SEC Proposed Rule Would Enhance and Standardize Climate-Related Disclosures for Investors

Categories: Regulatory

By Bill Balek | June 10, 2022 << Back to Articles

The U.S. Securities and Exchange Commission (SEC) proposed a new rule that would require and standardize publicly traded companies’ climate-change disclosures to investors. Under the proposed rules, which would apply to both domestic companies and foreign private issuers, certain climate-related disclosures would be required in registration statements and annual reports, including information about climate-related risks that are reasonably likely to have a material impact on the company’s business, results of operations, or financial condition. Additionally, certain climate-related financial statement metrics would become required in a company’s audited financial statements.

The proposed rule would require a publicly traded company to disclose information about: i) the company’s governance of climate-related risks and risk management processes; ii) how any identified climate-related risks impact the company’s business and consolidated financial statements; iii) how any identified climate-related risks have impacted or impact the company’s strategy, business model, and outlook; and iv) the impact of climate-related events (severe weather events and other natural conditions) on the company’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements. For companies that already conduct scenario analysis or publicly set climate-related goals, the proposed rules would require certain disclosures to enable investors to understand the company’s current climate risk management.

In addition, the proposed rule would require information about climate-related risks to include disclosure of a company’s direct and indirect emission of greenhouse gases (“GHG”), which has become a commonly used metric to assess a company’s exposure to climate-related risks. This would include disclosure about the following: Scope 1 emissions—the company’s direct GHG emissions from its operations; Scope 2 emissions—indirect emissions from purchased electricity or other forms of energy consumed by operations of the company; and Scope 3 emissions—GHG emissions from upstream and downstream activities in the company’s value chain that overall are material. Upstream emissions include, among others, those related to goods and services acquired by the company, the transportation of goods to the company, and employee business travel and commuting. Downstream emissions include, among others, those related to the use of the company’s products, the transportation of the company’s products to its customers, and the end-of-life treatment of its sold products.

The SEC’s expectation is that the disclosures would provide investors with information to assess a company’s exposure to, and management of, climate-related risks and, in particular, transition risks. The proposed rules would provide a safe harbor for liability from certain forms of liability under the federal securities law for Scope 3 emissions disclosure, and exemptions from Scope 3 emissions disclosure requirements for smaller reporting companies.

Under the proposed rule, accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering emissions disclosures, with a phase-in over time, to promote the reliability of emissions disclosures for investors. The proposed rule would additionally include a compliance phase-in period for all companies, with the compliance date dependent on the company’s filer status, and an additional phase-in period for Scope 3 emissions disclosures.

According to SEC, the goal of the proposed rule is to provide investors with consistent, comparable, and decision-useful information for making their investment decisions.

The SEC’s proposed rule is available here. Public comment period on the proposed rule ends on June 17, 2022.

Readers interested in submitting comments may submit comments using the Commission’s internet comment form. Alternatively, comments may be submitted via email to [email protected]. Please include File Number S7-10-22 on the subject line.

About the Author.

ISSA Director of Legislative Affairs Bill Balek has more than 25 years of experience working with various legislative and regulatory organizations that create rules that have a direct impact on the cleaning products industry, including antimicrobial pesticide registration, hazardous material transportation, safety and health regulations, and general environmental laws.