SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures

The Securities and Exchange Commission (SEC) has proposed rule changes that would require investors to provide certain climate-related information in their registration statements and annual reports. 

Those include information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. 

The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks.

Caroline A. Crenshaw

Commissioner Caroline A. Crenshaw said that investors try to figure out how to compare different regimes, how to use discordant information, and how to discern whether it’s even accurate. 

“All the while, these data have become more important than ever to investors as they make their investment and voting decisions,” she said in a statement.

She added that the proposed rule would empower investors to make more informed decisions. 

In addition, with standardized disclosures, investors and their advisers can both track data over time and effectively compare data across companies and sectors, she said.

“This proposal also offers needed modernization while providing flexibility to adapt to a constantly changing market,” she commented.

The proposed rule changes would require a registrant to disclose information about the registrant’s governance of climate-related risks and relevant risk management processes;  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; and the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

For registrants that already conduct scenario analysis, have developed transition plans, or publicly set climate-related targets or goals, the proposed amendments would require certain disclosures to enable investors to understand those aspects of the registrants’ climate risk management.

The proposed rules also would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). 

In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions. 

These proposals for GHG emissions disclosures would provide investors with decision-useful information to assess a registrant’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 Scope 3 emissions disclosure and an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies.

 The proposed disclosures are similar to those that many companies already provide based on broadly accepted disclosure frameworks, such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.

Under the proposed rule changes, accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering Scopes 1 and 2 emissions disclosures, with a phase-in over time, to promote the reliability of GHG emissions disclosures for investors.

The proposed rules would include a phase-in period for all registrants, with the compliance date dependent on the registrant’s filer status, and an additional phase-in period for Scope 3 emissions disclosure.

SEC Chair Gary Gensler added that if  adopted, the proposal would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.

“Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures,” he said.

According to Gensler, today, investors support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies. 

“Investors need reliable information about climate risks to make informed investment decisions,” he said in a statement. 

He added the proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. 

“I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance,” he said.