-related risks have had or are reasonably likely to have material impacts on a company’s business or consolidated financial statements;
- How any climate-related risks have affected or are reasonably likely to affect a company’s strategy, business model and outlook;
- Processes for identifying, assessing and managing climate-related risks, as well as board governance of climate-related risks and relevant risk management processes;
- Scope 1 and Scope 2 greenhouse gas (GHG) emissions metrics, which, for accelerated and large accelerated filers only, will be subject to assurance by an independent GHG emissions attestation provider;
- Scope 3 GHG emissions, but only if material or if the company has set a GHG emissions reduction target or goal that includes its Scope 3 emissions; and
- Information regarding climate-related targets, goals, and transition plans, if any.
Reg S-X Amendments
In addition, the rule proposal would amend Regulation S-X to require certain climate-related financial statement metrics and related disclosures in a separately identified note to companies’ audited financial statements, as well as disclosure of the financial impact of climate-related events (severe weather event and other natural conditions) and transition activities on every line item of a company’s audited financial statements, unless the aggregate impact on a particular line item is less than 1% of the line item. Further, companies would be required to disclose financial estimates and assumptions impacted by such climate-related events and transition activities. Such information would need to be audited, and the controls and procedures for such information would be part of internal control over financial reporting and therefore subject to any required annual attestation by the independent registered public accounting firm.
GHG Emissions Disclosures
Some of the most anticipated aspects of the rule proposal are the disclosure requirements concerning GHG emissions. The rule proposal would require all companies to disclose both Scope 1 (direct emissions) and Scope 2 (indirect emissions from purchased electricity and other forms of energy) emissions. The rule proposal contains detailed requirements for reporting Scope 1 and Scope 2 emissions, such as requiring disclosure of each in the aggregate and broken down into the disaggregated constituent GHGs, as well as in both absolute terms and in terms of intensity (based on emissions per dollar of revenue and unit of production). For accelerated filers and large accelerated filers, Scope 1 and Scope 2 emissions disclosures would be required to be subject to assurance by an independent GHG emissions attestation provider, to be phased-in over a number of years.
Scope 3 emissions (upstream and downstream emissions generated in the value chain) would be required to be disclosed only to the extent material or if the company has set GHG emissions targets or goals that include Scope 3 emissions. Smaller reporting companies would be exempt from this requirement. Scope 3 emissions would be subject to a safe harbor from liability unless such statements were made without a reasonable basis or other than in good faith. Scope 3 emissions disclosures would not be subject to the assurance requirements.
To the extent that a company has publicly announced climate-related targets or goals, additional disclosure would be required, including the scope of activities and emissions included in the goal, the time horizon for the goal, interim targets, how the company intends to meet the goal, annual updates on progress towards achieving the goal, and how carbon offsets and renewable energy certificates factor into achievement of the goal. In addition, the rule proposal would also require companies to disclose any climate transition plans and would permit registrants to disclose any climate-related opportunities at their discretion.
The rule proposal represents an ambitious approach to mandated “line item” climate change disclosure. Although some of the mandated disclosures would be entitled to claim the safe harbor liability defense for forward-looking statements, the safe harbor is not available for disclosures appearing in the notes to the financial statements. By requiring the new disclosures to be included in IPO registration statements and in annual reports that are incorporated by reference into shelf registration statements and other offering documents, this information will be subject to the heightened liability provisions under the Securities Act, including Sections 11 and 12 liability for the company, executive officers, directors, underwriters and auditors.
Effective Dates and Comment Period
The SEC’s Fact Sheet sets forth the following schedule as an example of when various aspects of the rules would apply to companies, assuming the rules are adopted and effective by the end of 2022.
As with other recent Gensler-era SEC rulemaking, the comment period ends on the later of 30 days after publication in the Federal Register or May 20, 2022 (which is 60 days from when the SEC approved the rule proposal), whichever is longer.
We would like to thank Charli Gibbs-Tabler and Zane Clark in our Washington, DC office for their work on this article.