The SEC's Brobdingnagian Climate Change Disclosure Rule Proposal
Friday, March 25, 2022

Earlier this week, the Securities and Exchange Commission issued a proposed rule change that would require companies to make specific climate-related disclosures when filing a Securities Act or Exchange Act registration statement or an Exchange Act annual or other periodic report, including:

  • Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy, and outlook;

  • The company’s governance of climate-related risks and relevant risk management processes;

  • The company’s greenhouse gas emissions, which, for accelerated and large accelerated filers and with respect to certain emissions, would be subject to assurance;

  • Certain climate-related financial statement metrics and related disclosures in a note to the company's audited financial statements; and

  • Information about climate-related targets and goals, and transition plan, if any.

This is no "modest proposal".   The proposing release consists of nearly 150,000 words and exceeds 500 pages.  Indeed, the sheer prolixity of the release is itself an argument against its adoption. 

It does seem that the SEC has vastly underestimated the impact of its proposal on smaller entities.  While the SEC is proposing to exempt "smaller reporting companies" from the mandatory "Scope 3 disclosures", they and other small businesses are likely to incur significant costs if they are in the "value chain" of a company required to make Scope 3 disclosures.  The SEC describes Scope 3 disclosures as emissions that result from third parties in a company's "value chain".  If adopted, therefore, companies mandated to make Scope 3 disclosures are likely to require disclosures from others, including small companies that are not subject to the SEC's reporting requirements.  Thus, the SEC could indirectly impose massive costs on small businesses even though they may not be subject to SEC reporting requirements.


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