Key Takeaways

• The SEC proposed amendments to require registrants to provide certain climate-related information in registration statements and periodic reports.
• The proposed rules would require a company to disclose certain climate-related risks that are reasonably likely to have material impacts on business, consolidated financial statements and GHG emission metrics.
• The proposed rules would also require the disclosure of certain climate-related financial statement metrics and related disclosures in a note to a registrant’s audited financial statements.
• Given the significant interest in the proposal from a wide range of stakeholders, on May 9, the SEC announced that it had extended the deadline for public comments regarding the proposed rules so that they must now be received by the SEC by Friday, June 17.

Introduction

The U.S. Securities and Exchange Commission (SEC) proposed amendments on March 21 that would significantly alter Regulations S-K and S-X. The amendments would require public companies to disclose information regarding climate-related risks that are reasonably likely to have a material impact on their business or financial statements, related governance and oversight processes, greenhouse gas (GHG) emission metrics, and climate-related financial metrics.

The proposed rules would require public companies to disclose:

• The registrant’s processes for identifying, assessing and managing climate-related risks.
• Any climate-related risks that have had or are likely to have a material impact on the registrant’s business and consolidated financial statements.
• How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model and outlook.
• The oversight and governance of climate-related risks by the board and management.
• GHG emissions resulting directly and indirectly from the registrant’s operations and, in some cases, obtain third-party attestations regarding such emissions.
• Climate-related targets, goals, transition plans and, if desired, any opportunities.
• The impact of climate-related events (severe weather events and other natural conditions as well as other physical risks identified by the registrant) and transition activities (including transition risks identified by the registrant) on the line items of a registrant’s financial statements and related expenditures, as well as financial estimates and assumptions impacted by such climate-related events and transition activities.

If adopted, the proposed rules would be phased in for filings by larger registrants in 2024 and by smaller registrants in 2026. All public comments regarding the proposed rules must be received by the SEC by Friday, June 17.

Overview

On March 21, the SEC proposed rules in Release No. 33-11042 (the Proposal) to supplement the disclosure already required in SEC filings regarding material risks and compliance obligations and to standardize disclosure of climate-related risks, impacts and GHG emissions. The SEC noted in the Proposal that climate risks can impact companies’ financial performance and the results of operations in varying ways, particularly given the uptick in catastrophic natural events in recent decades. Forecasting how these climate-related risks may affect a registrant can be difficult, if not impossible, for investors lacking comprehensive climate information.

The proposed disclosure requirements are modeled after existing international recommendations, including but not limited to the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol (GHP). According to the GHP, both have been adopted globally by approximately 90% of Fortune 500 companies.[1] The aim is to provide investors with disclosure of consistent, comparable and reliable information that is useful in determining the climate-related risks of investments or voting decisions, while also seeking to mitigate the administrative burden on registrants that provide such disclosures. While many companies have been providing climate-related information in sustainability reports and other locations, the Proposal notes that requiring such information in SEC filings would improve access and consistent presentation, further subjecting this information to a registrant’s disclosure controls and procedures.

Climate-Related Disclosures

The proposed rules would add a new subpart 1500 to Title 17 of Regulation S-K, with the following eight new proposed disclosure items:

• Definitions (Item 1500).
• Governance (Item 1501).
• Strategy, business model and outlook (Item 1502).
• Risk management (Item 1503).
• GHG emissions metrics (Item 1504).
• Attestation of Scope 1 and Scope 2 emissions disclosures (Item 1505).
• Targets and goals (Item 1506).
• Interactive data requirement (Item 1507).

Proposed Item 1500 would provide more than 20 new definitions applicable to both subpart 1500 and to a new Article 14 of Regulation S-X, discussed below. Defined are varying types of risks that registrants would be required to address, including acute, chronic, climate-related, transition and physical risks. The definitions also address the scope of activity in and around a registrant’s current operations along with the direct and indirect emissions associated with such activity. This can include emissions attributable to the registrant’s entire value chain, which comprises operations both up- and downstream of the registrant’s operations.

Governance, Risk Oversight and Management (Items 1501 and 1503)

Proposed Item 1501 would require disclosure of a registrant’s governance structures and processes for board and management oversight of climate risks. This would include identifying the board members and management positions involved and their relevant expertise as well as a description of whether and how the board considers climate-related risk in overseeing business strategy, risk management and financial oversight. Whether targets are set and monitored must also be disclosed. If internal reporting structures for climate-related disclosures are in place (e.g., a climate-risk committee reporting to the full board or an employee group reporting to an executive), then the registrant would need to disclose the nature and frequency of that reporting. Otherwise, Item 1501 would require a registrant to explain why no internal climate-related reporting structure is in place.

