On March 21, 2022, in one of the most widely anticipated rulemakings in memory, the SEC proposed extensive new requirements relating to climate change. The proposals, announced in a press release titled “SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors,” began generating controversy well before they were published, and there is already talk of litigation challenging them as being beyond the SEC’s authority. Those who expected a detailed, prescriptive approach to climate change disclosure have been proven correct; in fact, the 510-page proposing release seems to go beyond those expectations.
The proposed rules contemplate two types of disclosure. First, they would require a company to disclose information regarding:
- the oversight and governance of climate-related risks by the board and management;
- how any climate-related risks identified have had or are likely to have a material impact on the company’s business and consolidated financial statements, over the short, medium, or long term;
- how any identified climate-related risks have affected or are likely to affect strategy, business model, and outlook;
- the company’s processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the company’s overall risk management system or processes;
- if the company 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 company 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 company uses an internal carbon price, information about the price and how it is set; and
- the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of the company’s consolidated financial statements, as well as the financial estimates and assumptions used in the financial statements.
In addition, if a company has publicly set climate-related targets or goals, it would be required to disclose 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 company intends to meet its climate-related targets or goals;
- relevant data to indicate whether the company 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 company’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.
As if these “general” requirements were not sufficient, the proposals would go even further by requiring disclosure regarding (a) a company’s direct greenhouse gas ("GHG") emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2); and (b) GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the company has set a GHG emissions target or goal that includes Scope 3 emissions.
In the SEC’s view, these disclosures “would provide investors with decision-useful information to assess…exposure to, and management of, climate-related risks, and in particular transition risks,” noting that the disclosures “are similar to those that many companies already provide”.
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. However, the 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 proposal would include a phase-in period for all companies, based upon their filing status, as well as an additional phase-in period for Scope 3 emissions disclosure.
The proposals are subject to public comment for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.
Please direct any questions or observations to Gunster securities law and corporate governance practice leader Bob Lamm.
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
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