On March 21, the U.S. Securities Exchange Commission (SEC) proposed far-reaching climate-related disclosure rules for public companies that do business in the United States.

In a 3-1 vote, the SEC proposed rules that would require all public companies to disclose detailed information about their climate risks and strategies in annual reports and stock registration statements.

The proposed rule states that presenting disclosure obligations about climate risk would ensure “consistent, comparable, and reliable disclosures on the material climate-related risks public companies face would serve both investors and capital markets.” In justifying the proposal and its limitations, the SEC states that it is not regulating greenhouse gas emissions. Instead, the proposal states that climate-related financial risks are well-documented, noting that record numbers of climate-related disasters with at least $1 billion in damages struck the U.S. economy in recent years, damaging assets, disrupting operations, and increasing costs along the way. It cites the recently released report by the Financial Stability Oversight Council that we discussed here.

In a starkly contrasting position statement entitled “We are not the Securities and Environment Commission – At Least Not Yet,” Commissioner Hester Peirce, the sole Commissioner voting against the proposal, set forth her many criticisms of the proposal, reflecting the controversy this topic has stirred up and will continue to generate among stakeholders.

1. The SEC’s Disclosure Requirements Are Modeled After Widely Used Frameworks

The SEC’s climate-related disclosures proposal requires disclosure of: climate-related risks; climate-related effects on corporate strategy, business models and outlooks; board management and board oversight of climate-related issues; processes for identifying, assessing and managing climate risks; plans for transition; financial statement metrics related to climate; total GHG emissions; and climate targets and goals. The SEC modeled its reporting requirements on two widely accepted and followed frameworks:

• TCFD – the Task Force on Climate-Related Financial Disclosures has developed a disclosure framework for evaluating material climate-related risks and opportunities by assessing their projected short-, medium-, and long-term financial impacts on a company.

• GHG Protocol – the GHG Protocol framework consists of the Global GHG Accounting and Reporting Standards, which provide the most widely used accounting and reporting framework to measure and manage greenhouse gas emissions from business operations, value chains, and mitigation activities.

2. The Standard for Disclosure of Climate-Related Business Risks

A registrant would be required to disclose climate-related risks that are “reasonably likely to have material impacts on its business or consolidated financial statements, and GHG metrics that could help investors assess those risks.”

The proposal is more prescriptive than some expected. It not only asks a registrant to identify risks, but also to explain why they are risks and how the registrant arrived at that determination. The proposal follows TCFD very closely in terms how to identify risk and disclose it.

3. Carbon Goals Must be Explained

Under the proposed rule, registrants that set a net-zero carbon or similar goal would be required to disclose the baseline year. According to the SEC proposal, setting a baseline allows investors to measure progress towards targets over time. Registrants would have to provide additional details like the unit of measurement (whether an absolute terms or intensity), intervening goals, and its plans to reach its target.

4. GHG Emissions Data Would Require Third-Party Assurance or Verification

The proposal asks all registrants to disclose all Scope 1 and Scope 2 GHG emissions, without any materiality qualifier. Though noting that the SEC’s rules typically do not require registrants to obtain third-party assurance for quantitative disclosures provided outside of the registrant’s financial statements, the proposal states that GHG emissions disclosure is different. Large companies would be required to include an attestation report from an independent service provider covering the accuracy of direct GHG emissions (Scope 1 emissions) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2) emissions.

5. Compliance Would Be Phased-In Over Several Years

Assuming a December 2022 effective date, the new requirements would be phased in over several years. Larges Accelerated Filers would need to start disclosing climate risks for fiscal year 2023 in fiscal year 2024, while Smaller Reporting Companies, for example, would have to start reporting climate risks for fiscal year 2025 in 2026. The full definitions of issuers are detailed, but to illustrate these issuer categories, the aggregate market values of three of the categories are set forth in the table below. Companies will get an extra year beyond those dates to include supplier and customer GHG emissions information (Scope 3 emissions), and to have GHG emissions data audited. Smaller reporting companies are exempt from disclosing Scope 3 emissions.

 Next Steps

For those interested in this proposed rule, now is the time to consider submitting comments. The SEC will accept public comments on the proposal for up to 30 days from the date of publication in the Federal Register, or 60 days from the date of issuance, whichever period is longer, and states it expects to finalize the rule by mid-December 2022.