SEC Proposes Sweeping New Rules on Climate Risk Disclosure

On March 21, 2022, the Securities and Exchange Commission (the “SEC”) proposed new climate disclosure rules (the “Proposed Rules”)¹, which would require registrants, including foreign private issuers, to disclose a broad array of information on climate-related risks and activities, including emissions data.

Background

The goal of the Proposed Rules, the SEC says, is to enhance and standardize climate-related disclosure, which some registrants have already begun making voluntarily, but which has until now occurred in the absence of any overarching regulatory framework and with different stakeholders seeking differing information. All of this is happening against the backdrop of a spike in investor demands for climate and environmental disclosure, and the focus of the Biden administration on integrating climate concerns into rulemaking generally.

The Proposed Rules would be phased in incrementally between 2023 and 2027 and would require disclosure of certain climate-related risks in a separate, captioned section of registrants’ registration statements and annual reports, including, for large accelerated filers and accelerated filers, an attestation requirement for certain emissions information. They also would require certain climate-related metrics to be included in a note to registrants’ audited financial statements.

The Proposed Rules

The Proposed Rules would require disclosure of both actual and potential negative impacts of climate-related conditions and events on a registrant’s consolidated financial statements, business operations or value chains, taken as a whole. The required disclosures, which are modeled on the recommendations from the Task Force for Climate-Related Financial Disclosures, cover the following items:

• A description of the role of the board and the management of the registrant in the oversight and governance of climate-related risks, including disclosure of whether and how the board and management discusses, identifies, assesses and manages such risks, as well as a description of the registrant’s process for identifying, assessing, and managing climate-related risks and whether and how this is integrated into their overall risk management process.
• The material impact (where the materiality determination aligns with that made in disclosure in the MD&A section of a registration statement or annual report; that is, it requires that there be a reasonable likelihood that the events and uncertainties reported could cause reported financial information to not necessarily be indicative of future operating results or future financial condition) of any climate-related risks identified by the registrant on business and consolidated financial statements over short-, medium- or long-term, and the effect of climate-related risks on the registrant’s strategy, business model and outlook.
• The impact of climate-related events and of climate transition activities on line items of consolidated financial statements, related expenditures and financial estimates, and assumptions impacted by such events and transition activities.
• Information about a registrant’s climate-related targets and goals, climate transition plan, use and calculation of an internal carbon price, and scenario analysis relating to a registrant’s climate resilience, if the registrant has any of the foregoing (though a registrant is not required to create these items if they are not separately tracking them).
• Greenhouse gas (“GHG”) emissions, disaggregated into their constituent greenhouse gases and aggregated, and in both absolute terms and intensity (i.e., emissions per unit of economic output), and including, for accelerated filers and large accelerated filers, an attestation report from an independent expert in GHG emissions covering these disclosures:
  • Scope 1 GHG emissions, those that come from operations owned or controlled by the registrant, and
  • Scope 2 GHG emissions, which come from the generation of electricity, heat, steam or cooling purchased or acquired by the registrant and used in the operations owned or controlled by the registrant.
• Indirect GHG emissions from upstream activities (activities by parties other than the registrant relating to the initial stages of a good or service such as materials sourcing or supplier activities) and downstream activities (activities by a party other than the registrant relating to finishing or providing a product or service to an end user, such as transportation and distribution, use of sold products, or investments) in a registrant’s value chain, known as Scope 3, if such emissions are material or if the registrant has a Scope 3 GHG emissions target, which would be protected under a safe harbor providing that this disclosure would not be deemed fraudulent unless shown that it was made without a reasonable basis or disclosed other than in good faith. Smaller Reporting Companies (“SRCs”) would be exempt from this requirement.

Timeline

The proposed disclosure requirements would be phased in over time as follows:

• For large accelerated filers, all proposed disclosures except the Scope 3 GHG emissions disclosures would be required beginning with FY 2023, and the Scope 3 disclosures would begin with FY 2024. The attestation requirements would begin with limited assurance starting in FY 2024, and reasonable assurance starting in FY 2026.
• For accelerated filers and non-accelerated filers, all proposed disclosures except the Scope 3 GHG emissions disclosures would be required beginning with FY 2024, and the Scope 3 disclosures would begin with FY 2025. The attestation requirements for accelerated filers would begin with limited assurance of this data starting with FY 2025, and reasonable assurance starting with FY 2027.
• For SRCs, all proposed disclosures except the Scope 3 GHG emissions disclosures would be required beginning with FY 2025, but SRCs would be exempt from making disclosures about Scope 3 GHG emissions.

Next Steps

U.S.-listed reporting companies, whether domestic or foreign private issuers, should carefully study the proposed disclosure requirements. Although compliance will not be required immediately, and the narrow safe harbor and exemption for SRCs available for Scope 3 disclosures may provide certain registrants some relief, the additional requirements of the Proposed Rules would significantly increase the level of mandated disclosure and raise the bar for disclosure compliance on annual reports and registration statements for any registrant in the public markets.

The SEC is currently soliciting public comments on the proposed amendments, and the public comment period will remain open until at least May 20, 2022. As with any proposed rulemaking, it is difficult to predict whether the SEC’s proposals will be enacted, either in their proposed form or modified as a result of public comment. Kleinberg Kaplan intends to monitor the situation and update as appropriate.

¹ The full rules can be found here.