Proposed Item 1503 would require disclosure of any processes that the registrant has for identifying, assessing and managing climate-related risks. This would call for a description of how the registrant determines the materiality of such risks and, optionally, a disclosure about climate-related opportunities. Proposed Item 1503 would also require a detailed discussion of any transition plans addressing risks over time, related metrics and targets, and how such plans will adapt to factors such as physical and transition risks.

Risks and Impact on Strategy, Business Model, Financial Statements and Outlook (Item 1502)

Proposed Item 1502 would require registrants to describe any climate-related risks reasonably likely to have a material impact on the registrant, including on its business or financial statements. This item would require registrants to provide a thorough discussion of the particular climate-related risks that are most applicable to the registrant and its operations, including the impact on:

• Business operations, including the types and locations.
• Products or services.
• Suppliers and other parties in its value chain.
• Activities to mitigate or adapt to climate-related risks, including adoption of new technologies or processes.
• Expenditure for research and development.

The proposed rule categorizes risks as either physical or transition. Physical risks are those related to the physical impact of climate change, such as earthquakes, hurricanes, tornadoes and other natural disasters. Transition risks are those inherently related to a registrant’s transitions to align and comply with the demands of a lower-carbon economy.

Disclosures for physical and transition risks would require registrants to detail the nature of each risk. Physical risk disclosures would need to include the location and nature of the properties subject to the risks, whether the risks are acute or chronic, and, in the case of drought or flooding, additional information about the size and location of the assets at risk. Transition risk disclosures would need to include whether the risk relates to technological, regulatory, market, liability, reputational or other similar factors.

Registrants would also be required to elaborate on the specific impacts of such risks on their strategy, business model, financial statements (see “Financial Disclosures” below) and outlook, including the nature and time horizon of each impact. Such disclosures would require registrants to expand on whether these impacts and related metrics are factored into the registrant’s business strategy, financial planning or capital allocation.

The proposed rule would require registrants to provide narrative disclosures about the resilience of their business strategy in light of future climate-related risks. Registrants would need to address mitigation efforts in relation to these anticipated risks as well as their cost, effectiveness and impact on financial results and operations. Accompanying this, registrants would need to provide disclosure regarding any analysis of the price and cost per metric ton of carbon dioxide equivalent (CO2e) and GHG emissions.

Reporting and Attestation of GHG Emissions (Items 1504 and 1505)

Reporting

Under proposed Items 1504 and 1505, registrants would be required to disclose GHG emissions metrics. Item 1504 would require general disclosure of GHG emissions. Item 1505 focuses more closely on the disclosure of direct emissions (Scope 1) and indirect emissions (Scope 2) related to operations under a registrant’s control. In some cases, as detailed below, a registrant may also need to disclose Scope 3 emissions. Certain registrants would be required to provide a GHG emissions attestation report.

Under the proposed rules, registrants would need to provide GHG emissions data for each year that financial statements are included in the filing. Large companies, including accelerated and large accelerated filers, would need to disclose all three scope levels (to the extent applicable), but smaller reporting companies would be required only to disclose Scopes 1 and 2.

Regardless of size, however, registrants would be required to discuss the correlation between their metric tons of emissions on the one hand and revenue and production on the other to show the intensity of the registrant’s GHG emissions. Registrants would also need to include calculation methodologies for these figures. The following table summarizes disclosures for Scopes 1, 2 and 3:

Registrants would be permitted to omit data for prior years that was not reasonably available to the registrant without undue effort or expense, as long as such data was not previously reported. As a result, it is likely that registrants without such data would qualify for this exception as they work toward more comprehensive compliance with the proposed rule. Lastly, there would be a limited safe harbor shielding registrants from liability for Scope 3 disclosures so long as the disclosures are not fraudulent. Securities Act liability would still apply despite this safe harbor, including strict liability under Section 11 of the Securities Act for misstatements in registration statements.

Attestation

Following the phase-in period between 2024 and 2026, Item 1505 would require large accelerated filers and accelerated filers to provide an attestation of Scope 1 and Scope 2 emissions disclosures. An attestation report would need to be provided by an independent expert qualified in GHG emissions. The registrant would need to disclose whether the attestation provider is licensed to provide assurances, subject to any record-keeping requirements specific to an engagement and subject to any oversight inspection programs.

