SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures

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The SEC has proposed rules that would require registrants to provide certain climate-related information in their registration statements and annual reports. The proposed rules would require information about a registrant’s climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition.

Content of the Proposed Disclosures

The proposed climate-related disclosure framework is modeled in part on the Task Force on Climate-Related Financial Disclosures (“TCFD”) recommendations, and also draws upon the Greenhouse Gas Protocol (“GHG Protocol”). In particular, the proposed rules would require a registrant to disclose information about:

  • The oversight and governance of climate-related risks by the registrant’s board and management;
  • How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term;
  • How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook;
  • The registrant’s processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes;
  • The impact of climate-related events (severe weather events and other natural conditions as well as physical risks identified by the registrant) and transition activities (including transition risks identified by the registrant) on the line items of a registrant’s consolidated financial statements and related expenditures, and disclosure of financial estimates and assumptions impacted by such climate-related events and transition activities.
  • Scopes 1 and 2 greenhouse gas (“GHG”) emissions metrics, separately disclosed, expressed: o Both by disaggregated constituent greenhouse gases and in the aggregate, and o In absolute and intensity terms;
  • Scope 3 GHG emissions and intensity, if material, or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions; and
  • The registrant’s climate-related targets or goals, and transition plan, if any.

Similar to the GHG Protocol, the proposed rules would define:

  • Scope 1 emissions as direct GHG emissions from operations that are owned or controlled by a registrant;
  • Scope 2 emissions as indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a registrant;
  • Scope 3 emissions as all indirect GHG emissions not otherwise included in a registrant’s Scope 2 emissions, which occur in the upstream and downstream activities of a registrant’s value chain. Upstream emissions include emissions attributable to goods and services that the registrant acquires, the transportation of goods (for example, to the registrant), and employee business travel and commuting. Downstream emissions include the use of the registrant’s products, transportation of products (for example, to the registrant’s customers), end of life treatment of sold products, and investments made by the registrant.

Presentation of the Proposed Disclosures

The proposed rules would require a registrant (both domestic and foreign private issuers):

  • To provide the climate-related disclosure in its registration statements and Exchange Act annual reports;
  • To provide the Regulation S-K mandated climate-related disclosure in a separate, appropriately captioned section of its registration statement or annual report, or alternatively to incorporate that information in the separate, appropriately captioned section by reference from another section, such as Risk Factors, Description of Business, or Management’s Discussion and Analysis (“MD&A”);
  • To provide the Regulation S-X mandated climate-related financial statement metrics and related disclosure in a note to the registrant’s audited financial statements;
  • To electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL; and
  • To file rather than furnish the climate-related disclosure.

Attestation for Scope 1 and Scope 2 Emissions Disclosure

The proposed rules would require an accelerated filer or a large accelerated filer to include, in the relevant filing, an attestation report covering, at a minimum, the disclosure of its Scope 1 and Scope 2 emissions and to provide certain related disclosures about the service provider. As proposed, both accelerated filers and large accelerated filers would have time to transition to the minimum attestation requirements.

Phase-In Periods and Accommodations for the Proposed Disclosures

The proposed rules include:

  • A phase-in for all registrants, with the compliance date dependent on the registrant’s filer status;
  • An additional phase-in period for Scope 3 emissions disclosure;
  • A safe harbor for Scope 3 emissions disclosure;
  • An exemption from the Scope 3 emissions disclosure requirement for a registrant meeting the definition of a smaller reporting company (“SRC”); and
  • A provision permitting a registrant, if actual reported data is not reasonably available, to use a reasonable estimate of its GHG emissions for its fourth fiscal quarter, together with actual, determined GHG emissions data for the first three fiscal quarters, as long as the registrant promptly discloses in a subsequent filing any material difference between the estimate used and the actual, determined GHG emissions data for the fourth fiscal quarter.

