On March 21, the Securities and Exchange Commission (SEC) voted along party lines to propose its long-awaited climate disclosure framework for public companies. The proposed rule borrows concepts and definitions from the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol and would require registrants to provide a significant amount of climate-focused information, including on annual greenhouse gas (GHG) emissions, board and management involvement in oversight of climate-related risk, and how varying climate risks are identified and addressed. To the extent such disclosures constitute forward-looking information, registrants may be able to take advantage of an existing safe harbor from liability. The proposal was crafted in part to standardize climate risk disclosures, which are already made in some form by many large companies.
The proposal comes almost exactly a year from the SEC’s March 2021 publication of a request for public input on climate change disclosures. The request was issued under the leadership of then-Acting Chair Allison Herren Lee, and posed 15 questions for public consideration and led to the submission of over 5,000 responses, roughly 600 of which were unique. The release of the climate disclosure proposal was repeatedly delayed amid intense scrutiny of the issue. Republicans contend that the SEC is overstepping its bounds and embarking on rulemakings on highly politicized topics, while Democrats believe that information on registrants’ climate risk exposure is material to investors. The SEC’s materiality standard is also a point of partisan contention.
Through alterations to existing forms, registrants would be required to disclose:
- Identification and Management of Climate Risks.
- The process for identifying and managing climate-related risks, and the projected impacts of such risks on the company;
- Information on scenario analysis or internal carbon pricing if either are in use at a company; and
- The involvement of a company’s board and management in oversight and governance of climate-related risks.
- Updates on Public Climate Goals.
- Updates on any public climate-related goals, such as a pledge to eliminate greenhouse gases, as well as any transition plans in place to achieve the goals;
- Relevant data to illustrate progress made towards stated goals; and
- Any use by the company of carbon offsets or renewable energy certificates.
- Information on Annual Emissions.
- Separately, scope 1 and scope 2 emissions in both disaggregated metrics and in the aggregate.
- Scope 1 and scope 2 emissions disclosures made by large companies would be verified by an independent third party.
- Large companies would also be required to disclose scope 3 emissions, which are generated by activities in the company’s broader value chain, if material or as part of a set public goal. Such disclosures would be subject to a safe harbor from liability. Smaller reporting companies (SRC) would be exempt.
- Financial Statement Metrics and Disclosures.
- Disaggregated climate-related impacts on existing financial statement line items, which would be subject to audit, and the registrants’ internal controls over financial reporting.
Companies would comply with the majority of the proposal in stages from fiscal years (FY) 2023 through 2025:
- Large accelerated filers: FY2023 (filed in 2024);
- Accelerated filers and non-accelerated filers: FY2024 (filed in 2025); and
- Small Reporting Companies: FY2025 (filed in 2026).
Compliance with Scope 3 emissions and limited assurance requirements would be delayed by one year for each applicable group, but the proposal also provides a safe harbor specific to scope 3 disclosures. Reasonable assurance is required after two years. As noted above, SRCs would not be required to make scope 3 disclosures or meet assurance requirements. Companies would also need to tag climate-related disclosures in Inline XBRL.
The rule will be open for public comment for 30 days after its publication in the Federal Register, or 60 days after today’s publication on the SEC’s website, whichever period is longer. As a result, late May is the earliest that the window will close. This structure is likely an effort to appease Republican lawmakers and Commissioner Hester Peirce, who publicly oppose limiting comment windows to only 30 days, particularly on high-profile rules, as they believe it does not allow commenters sufficient time to prepare and submit robust responses.
Commissioner Peirce, the SEC’s sole Republican, delivered a lengthy statement in opposition to the proposal. She raised concerns that the proposal would undermine the existing regulatory framework, and cautioned that making such substantive changes without proper vetting would have serious consequences for the agency, investors and the broader economy,
Conversely, Commissioners Lee and Caroline Crenshaw, both Democrats, spoke in support of the rule. Along with Chair Gary Gensler, the duo highlighted growing industry demand for standardized disclosures, particularly as similar standards are adopted in other jurisdictions. Chair Gensler also urged impacted businesses to submit input on the requirements outlined in the proposal.
Commissioners Lee and Crenshaw asked commentors to provide feedback on several specific parts of the proposed rule, including whether to (1) place GHG disclosures within Regulation S-K or Regulation S-X, (2) subject scope 1 and 2 disclosures to reasonable assurance attestation after a period of limited assurance as proposed, (3) allow for assurance from third-party verifiers that are not PCAOB-registered audit firms, or (4) modify the terms of the scope 3 disclosure requirements or safe harbor.
An SEC-prepared fact sheet on the proposal is available here. For additional information on the proposal or the comment process, please reach out to a member of the Brownstein Hyatt Farber Schreck team.
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