The Securities and Exchange Commission has proposed long awaited rules which, if adopted, would require domestic and foreign public companies to disclose material climate-related information in their registration statements and periodic reports.¹ The highly anticipated proposal follows years of efforts by the Commission to require public companies to provide investors with more extensive climate-related disclosure. In proposing the new rules, the Commission states that “Investors need information about climate-related risk--and its squarely within the Commission’s authority to require such disclosure in the public interests and for the protection of investors--because climate-related risks have present financial consequences that investors in public companies consider in making investment and voting decisions.”²

Background

The Commission began addressing environmental disclosure issues in the early 1970s. In 1971, the Commission issued an interpretive release regarding the disclosure of the financial impact of compliance with environmental laws based on the materiality of information.³ Later, in 1982, the Commission adopted rules to address disclosure of environmental compliance costs.⁴ Then, in 2010, the Commission published another interpretive release (the “2010 Guidance”) to provide guidance to public companies on disclosure requirements as they applied to climate change matters.⁵ The Commission’s new proposal expands existing disclosure requirements to elicit climate-related risks and metrics reflecting those risks.

Extensive new disclosure requirements

The Commission’s new proposal contains extensive disclosure requirements. It adds a new subpart 1500 to Regulation S-K (requiring disclosure of information and risks that are likely to impact business and financial statements) and a new article 14 to Regulation S-X (requiring climate-related financial statement metrics to be included in a note to the audited financial statements). The change to Regulation S-X would require a note to registrants’ audited financial statements addressing climate-related impacts on financial statement line items. Additionally, large accelerated filers and accelerated filers would be required to obtain an independent third-party attestation of their greenhouse gas (“GHG”) emissions.⁶ Under the new rules, registrants would need to provide climate-related disclosure in a new, separately captioned section of their registration statements and annual reports, including the following items:

• 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;
• if the registrant has adopted a transition plan as part of its climate-related risk management strategy, a description of the plan, including the relevant metrics and targets used to identify and manage any physical and transition risks;
• if the registrant uses scenario analysis to assess the resilience of its business strategy to climate-related risks, a description of the scenarios used, as well as the parameters, assumptions, analytical choices and projected principal financial impacts;
• if a registrant uses an internal carbon price, information about the price and how it is set;
• 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 the financial estimates and assumptions used in the financial statements;
• the registrant’s direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2), separately disclosed, expressed both by disaggregated constituent greenhouse gases and in the aggregate, and in absolute terms, not including offsets, and in terms of intensity (per unit of economic value or production);
• indirect emissions from upstream and downstream activities in a registrant’s value chain (Scope 3), if material, or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions, in absolute terms, not including offsets, and in terms of intensity; and
• if the registrant has publicly set climate-related targets or goals, information about:
  • the scope of activities and emissions included in the target, the defined time horizon by which the target is intended to be achieved, and any interim targets;
  • how the registrant intends to meet its climate-related targets or goals;
  • relevant data to indicate whether the registrant is making progress toward meeting the target or goal and how such progress has been achieved, with updates each fiscal year; and
  • if carbon offsets or renewable energy certificates (“RECs”) have been used as part of the registrant’s plan to achieve climate-related targets or goals, certain information about the carbon offsets or RECs, including the amount of carbon reduction represented by the offsets or the amount of generated renewable energy represented by the RECs.

Materiality

As it is throughout the federal securities laws, the concept of “materiality” is central to the disclosure requirements of the proposed rules. Consistent with Supreme Court precedent, in the proposal the Commission states that a matter is material when “there is a substantial likelihood that a reasonable investor would consider it important in determining whether to buy or sell securities or how to vote.”⁷ The proposal will require registrants to discuss climate-related risks that had or will likely have material impacts on their business or financial statements that manifest in short, medium and long term time horizons. The new required disclosure would include direct GHG emissions from the operations that are owned or controlled by the registrant (Scope 1 emissions) and indirect GHG emissions from the consumption of electricity, steam, heat or cooling operations owned or controlled by the registrant (Scope 2 emissions). In addition to Scope 1 and 2 emissions, the proposed rules would require disclosure of the total indirect GHG emissions that occur in a registrant’s value chain (Scope 3 emissions), only if those emissions are material.

As expected, commenters on prior Commission guidance indicated a desire to limit or even eliminate the requirement to disclose Scope 3 emissions. They point out the difficulty in obtaining the necessary data from third parties. Distinguished from the materiality concept discussed above, the proposal suggests, when assessing the materiality of Scope 3 emissions, registrants should consider whether Scope 3 emissions make up a relatively significant portion of their overall GHG emissions. While the proposal doesn’t state a concrete threshold, it provides that some companies support reliance on a quantitative threshold, such as 40% of total GHG emissions, when assessing materiality. However, many critics of the proposal do not find this limitation helpful. Commissioner Hester Peirce even asserted in her dissenting statement that the “materiality limitation is not especially helpful because the Commission suggests that such emissions generally are material and admonishes companies that materiality doubts should ‘be resolved in favor of those the statute is designed to protect,’ namely investors.”

