Marika Christopher, Senior Director, Product Strategy & ESG, provides an overview of the proposed climate-related disclosures recently released by the Securities and Exchange Commission (SEC) for public companies in the U.S.
- The SEC has proposed rule changes that would require companies to include certain climate-related disclosures in their registration statements, as well as in annual report filings.
- In addition to providing information on climate risks facing their business, public companies would also be required to report on their greenhouse gas emissions.
- The proposed rules, according to SEC Chair Gary Gensler, are a response to increased investor demand and would benefit issuers by establishing clear rules of the road for disclosure.
On 21 March 2022, the U.S. Securities and Exchange Commission (SEC) released its long-awaited proposed climate-related disclosures for U.S. companies. Under the planned regulation, public companies would be required to report on their greenhouse gas (GHG) emissions, as well as provide information on how climate change is affecting their business, including climate-related targets and goals.
Every year, public companies in the U.S. are required to report on standard financial information, including revenues, operating costs and general financial performance. They are also expected to provide commentary on the risks and challenges they face as a business and within a larger industry. The new SEC climate-related disclosure recommendations mean that reporting requirements for public companies are likely to get much more detailed and companies may require new subject matter expertise to gather, collate and report on the climate-related data required.
In the accompanying press release, SEC Chair Gary Gensler stated:
Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions. Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do.1
The new climate disclosure rules would require U.S. public companies to provide the following information in its registration statement, as well as in their annual report filings:
- Climate risks facing their business, strategy, outlook and related risk mitigation practices
- Materiality of those climate risks on financial performance in the short, medium, and/or long term
- Climate footprint, including:
- Direct GHG emissions (Scope 1)
- Indirect GHG emissions
- Scope 2 (from purchased electricity and other forms of energy)
- Scope 3 (from upstream/downstream suppliers and clients in their value chain)
- Only required if deemed material by the company or is included in a company’s GHG reduction target.
- Companies that already have a transition plan in place and/or conduct scenario analyses would also be expected to provide:
- A description of the transition plan, including metrics and targets used to identify and manage physical and transition risks; disclosures on the scenarios used, including the parameters, assumptions, analytical choices; and projected financial impacts from the scenarios.
- If a company uses carbon pricing in assessing climate-related factors, it must describe its internal carbon price (typically an estimated cost of carbon emissions used internally within an organization), including information about the price and how it is set.
Timing for Compliance
The proposal includes a phase-in period for all companies, dependent on the company’s filer status. For explanatory purposes, assuming an effective date of December 2022, companies (depending on size) will be expected to provide the information on Scope 1 and Scope 2 GHG emissions outlined above as early as for FY 2023 or 2024. Scope 3 emissions, if required to be disclosed, have a different phase-in period.
While many investors welcome the proposed disclosure standards, others believe it will place undue burden on smaller companies – particularly when having to report on Scope 3 emissions, which are complicated to measure and control. However, the SEC has stressed that their goal is to provide more detailed information to investors and notes that the proposal does not require companies to reduce their climate footprints, but rather seeks to establish more comprehensive reporting standards
The SEC proposal is open for comment until the later of May 20, 2022 or 30 days after the proposal is published in the Federal Register. The SEC will then initiate the process to finalize its own climate disclosure rules.
1“SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors.” U.S. Securities and Exchange Commission press release, March 21, 2022.