The attestation report itself would need to contain details about its subject matter, measurement criteria, evaluation of the time horizon and which attestation standard was used. In addition, it would need to contain the level of assurance that is provided, the nature of the engagement, the work performed, a description of the independence and responsibilities of the attestation provider, any inherent limitations to the evaluation and conclusions of the attestation provider, and the provider’s conclusion or opinion based on the applicable standard used.

These specific representations could potentially carry liability for misstatements. For instance, information filed in an Annual Report on Form 10-K would be subject to Section 18 of the Securities Exchange Act for material misstatements. Information in periodic reports, including Form 10-K, could also indirectly prompt strict liability under the Securities Act when periodic report information is incorporated by reference into Securities Act registration statements. During the phase-in period, the reliability level would increase from “limited” to “reasonable” assurance — with limited assurance being required for large accelerated filers starting with filings in year 2025 and accelerated filers starting with filings in year 2026, where reasonable assurance would be phased in for large accelerated filers submitting filings in year 2027 and accelerated filers submitting filings in year 2028 and onward. Note that “reasonable assurance” is equivalent to the level of assurance provided in a financial audit on Form 10-K, whereas “limited assurance” is equivalent to reviewed financials provided on Form 10-Q.

Targets, Goals and Transition Plans (Items 1506 and 1507)

Under proposed Item 1506, registrants would need to disclose whether they have set any targets or climate-related goals, such as to reduce GHG emissions, conserve energy or water, or use more low-carbon products. Such disclosure would need to discuss the scope of these targets and goals, the measurements used, the applicable timelines, a baseline for assessment, interim targets, how goals are intended to be met, progress statements toward interim or ultimate goals, and information about carbon offsets, if used.

A registrant would also include the amount of carbon reduction represented by the offsets or amount of generated renewable energy from the Renewable Energy Certificates (RECs); a description and location of the underlying projects; and information about the source, authentication and cost of the carbon offsets or RECs.

Financial Disclosures

The proposed rules would amend Regulation S-X to add a new Article 14, which would call for supplemental financial statement information regarding the climate-related disclosures that would be required in such filing under the proposed Regulation S-K items discussed above. The information would be required for the most recent fiscal year and for the other historical periods included in the financial statements for the filing.

Registrants would be required to disclose the financial impacts, expenditures and estimates and assumptions impacted by severe weather events and other natural conditions, transition activities, mitigation efforts and climate-related risks on a line item in their consolidated financial statements if the applicable disclosure threshold was reached. Line item disclosure is required if (1) the sum of the absolute values of all the impacts on the line item is 1% or more of the total line item for the relevant fiscal year, or (2) for expenditures expensed or capitalized costs incurred, such amount is 1% or more of the total expenditure expensed or total capitalized costs incurred, respectively, for the relevant fiscal year. Positive and negative impacts and impacts by category of disclosure should be separately aggregated.

These metrics would need to be accompanied by contextual information about the metrics themselves and their underlying inputs and assumptions. Qualitative discussion would also be required about the impact of severe weather events and other natural conditions and transition activities on the estimates and assumptions used to produce the financial statements.

The impact of these events and conditions could include changes to revenues, costs, loss contingencies or reserves due to natural disasters such as flooding, wildfires and sea level rise and the carrying costs associated with assets related to addressing such risks.

The Bottom Line

The Proposal would significantly elevate the quantity of, and associated burden to provide, climate-related disclosures. The rules would also elevate the scrutiny of such information and subject registrants to liability for misstatements, in some cases, for data they have been voluntarily providing. Not only would this impact what public companies consider while planning or conducting operations, but it would also supplement the professional group involved in preparing SEC filings; the lawyer, accountant and auditor would find themselves working with GHG experts.

More broadly, if adopted, the scope and impact of these proposed rules on the capital markets and investment decision-making could be significant. While investors have made meaningful strides in demanding that public companies provide this information, making it available on a consistent and widespread basis would allow investors to apply decision-making principles in a more uniform and impactful way. If these rules are adopted, it could accelerate the shift toward emphasizing climate considerations, not just financial considerations, in making investment decisions and significantly expand our understanding of the impact that climate risks present for businesses and the financial market.

[1] See Rel. No. 33-11042, Part I.C.1 (Mar. 21, 2022) (explaining that the SEC’s proposed rules on climate-related disclosures are modeled after existing international recommendations, including but not limited to the TCFD and GHP, which have both been increasingly adopted globally, including by roughly 450 of the Fortune 500 companies, according to the GHP).

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