On March 21, 2022, the SEC proposed via a 3-1 vote a sweeping series of rule amendments that would require U.S. public companies and foreign private issuers to make specific climate-related disclosures in their annual reports on Form 10-K or Form 20-F and registration statements.
If adopted substantially as proposed, the new rules would require disclosure of the following:
- A company’s climate-related risks and their actual or likely material impacts on its business, strategy and outlook, which could manifest over the short-, medium- or long-term;
- the oversight and governance of climate-related risks by the company’s board and management;
- the company’s greenhouse gas (GHG) emissions, which, for accelerated and large accelerated filers and with respect to certain emissions, would be subject to independent third-party assurance;
- certain climate-related financial statement metrics and related disclosures in a note to the company’s audited financial statements; and
- the impact of climate-related events (severe weather events and other natural conditions) and information about the company’s climate-related targets and goals and transition plan, if any.
The proposed rules would require companies to disclose information about direct GHG emissions (i.e., Scope 1) and indirect emissions from purchased electricity or other forms of energy (i.e., Scope 2). In addition, a company will be required to disclose GHG emissions from upstream and downstream activities in its value chain, such as emissions created by suppliers and business travel (i.e., Scope 3), but only if material or if the company has set a GHG emissions target or goal that includes Scope 3 emissions.
While many companies currently voluntarily report climate and other sustainability-related information, there is no specific line-item requirement to do so, which potentially creates difficulties analyzing information across companies and sectors. The SEC’s proposing release explains that the proposed amendments generally align with the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol and therefore should be familiar to those companies choosing to engage in voluntary reporting outside the four corners of their SEC-filed documents.
The SEC release includes phase-in periods, which vary by type of registrant and disclosure, for compliance with the proposed rules (if adopted), a safe harbor for certain emissions disclosures and an exemption from certain emissions reporting requirements for smaller reporting companies. The proposing release also noted that existing safe harbors for forward-looking statements under the Securities Act and Exchange Act would be available for aspects of the proposed disclosures.
To illustrate the disclosure compliance deadlines and phase-in periods, the fact sheet accompanying the SEC release included the two following tables assuming that the proposed rules were adopted with an effective date in December 2022 (which we believe is doubtful) and that the registrant has a December 31st fiscal year-end.
Phase-in period for the assurance requirement and the minimum level of assurance required:
|Scopes 1 and 2 GHG Disclosure Compliance Date
|Large Accelerated Filer
|Fiscal Year 2023 (filed in 2024)
|Fiscal Year 2024 (filed in 2025)
|Fiscal Year 2026 (filed in 2027)
|Fiscal Year 2024 (filed in 2025)
|Fiscal Year 2025 (filed in 2026)
|Fiscal Year 2027 (filed in 2028)
Interested parties have until May 20, 2022 (or, if longer, 30 days from the date of publication in the Federal Register) to comment on the proposed amendments. Once the comment period ends, and depending on the evidentiary record created by these letters, the SEC could take a number of steps, including but not limited to revising and re-issuing the proposed rule amendments, before voting on whether to proceed to adoption. In his statement announcing the proposed amendments, Chairman Gensler declined to specify when the SEC would issue final rules, stating only that the agency would “take the time appropriate to get it right.” We believe the SEC’s final rule amendments will be subject to litigation alleging that the amendments exceed the agency’s regulatory authority. Perhaps in anticipation, some of the 510-page proposing release was devoted to arguments on the nature and scope of the SEC’s authority to adopt these rules – which was apropos given SEC Commissioner Hester Peirce’s lengthy dissent that included authority arguments. In sum, the courts could delay the effective date of these amendments or limit their scope. Regardless of the outcome of the proposed rules, and while the proposed rules are being debated by the commenters – either in their comment letters or media reports – we anticipate that public companies will increasingly face regulatory, investor and other stakeholder pressure to disclose this information.