The proposed rules would be phased in for all registrants, with the compliance date dependent upon the status of the registrant as a large accelerated filer, accelerated or nonaccelerated filer, or SRC, and the content of the item of disclosure. For example, assuming that the effective date of the proposed rules occurs in December 2022 and that the registrant has a December 31st fiscal year-end, the compliance date for the proposed disclosures in annual reports, other than the Scope 3 disclosure, would be:

  • For large accelerated filers, fiscal year 2023 (filed in 2024);
  • For accelerated and non-accelerated filers, fiscal year 2024 (filed in 2025); and
  • For SRCs, fiscal year 2025 (filed in 2026).

Registrants subject to the proposed Scope 3 disclosure requirements would have one additional year to comply with those disclosure requirements.

Governance Disclosure

Board Oversight

The proposed rules would require a registrant to disclose a number of board governance items, as applicable, including:

  • requiring a registrant to identify any board members or board committees responsible for the oversight of climate-related risks;
  • requiring disclosure of whether any member of a registrant’s board of directors has expertise in climate-related risks, with disclosure required in sufficient detail to fully describe the nature of the expertise:
  • requiring a description of the processes and frequency by which the board or board committee discusses climate-related risks;
  • disclosing how the board is informed about climate-related risks, and how frequently the board considers such risks;
  • requiring disclosure about whether and how the board or board committee considers climate-related risks as part of its business strategy, risk management, and financial oversight; and
  • requiring disclosure about whether and how the board sets climate-related targets or goals and how it oversees progress against those targets or goals, including the establishment of any interim targets or goals.

Management Oversight

The proposed rules would require a registrant to disclose a number of items, as applicable, about management’s role in assessing and managing any climate-related risks, including:

  • requiring disclosure regarding whether certain management positions or committees are responsible for assessing and managing climate-related risks and, if so, to identify such positions or committees and disclose the relevant expertise of the position holders or members in such detail as necessary to fully describe the nature of the expertise;
  • requiring disclosure about the processes by which the responsible managers or management committees are informed about and monitor climate-related risks; and
  • requiring disclosure about whether the responsible positions or committees report to the board or board committee on climate elated risks and how frequently this occurs.

Risk Management Disclosure

The proposed rules would require a registrant to describe any processes the registrant has for identifying, assessing, and managing climate-related risks.  When describing the processes for identifying and assessing climate-related risks, the registrant would be required to disclose, as applicable:

  • How it determines the relative significance of climate-related risks compared to other risks;
  • How it considers existing or likely regulatory requirements or policies, such as GHG emissions limits, when identifying climate-related risks;
  • How it considers shifts in customer or counterparty preferences, technological changes, or changes in market prices in assessing potential transition risks; and
  • How it determines the materiality of climate-related risks, including how it assesses the potential size and scope of any identified climate-related risk.

When describing any processes for managing climate-related risks, a registrant would be required to disclose, as applicable:

  • How it decides whether to mitigate, accept, or adapt to a particular risk;
  • How it prioritizes addressing climate-related risks; and
  • How it determines how to mitigate a high priority risk.

Scope 3 Emissions Disclosure Safe Harbor

The SEC is proposing a targeted safe harbor for Scope 3 emissions data in light of the unique challenges associated with that information. The proposed safe harbor would provide that disclosure of Scope 3 emissions by or on behalf of the registrant would be deemed not to be a fraudulent statement unless it is shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith. The safe harbor would extend to any statement regarding Scope 3 emissions that is disclosed pursuant to proposed subpart 1500 of Regulation S-K and made in a document filed with the Commission.

Targets and Goals Disclosure

If a registrant has set climate-related targets or goals, the proposed rules would require it to disclose them, including, as applicable, a description of:

  • The scope of activities and emissions included in the target;
  • The unit of measurement, including whether the target is absolute or intensity based;
  • The defined time horizon by which the target is intended to be achieved, and whether the time horizon is consistent with one or more goals established by a climate-related treaty, law, regulation, policy, or organization;
  • The defined baseline time period and baseline emissions against which progress will be tracked with a consistent base year set for multiple targets;
  • Any interim targets set by the registrant; and
  • How the registrant intends to meet its climate-related targets or goals.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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