On March 22, 2022, the U.S. Securities and Exchange Commission (SEC) released the long-anticipated proposed rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors. The proposed rule has a 60-day comment period which ends May 20, 2022.
Summary of the Proposed Rules
The SEC will require registrants to disclose certain climate-related information, including information about climate-related risks that are reasonably likely to have material impacts on the business or consolidated financial statements and Greenhouse Gas (GHG) emissions metrics, which could help investors assess those risks.
The proposed financial statement metrics would consist of climate-related impacts on existing audited financial statement line items. The proposed climate-related disclosure framework is modeled on the Task Force on Climate-Related Financial Disclosures’ (TCFD) recommendations and the GHG Protocol.
The proposed rules would require a registrant to disclose information about:
Oversight and Risk Disclosures:
- Oversight and governance of climate-related risks.
- How climate-related risks are likely to have a material impact on its business and consolidated financial statements over the short-, medium-, or long-term.
- How climate-related risks affect the registrant’s strategy, business model and outlook.
- The registrant’s processes for identifying, assessing and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes.
- The impact of climate-related events (physical risks) and transition activities (transitional risks) on the line items of the consolidated financial statements and related expenditures, and disclosure of financial estimates and assumptions impacted by such climate-related events and transition activities.
Greenhouse Gas Disclosures:
- Scopes 1 and 2 GHG emissions metrics in both absolute and intensity terms.
- Scope 3 GHG emissions and intensity if material, or if the registrant set a GHG emissions reduction target or goal that includes Scope 3 emissions.
- Any climate-related targets or goals and transition plans.
Presentation of the Proposed Disclosures
The proposed rules require a registrant:
- To provide the climate-related disclosure in its registration statements and Exchange Act annual reports.
- To provide the Regulation S-K mandated climate-related disclosure in a separate, appropriately captioned section of its registration statement or annual report, or alternatively to incorporate that information in the separate, appropriately captioned section by reference from another section, such as Risk Factors, Description of Business or Management’s Discussion and Analysis (MD&A).
- To provide the Regulation S-X mandated climate-related financial statement metrics and related disclosure in a note to the registrant’s audited financial statements.
- To electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL.
Attestation Requirements for Scope 1 and Scope 2 Emissions Disclosure
The proposed rules would require an accelerated filer or a large, accelerated filer to include an attestation report covering, at a minimum, the disclosure of its Scope 1 and 2 emissions.
The proposed transition periods would provide existing accelerated filers and large accelerated filers one fiscal year to transition to provide limited assurance and two additional fiscal years to transition to providing reasonable assurance, starting with the respective compliance dates for Scopes 1 and 2 disclosure described below.
The proposed rules would not require an attestation service provider to be a registered public accounting firm.
(Assuming the effective date of the proposed rules is December 2022.) For a December 31st fiscal year-end, the compliance date for the proposed disclosures in annual reports, other than the Scope 3 disclosure, would be:
- For large, accelerated filers, fiscal year 2023 (filed in 2024).
- For accelerated and non-accelerated filers, fiscal year 2024 (filed in 2025).
- For SRCs, fiscal year 2025 (filed in 2026).
- The 144 registrants subject to the proposed Scope 3 disclosure requirements would have one additional year to comply with those disclosure requirements.
The proposed climate disclosure rules will face significant headwinds from Republicans who argue the SEC is overreaching its authority because the proposed rule does not meet the Supreme Court’s materiality test on financial discloser. However, given shareholders’ demands for climate-related information, it is our belief the above disclosures will be made voluntarily by most public registrants.