SEC Proposes Enhanced Climate Change Reporting Requirements

On March 21, the Securities and Exchange Commission (SEC) announced proposed rule changes that would require a domestic or foreign registrant to include certain climate-related information in its registration statements and periodic reports, such as on Form 10-K. This would include information about climate-related risks that are reasonably likely to have a material impact on a registrant’s business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to the registrant’s audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions.

According to the background information on the SEC’s Fact Sheet:

“Many investors are concerned about the potential impacts of climate-related risks to individual businesses. As a result, investors are seeking more information about the effects of climate-related risks on a company’s business to inform their investment decision-making. Investors also have expressed a need for more consistent, comparable, and reliable information about how a registrant has addressed climate-related risks when conducting its operations and developing its business strategy and financial plan. The proposed rules are intended to enhance and standardize climate-related disclosures to address these investor needs.”

The proposed rule changes would require a registrant to disclose information about:

1. The registrant’s governance of climate-related risks and relevant risk management processes;
2. How any climate-related risks identified by the registrant 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;
3. How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and
4. 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 on the financial estimates and assumptions used in the financial statements.

The proposed rules also would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to 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 proposed disclosures are similar to those that many companies already provide based on broadly accepted disclosure frameworks, such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.

Under the proposed rule changes, 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, to promote the reliability of GHG emissions disclosures for investors.

The proposed rules would 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.

The proposed rules have been published on SEC.gov. 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.

For information about how the proposed rule might affect your business, contact us. We are here to help.

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