SEC Proposed Rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors

Overview

Many investors are concerned about the potential effects of climate-related risks on individual businesses and industries. As a result, these investors actively seek out more information regarding environmental, social, and governance (“ESG”) related disclosures to inform their investment decision-making. While many companies already make these types of disclosures in their proxy statements, sustainability reports, and websites, the Securities and Exchange Commission (“SEC”) has observed that these reports vary widely in content and format and have not met the existing, and growing, need for climate-risk related disclosures.

On March 21, 2022, the SEC proposed a new set of rules that would require public companies to include climate-related disclosures in their registration statements and periodic SEC filings. The proposed regulations are more prescriptive in nature than the principles-based approach currently used by many companies and industries, and would require integration with the registrant’s internal controls, audit, and oversight functions. 

The SEC believes that the proposed rules provide for “consistent, comparable, and decision-useful information for [investors, and] would provide consistent and clear reporting obligations for issuers.”¹ The SEC further states that because “climate-related risks can affect a company’s business and its financial performance and position in a number of ways… [the proposed disclosures] on the material climate-related risks public companies face would serve both investors and capital markets.”²

The Proposed Disclosures

The proposed disclosures are modeled, in part, after frameworks that many companies already use, such as the Task Force on Climate-Related Financial Disclosures (“TCFD”) and the Greenhouse Gas Protocol.³ The SEC’s proposed disclosure framework would apply to both domestic registrants and foreign private issuers and would require the following:⁴

Presentation of the Proposed Disclosures

The proposed rules would require registrants, both foreign and domestic, to provide the climate-related disclosures, including proposed financial metrics, in the following filings and documents with the SEC:⁵

• Registration statements and Exchange Act annual reports, for example, on Form 10-K
• Regulation S-K mandated climate-related disclosure in a separate section of its registration statement or annual report
• Regulation S-X mandated climate-related financial statement metrics and related disclosure in a note to the consolidated financial statements
• Electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL
• Attestation reports from an independent attestation service provider, if considered an accelerated or large accelerated filer

Attestation of the Proposed Disclosures

The SEC’s proposed framework would require registrants, including foreign private issuers, to include an attestation report from an independent attestation service provider covering, at a minimum, Scopes 1 and 2 emissions disclosure.⁶ This new attestation requirement for non-financial, climate-related data is a departure from the typical SEC disclosure requirements as registrants are not currently required to obtain assurance over non-financial data presented in their periodic SEC filings.

Phase-In Periods

The proposed rules regarding the new climate-related disclosures would include a phase-in period for all registrants, with the compliance date being dependent upon the individual registrant’s filing status, and an additional phase-in period for disclosure of Scope 3 emissions.⁷

Accommodations

The SEC’s proposal explains that “unlike Scopes 1 and 2 emissions, Scope 3 emissions typically result from the activities of third parties in a registrant’s value chain and thus…calculating these emissions would potentially be more difficult than for Scopes 1 and 2 emissions.”⁸ Therefore, the proposed rules regarding the new climate-related disclosures also include a series of accommodations to alleviate concerns that registrants might have regarding their disclosure obligations:⁹

• A safe harbor for liability for Scope 3 emissions disclosure
• An exemption from the Scope 3 emissions disclosure requirement for smaller reporting registrants
• Forward-looking statement safe harbors, under the Private Securities Litigation Reform Act, to the extent that proposed disclosures would include forward-looking statements

The SEC expects that the need for accommodations regarding Scope 3 related disclosures will diminish over time. This will be especially true as more companies make their Scope 1 and 2 emissions available to the public, and large companies continue to voluntarily disclose their Scope 3 emissions which could allow smaller registrants that use the same suppliers to gain access to these methodologies and practices.¹⁰

Conclusion

The SEC’s proposal will likely receive many significant comments from registrants over the next few weeks that could change the details of the required disclosures before being finalized. Many comments are to be expected from industries and individual registrants that believe climate-related disclosures are out of the SEC’s statutory authority. Nevertheless, bringing climate-related disclosures to the forefront of business and the largest publicly traded companies in the world is likely to cause serious reflection and analysis of current climate-related governance and strategy. Additionally, these proposed changes will continue to influence the expectations and demands of investors, especially those who are sustainability focused. The proposed disclosures are open to public comments through at least May 20, 2022.