Phase in periods

The Commission recognizes that compliance with the GHG emissions requirements would be a time consuming process. In an effort to provide registrants with additional time to prepare, the Commission proposes a phase in period for disclosure of GHG emissions based on filer status. Under the new rules, if adopted, large accelerated filers would have to disclose Scope 1 and Scope 2 GHG emissions for fiscal year 2023, accelerated filers and non-accelerate filers for fiscal year 2024 and smaller reporting companies (“SRCs”) for 2025. Scope 3 GHG emissions would have to be disclosed the following years. However, SRCs are exempted entirely from Scope 3 GHG emissions disclosure. The table below summarizes the proposed phase-in periods for the compliance dates.

Summary

This proposal should not come as a surprise. The Commission published its 2010 Guidance in response to increasing calls by the public and shareholders to disclose how climate change may affect business and operations. What followed were initiatives by major institutional investors urging companies to provide climate-related information, aligned with the recommendations of the Task Force on Climate-Related Financial Disclosure (“TCFD”), that was likely to impact their businesses. The TCFD, which developed a climate-related reporting framework that is widely accepted by registrants and investors, inspired the framework of the Commission’s proposal. Additionally, many companies began making commitments to reduce GHG emissions and its carbon footprint. In March of 2021, then acting Chair Allison Lee requested public input on climate disclosure from investors, registrants and other market participants.⁸ Then, in September of 2021, the Commission provided a sample comment letter outlining comments related to climate change disclosure that would likely be issued to public companies after reviewing its SEC filings.⁹

Although the Commission’s proposal can be viewed as an inevitable result of years of discussions, initiatives and guidance, the prospects for success of the proposal are uncertain as it is politically controversial and faces opposition due to its broad scope and the likely burdens on companies seeking to comply with the new mandates. Three Democratic Commission members voted in favor of the proposal, while the sole Republican commissioner, Hester Peirce, strongly dissented. Peirce discussed in depth what she believed were deficiencies in the proposal, and presumably opponents of the proposal will share many of her views. Peirce suggested that making such fundamental changes to the current disclosure regime would harm investors, the economy and even the agency. Peirce feels that, among other things, existing rules already cover material climate risks; the proposed rules dispense with materiality in some places and distort it in others, and the proposed rules will not lead to comparable, consistent and reliable disclosures in the way that the Commission suggests. Peirce’s opposition is shared by many critics of the proposal. Some critics, like Peirce, feel that the Commission lacks authority even to propose the rule. In her opposing statement, Peirce asserts “[t]his proposal steps outside our statutory limits by using the disclosure framework to achieve objectives that are not ours to pursue . . .”

It is important to note that this stage of the rule-making process is only a proposal, not the adoption of final rules. The adoption of final rules could be substantially delayed, or the rules could be substantially re-written and need to be re-proposed, if there is substantial public comment. The Commission is seeking public comment on the proposal until May 20, 2022 and is required to take such comments into account in determining whether or not to adopt the proposal into law. Comments may be submitted to the Commission through one of the following methods:

• Use the Commission’s internet comment form (https://www.sec.gov/rules/submitcomments.htm).
• Send an email to rule-coments@sec.gov. Please include File Number S7-10-22 on the subject line.
• Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

¹ Securities Act Rel. No. 11,042 (Mar. 21, 2022) (the “Proposing Release”)
² See Proposing Release, text accompanying note 6.
³ Securities Act Rel. No. 5,180 (July 19, 1971)
⁴ Securities Act Rel. No. 6,383 (Mar, 3, 1982)
⁵ Securities Act Rel. No. 9,106 (Feb. 2, 2010)
⁶ A GHG emissions attestation provider would need to be an independent firm or person that is an expert in GHG emissions by virtue of having significant experience in measuring, analyzing, reporting or attesting to GHG emissions.  Significant experience means having the capability to perform engagements in accordance with professional standards and applicable regulatory requirements and enable the service provider to issue reports that are appropriate under the circumstances.
⁷ See Proposing Release, text accompanying note 209. See also Basic Inc. v. Levinson, 485 U.S. 224, 231, 232, and 240 (1988) (holding that information is material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision; and quoting TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438, 449 (1977) to further explain that an omitted fact is material if there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”).
⁸ https://www.sec.gov/news/press-release/2022-46 
⁹ https://www.sec.gov/corpfin/sample-letter-climate-change-disclosures#_ftn2