Climate Change Reporting: Basic Requirements Under SEC’s Proposed Rule | Lippes Mathias LLP

On March 21, 2022, the United States Securities and Exchange Commission (SEC) issued a Notice of Proposed Rulemaking on “Enhancing and Standardizing Climate-Related Disclosure for Investors” (Proposed Rule). According to the SEC’s press release, the effect of the proposed rule would be “to require registrants to include certain weather-related information in their registration statements and periodic reports.” The requirements would apply to public companies with the aim of providing investors with more reliable and standardized data on climate-related risks and how climate change is likely to affect a company’s operations. The proposed rule would require the disclosure outside of a company’s financial statements of information regarding climate-related risks; greenhouse gas (GHG) emissions; and Governance, monitoring and management of climate-related risks.

Climate-related physical and transition risks

The proposed rule would require a company to disclose:

The impact of physical climate-related risks, including extreme weather events and conditions such as wildfires, hurricanes and drought, both acute and chronic, on company operations and assets and on its consolidated financial statements and the financial estimates and assumptions used in the financial statements.
How these risks have had or are likely to have a significant impact on the company’s activities and consolidated financial statements in the short, medium or long term;
How the risks have affected or are likely to affect strategies, business models and prospects; and
Transition risks (i.e. the impacts associated with transitioning to meet carbon commitments and requirements).

GHG emissions

The proposed rule would also require companies to disclose information on direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity or other forms of energy (Scope 2). ). Companies would be required to disclose Scope 1 emissions separately from Scope 2 emissions, and disclose both in disaggregation (that is to say, by each constituent greenhouse gas) and the aggregate (in CO2 equivalent). Companies would also be required to disclose Scope 3 GHG emissions, which are emissions from activities up and down their value chains, if those emissions are material or if the company has set one or more GHG emissions targets that include these emissions. The proposed rule would provide a safe harbor for liability for Scope 3 disclosures and an exemption for small businesses.

Many companies already provide protocol-based disclosures similar to the proposed rule’s Scope 3 disclosures, but the proposed rule would move what have been voluntary commitments by companies to mandatory disclosure obligations. Drawing on the Task Force on Climate-Related Financial Disclosures (“TCFD”) framework, which was developed by the G20 Financial Stability Board to inform investors on how companies are mitigating climate risks, the The proposed rule states that because investors have experience using TCFD disclosures, the framework should reduce the burden on companies required to disclose under the proposed rule. However, according to the TCFD’s recently released 2021 Status Report, many companies using the TCFD framework may not fully implement its recommendations and therefore the requirements of the proposed rule may prove to be more burdensome than expected. In addition, all proposed climate-related disclosures required by the Proposed Rule would be treated as “filed” if included or incorporated by reference in a registration statement under securities law, which exposes a person listed for potential liability under Section 18 of the Exchanges Act. and section 11 of the Securities Act. This increased responsibility will encourage registrants to be even more thorough and carefully review the information contained in their filings with the SEC.

Governance, monitoring and management of climate-related risks

Finally, the proposed rule would require disclosure of corporate climate risk governance, oversight and management in particular, including: (i) any risk assessment and management efforts by corporate management; company regarding climate-related risks and the role of the board of directors in monitoring these risks; (ii) which committee or board members are involved in oversight; and (iii) any individual on the board who has expertise in a climate-related area.

Compliance with the proposed rule will be through a phased approach, with disclosures other than Scope 3 GHG emissions disclosures followed by Scope 3 disclosures, if required, submitted first by large expedited companies, then by accelerated and non-accelerated filers and small businesses. .

The SEC accepts comments until May 20, 2022 or 30 days after publication in the Federal Register, whichever is later.