SEC Issues Draft Rule Requiring Enhanced Climate Disclosures
On March 21, 2022, the SEC issued proposed amendments to its rules that require public companies to provide certain climate-related information in their registration statements and annual reports. The proposed rule has been anticipated for months. See our previous article from July 2021 – “SEC May Soon Require Affirmative Climate Change Disclosure” – for more information. The proposal can be found here. An SEC fact sheet can be found here. The SEC is soliciting comments by May 20, 2022, or 30 days after publication in the federal register, whichever period is longer. Assuming that the rule is finalized by December 2022, and there are no court delays, SEC anticipates that the new rule, which will be phased in, will begin to apply to the largest registrants in fiscal year 2023 (filed in 2024).
The proposed rule requires registrants to disclose information about their direct greenhouse gas (GHG) emissions (Scope 1), and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2). It also requires registrants to disclose both upstream and downstream GHG emissions (Scope 3), if such emissions are material. Scope 3 emissions include emissions caused by suppliers and users of a company’s products. An example of Scope 3 emissions for an automaker would be the GHG emissions caused by drivers of the manufacturer’s cars.
Registrants must also provide information about their governance over climate-related risks, whether such risks may materially impact their business and financial statements, and how such risks may impact a company’s strategy, business model, and outlook. Under the proposal, companies are required to disclose any transition plan relating to climate-related risks, any analysis used to assess their resilience to these risks, and the impact of climate change on their financial statements. If registrants have publicly set climate-related targets or goals, as many companies have, they must provide information about the activities included in the target, the time span and strategy for reaching the goals, data relating to their progress, and any carbon offsets used to achieve these targets.
The proposed rule requires registrants to provide the required disclosures in registration statements and annual reports, including Form 10-Ks. Companies must disclose climate information in separate captioned sections of disclosures, and provide climate-related financial statement metrics in a note to financial statements. The proposed rule also requires enhanced electronic tags of climate disclosures (Inline XRBL), and forces large filers to obtain an attestation report from an independent attestation service provider covering, at a minimum, their Scope 1 and Scope 2 GHG emissions.
In issuing the proposed rules, the SEC explains that; “investors are seeking more information about the effects of climate-related risks on a company’s business to inform their investment decision-making.” SEC adds that; “[i]nvestors 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.” While conceding that many companies already disclose some climate information, the SEC points out that such disclosures are often fragmented and inconsistent. The SEC has issued the proposed rules “to enhance and standardize climate-related disclosures to address these investor needs,” which it asserts will benefit both investors and issuers.
Now that SEC has issued its proposed rule, public companies should take action. Registrants should institute a formal program to calculate their direct and indirect GHG emissions and address each of the other required disclosures outlined in the proposed rule. For more information, please contact James Brusslan.