SEC Proposes Climate-Related Disclosures
March 31, 2022
By Charles Waring and Lourenco Miranda
On March 21, the SEC released the long-awaited proposed rule which will require public companies to disclose climate-related information in their annual 10-K filings.
In 2021, the SEC sought public comment on the consideration of the need for climate-related disclosures. Many public companies have been providing representations about sustainability initiatives, including goals around reduction or elimination of greenhouse gas (GHG) emissions. Companies have been publishing this information as part of corporate social responsibility (CSR) or environment, social, and governance (ESG) reports. The SEC cited that much of this voluntarily disclosed information was inconsistent and untimely, which made it difficult for investors to compare across companies.
The proposed disclosure information is made up of the following areas:
- Climate-Related Risks
- GHG Emissions
- Details Related to Publicly Set Climate-Related Goals
A public company would need to disclose what the board and management’s approach are for governance and oversight of climate-related risks. From there, what is the company’s approach for understanding and identifying material climate-related risks to the organization. This should include considerations of short and long-term risks. Potential impacts on the company’s business model, profitability, and strategy based upon the assessed climate-related risks should also be disclosed.
In addition, if a company has developed a transition plan, this would also need to be disclosed. A transition plan details the specific steps a company is undertaking to address the impact of climate-related risks. Use of scenario analysis related to the resilience of the company’s business strategy also needs to be included in the disclosure.
Following the Greenhouse Gas Protocol, a company would need to disclose direct GHG emissions (defined as Scope 1) and indirect GHG emissions from purchased electricity and energy (Scope 2). These disclosures are to be presented in disaggregated, aggregated, and absolute terms. Considerations of carbon offsets should not be included.
If a company determines that indirect GHG emissions from the company’s value chain (Scope 3) are material or if the company has set a GHG emissions target inclusive of Scope 3 emissions, then the company is required to disclose this information as well.
Details Related to Publicly Set Climate-Related Goals
A company that has made specific climate-related goals public is required to disclose details related to those goals: the scope and timeline for the goals to be met, including any interim goals; steps the company will take to meet the goals; and current data used to measure progress. Finally, the company needs to disclose if renewable energy certificates (RECs) are part of their plan to achieve the goals.
Location of Disclosure, Attestation Requirements, and Timeline for Implementation
The climate-related disclosure would be included in a company’s registration statement and annual 10-K filings as a note to a company’s consolidated financial statements.
For large accelerated and accelerated filer companies, they would need to obtain a separate attestation report over Scope 1 and Scope 2 emissions. These attestation reports could be included as part of a company’s ESG Report.
If the proposed rule is adopted in 2022, large accelerated filers would have to include the climate-related disclosure as part of their fiscal 2023 filing. Accelerated filer and non-accelerated filers would be subject to disclose in their fiscal 2024 filing. Scope 3 emissions are not need in the initial filings, but would be required the following year. Smaller Reporting Companies will be required to include the climate related disclosures in their fiscal 2025 filing and are exempt from Scope 3 emissions.
Large accelerated filers would be required to have a limited assurance report for fiscal year 2024 with a reasonable assurance report beginning for fiscal year 2026. Accelerated filers would be for fiscal years 2025 and 2027.
The proposed rule is currently open for public comment through May 20, 2022. The SEC will determine any revisions and the timeline for voting on the final rule, based upon public comments received.