U.S. Securities and Exchange Commission Proposes Rules for Climate Disclosures for Investors
On March 21, 2022, the United States Securities and Exchange Commission (SEC) published proposed rule changes aimed at enhancing and standardizing climate-related disclosures in registration statements and annual reports. The SEC has provided a Fact Sheet and has invited comments on the proposals by May 20, 2022.
This is a welcome move by the SEC. Consistent, comparable, reliable information identifying climate risks, and detailing how they are, and will be addressed is urgently needed.
The disclosure to be mandated—with phase-in and transition accommodations—includes:
Oversight and governance of climate-related risks by the registrant’s board and management;
Processes for identifying, assessing, and managing climate-related risks;
Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy and financial statements;
Greenhouse gas (GHG) emissions—including direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2), not including offsets; and indirect emissions from upstream and downstream activities in a registrant’s value chain (Scope 3), if material, or if a GHG emissions target or goal has been set which includes Scope 3 emissions (again not including offsets);
Information about climate-related targets and goals—including the scope of activities and emissions included in the target; how the registrant intends to meet these targets and goals; the defined time horizon by which the target is intended to be achieved; interim targets, and data indicating whether progress is being made towards targets or goals, with updates each fiscal year;
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—information as to these offsets or RECs, including the amount of carbon reduction represented by the offsets or the amount of generated renewable energy represented by the RECs;
Information about transition plans, including metrics and targets used to identify and manage risk;
The parameters, assumptions, analytical choices, and projected principal financial impacts used in any scenario analysis; and
Information about any internal carbon price and how this is set.
Invitation to Comment:
The proposed rule also contains over 200 requests for comment. These requests include the questions:
Do the current reporting requirements yield adequate and sufficient information regarding climate-related risks to allow investors to make informed decisions?
Are there other alternative approaches to improving climate-related disclosure the SEC should consider?
Should the SEC require registrants to disclose whether and how the board or board committee considers climate-related risks as part of its business strategy, risk management, and financial oversight?
Should the SEC require registrants to identify the board members or board committee responsible for the oversight of climate-related risks?
Should the SEC require registrants to describe the processes by which the management positions or committees responsible for climate-related risks are informed about and monitor climate-related risks?
When describing the processes for managing climate-related risks, should the SEC require registrants to disclose how they decide whether to mitigate, accept, or adapt to a particular risk? And how they prioritize climate-related risks?
Should the SEC define or further define some of the terms upon which aspects of the proposal relies, such as “short, medium and long term,” “climate-related risks,” and “climate-related opportunities”?
If a registrant has used carbon offsets or RECs, should the SEC require the registrant to disclose the role that the offsets or RECs play in its overall strategy to reduce its net carbon emissions?
Should the SEC require registrants to disclose any gaps in the data required to calculate its GHG emissions?
Should Scope 3 emissions disclosure be voluntary?