On March 21, 2022, following a party-line, 3-1 vote, the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) released a series of proposed rule changes impacting public companies’ climate-related disclosure obligations in registration statements and in periodic reports, including Forms 10-K and 20-F.¹  While the SEC’s efforts to provide investors with climate-related information began in the 1970s, the Commission issued its last official statement concerning climate-related disclosures in 2010 (the “2010 Guidance”), which advised registrants on how existing Commission rules may require disclosure of the impacts of climate change on a registrant’s business or financial condition.²  The SEC noted that since it released the 2010 Guidance, “investors have increased their demand” for more extensive climate-related information from registrants.³  In developing the proposed rule changes, the SEC noted that it had incorporated “comments from investors as to the information they need to make informed investment or voting decisions” and “concerns expressed by registrants with regard to compliance burdens and liability risk.”⁴

The Substance of the SEC’s Climate-Related Information Disclosure Proposal

Aiming to “augment and supplement the disclosures already required in SEC filings,”⁵ the proposed disclosure rule changes would require registrants to disclose the following climate-related information in their reporting to investors:

• (i) oversight and governance of climate-related risks by the registrant’s board and management;
• (ii) climate-related risks that would have a “material impact” on a public company’s business, results of operations, or financial condition that may occur over the short-, medium-, and long-term;
• (iii) the effect of identified climate-related risks on a registrant’s strategy, business model, and outlook;
• (iv) a registrant’s governance of climate-related risks and relevant risk management processes;
• (v) climate-related financial statement metrics in a note to a registrant’s audited financial statements;
• (vi) a registrant’s climate-related targets and goals and, if relevant, its transition plan; and
• (vii) a registrant’s direct and indirect greenhouse gas (“GHG”) emissions.⁶
  

According to the SEC, the climate-related information disclosure proposals are “modeled in part” on the broadly accepted disclosure frameworks many companies already follow pursuant to the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.⁷  In a press release accompanying the proposed rule changes, SEC Chair Gary Gensler said that the proposal “would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.”⁸  The SEC stated in its fact sheet summarizing the 534-page long proposal that the “proposed rules are intended to enhance and standardize climate-related disclosures.”⁹  Indeed, within the text of its proposed rule, the SEC noted “companies primarily provide [climate-related] information separate from their financial reporting,”¹⁰ if they provide it at all.  As support to this contention, the SEC cited to a February 2021 S&P Global report that found “approximately 90% of S&P 500 companies publish sustainability reports but only 16% include any reference to ESG factors in their Commission filings.”¹¹

Foretelling the contours of the debate that has already begun following the proposal’s release are divergent statements during the SEC’s presentation of the proposal from dissenting Commissioner Hester M. Pierce and retiring Commissioner Allison Herren Lee.  In a scathing 17-page statement explaining her vote against the proposal, Pierce said, “The proposal turns the disclosure regime on its head . . . [and] tells corporate managers how regulators, doing the bidding of an array of non-investor stakeholders, expect them to run their companies.”¹²  Lee, on the other hand, praised the proposal, heralding it as a “watershed moment for investors and financial markets” because climate change risk is “one of the most momentous risks to face capital markets since the inception of this agency.  The science is clear and alarming, and the links to capital markets are direct and evident.”¹³

The Proposal’s Greenhouse Gas Emissions Disclosure Regime

The aspect of the SEC’s new proposal most likely to dominate public discourse during the comment period and after the proposal’s likely enactment will be the disclosure obligations for companies related to GHG emissions.

The SEC proposal would require companies to disclose their GHG emissions in up to three categories:

• Scope 1: their own direct GHG emissions;¹⁴
• Scope 2: their indirect emissions from buying and using energy;¹⁵ and
• Scope 3: emissions from registrants’ supply chains and their consumers.¹⁶
  

With respect to Scope 1 and Scope 2 emissions disclosures, the proposed rule would require accelerated filers and large accelerated filers to include an attestation report from a third party regarding these direct and indirect emissions, though a registered public accounting firm is not required to make the attestation.¹⁷  Regarding Scope 3 disclosures, smaller reporting companies¹⁸ are exempt, while larger companies may find refuge in a safe harbor provision for protection from liability under the federal securities laws.¹⁹  According to the SEC, the proposed safe harbor “provide[s] that disclosure of Scope 3 emissions by or on behalf of the registrant would be deemed not to be a fraudulent statement unless it is shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith.”²⁰

In anticipation of the pushback from registrants regarding Scope 3, the SEC included accommodations and limited the applicability of the Scope 3 emissions disclosure rules because it “recognize[d] that the calculation and disclosure of Scope 3 emissions may pose difficulties compared to Scopes 1 and 2 emissions.”²¹  It is worth noting, however, that some companies, including Exxon Mobil Corp., are already disclosing Scope 3 emissions voluntarily.²²  Further, according to The New York Times, “Some companies—including Apple, Facebook, Google, and Microsoft—already report extensive data and have set deadlines by which they hope to have zero carbon emissions overall.”²³

For all the proposed rules, the SEC included a phase-in schedule based on the generous assumption that the effective date for the rules will occur in 2022.²⁴  A registrant’s compliance date depends upon its filing status as a large accelerated filer, accelerated or non-accelerated filer, or smaller reporting company, as well as the content of its disclosure item.²⁵  The compliance date for the proposed disclosures in annual reports, excluding the Scope 3 GHG emissions disclosure, would be:

• fiscal year 2023 (filed 2024) for large accelerated filers;
• fiscal year 2024 (filed 2025) for accelerated and non-accelerated filers; and
• fiscal year 2025 (filed 2026) for smaller reporting companies.²⁶
  

For Scope 3 GHG emissions disclosures, registrants would have one additional year from their original compliance date to disclose that information.²⁷

Next Steps

Now that the Commission has released the proposed changes to climate-related information disclosures, the public is invited to submit comments until 30 days after the proposed rule is published in the Federal Register or until May 20, 2022, whichever period is longer.²⁸

In due time, it is likely that critics of the proposed climate-related disclosure rules may launch legal challenges to whittle down their breadth or stymie their enactment entirely.  While unlikely to succeed given Democratic control of the executive and legislative branches, members of U.S. Congress opposed to the SEC’s climate-related information disclosure proposal may introduce legislation to symbolically attack the rules or bring attention to the rule-making process.  Additionally, interest groups will voice their opinions.  For example, shortly after the Commission released the proposal rule changes, the U.S. Chamber of Commerce issued a statement condemning the SEC’s “prescriptive approach,” while vowing to “advocate against provisions of the proposal that deviate from [the test of materiality] or are unnecessarily broad.”²⁹  On the other hand, the Sierra Club touted that the SEC’s proposed climate-related information disclosure rules would hold companies accountable to the climate impact pledges they have made.³⁰

While substantial public comment is likely based upon the volume of communication the SEC already received during the proposal’s development and the rules may be slightly changed in light of those comments, the Commission’s current membership, which consists of three Democratic appointees and one Republican appointee, is almost certain to approve new disclosure rules for climate-related information in line with the proposal released on March 21, 2022.  Therefore, registrants’ filings with the SEC will soon be required to include climate-related information disclosures that will provide investors with important details regarding a company’s climate-related exposures, risks, and opportunities.