Overview
On March 21, the Securities and Exchange Commission (SEC) released its long-awaited proposed rule requiring public companies to disclose certain climate-related information in their registration statements and annual reports. While the Rule acknowledged that many companies already provide some of this information due to increasing investor demands, the SEC expressed concern that such disclosures are not adequate and greater consistency, comparability, and reliability is needed.
Required Disclosures
The Rule amends federal securities laws to require all domestic and foreign issuers of registered securities (“registrants”) to disclose specific direct and indirect greenhouse gas (GHG) emissions, as well as information on the registrant’s climate-related risks. Registrants who have publicly set climate-related targets must also disclose some additional information related to those goals.
GHG Emissions
- Scope 1 Emissions. All registrants must report any direct GHG emissions produced by sources controlled by or owned by the registrant.
- Scope 2 Emissions. All registrants must also disclose indirect GHG emissions generated by a registrant’s energy consumption, typically resulting from the purchase of electricity or other forms of energy.
- Scope 3 Emissions. Indirect emissions produced by upstream and downstream activities in a registrant’s value chain must be disclosed if material, or if the registrant has set a Scope 3 emissions target or related goal. The rule includes a safe harbor for liability for Scope 3 emissions disclosures and exempts smaller reporting companies from Scope 3 reporting requirements.
Scope 1, Scope 2, and (if required) Scope 3 emissions must be disclosed both in the aggregate and disaggregated per constituent greenhouse gas.
Climate-Related Risks
- All registrants must disclose information regarding how their board and management are overseeing climate-related risks, how such risks have had or are likely to have a material impact on the business in the short, medium, or long-term, as well as the registrant’s strategy, business model, and outlook.
- Registrants must also disclose the processes for identifying, assessing, and managing climate-related risks, any transition plans adopted as part of a risk-management strategy, and the methodology used to assess the resilience of the business strategy in face of these risks.
- The impact of climate-related events 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, must also be disclosed.
Public Targets or Goals
- Registrants who have publicly set climate-related targets must provide information regarding the scope of activities and emissions included in the target, time horizons, and any interim targets.
- Registrants must also describe how they intend to meet these targets, and provide relevant updates each fiscal year on whether/how progress has been achieved.
- Specific information regarding the amount of offsets or renewable energy certificates must also be disclosed if part of the registrant’s climate plan.
Timing and Implementation
The disclosures will follow a phased approach, with the compliance date dependent on the registrant’s filer status. Per the SEC’s presumed December 2022 effective date for a final rule, compliance would be required beginning 2024 for larger accelerated filers, 2025 for accelerated and non-accelerated filers, and 2026 for smaller reporting companies. The Scope 3 requirements would phase in one year after the rest of the disclosure requirements take effect.
All required disclosures will be filed with the SEC on Form 10-K under a new “Climate-Related Disclosure” section. Notably, in addition to the Scope 3 safe harbor, the Rule also includes safe harbors for any forward-looking statements contained in a disclosure.
Comments on the proposed rule are due May 20, 2022 or 30 days after publication in the Federal Register, whichever is later. For additional information, the SEC’s accompanying fact sheet can be found here.
