On March 21, 2022, the SEC issued proposed rules, which, if finalized, would require disclosure of certain climate-related information in registration statements and annual reports on Form 10-K, together with disclosure in Form 10-Q of material changes to such information.
In addition, the proposed rules would require disclosure of certain climate-related metrics in a note to the registrant’s audited financial statements. The rules were proposed after a 3-1 vote by the SEC Commissioners, with Commissioner Hester M. Peirce dissenting. The 510-page proposal is briefly summarized below, and is available for comment until the later of May 20, 2022 or 30 days after it is published in The Federal Register.
Proposed climate-related metrics to be disclosed in the audited financial statements
Proposed new Regulation S-X Rules 14-01 and 14-02 would require disclosure of certain metrics in a note to the audited financial statements, which means the disclosure would be subject to audit by the registrant’s auditor, and would come within the scope of the registrant’s internal control over financial reporting. Such disclosures would be required for all fiscal years included in the consolidated financial statements in the filing. The proposed requirements include the following, among others:
- Disclosure of the (a) financial impacts of severe weather events and other natural conditions and (b) financial impacts related to transition activities (efforts to reduce greenhouse gas [GHG] emissions or otherwise address the mitigation of, or adaption to, climate-related risks). Disclosure for each of these categories would be required to be presented on an aggregated line-by-line basis for all negative impacts, and separately on an aggregated line-by-line basis for all positive impacts. Disclosure would not be required if the sum of the absolute values of all the impacts on the line item is less than one percent of the total line item for the relevant fiscal year.
- Separate disclosure of the aggregate amount of expenditures expensed and the aggregate amount of capitalized costs incurred to (a) mitigate the risks of severe weather events and other natural conditions and (b) reduce GHG emissions or otherwise mitigate exposure to transition risks (attributable to regulatory, technological and market changes to address the mitigation of, or adaption to, climate-related risks).
- Disclosure of whether the estimates and assumptions the registrant used to produce the consolidated financial statements were impacted by (a) exposures to risks and uncertainties associated with, or known impacts from, severe weather events and other natural conditions and (b) risks and uncertainties associated with, or known impacts from, a potential transition to a lower carbon economy or any climate-related targets disclosed by the registrant.
- Disclosure of the impact of any climate-related risks (separately by physical risks and transition risks) identified by the registrant on any of the above financial statement metrics.
Proposed Regulation S-K Item 1501: Governance
The proposed requirements include disclosures about the registrant’s governance as it relates to climate-related risks, including, among other matters:
- The board of director’s oversight of climate-related risks, including:
- The identity of any board members or committee responsible for the oversight and whether any board member has expertise in climate-related risks
- The process by which the board or board committee discusses climate-related risks
- Whether and how the board or board committee considers climate-related risks as part of its business strategy, risk management and financial oversight
- Whether and how the board of directors sets climate related targets or goals, and how it oversees progress against those targets or goals
- Management’s role in assessing and managing climate-related risks, including:
- The identity of management positions or committees responsible for assessing and managing climate-related risks and the relevant expertise of such position holders or members
- The process by which such positions or committees are informed about and monitor climate-related risks
- Whether and how frequently such positions or committees report to the board or a board committee on climate-related risks
Proposed Regulation S-K Item 1502: Strategy, business model and outlook
Under the proposed rules, a registrant would be required to describe any climate-related risks reasonably likely to have a material impact on its business or consolidated financial statements, which may manifest over the short-, medium-, or long-term. The proposed rules would require a registrant to describe, among other matters:
- Climate-related risks, specifying whether an identified climate-related risk is a physical risk or a transition risk. If a physical risk, the proposed rules would require a registrant to describe the nature of the risk, including whether it may be categorized as an acute risk (event-driven risk related to shorter-term extreme weather events) or chronic risk (resulting from longer term weather patterns and related effects). The proposed rules would require a registrant to include in its description of an identified physical risk, among other matters, the location of the properties, processes or operations subject to the physical risk.
- How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model and outlook, and the resilience of the registrant’s business strategy in light of potential future changes in climate-related risks
- Whether and how any impacts are considered as part of the registrant’s business strategy, financial planning and capital allocation
- Whether and how any climate-related risks have affected or are reasonably likely to affect the registrant’s consolidated financial statements, including any of the climate-related metrics required to be disclosed pursuant to Rule 14-02
Proposed Regulation S-K Item 1503: Risk management
The proposed rules would require disclosure of the registrant’s processes for identifying, assessing and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes. If the registrant has adopted a transition plan as part of its climate-related risk management strategy, the registrant must describe the plan, including the relevant metrics and targets used to identify and manage any physical and transition risks.
Proposed Regulation S-K Item 1504: GHG emissions metrics
The proposal would require disclosure of a registrant’s GHG emissions for its most recently completed fiscal year and for the historical fiscal years included in its consolidated financial statements in the filing to the extent such historical GHG emissions data is reasonably available.
The rules would require Scope 1 (direct GHG emissions from operations owned or controlled by the registrant) and Scope 2 (indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat or cooling that is consumed by operations owned or controlled by the registrant) emissions to be separately disclosed.
Scope 3 emissions (indirect GHG emissions not otherwise included in a registrant’s Scope 2 emissions, which occur in the upstream and downstream activities of a registrant’s value chain) would be required to be disclosed if material, or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions. Smaller reporting companies would be exempt from the Scope 3 emissions disclosure requirement.
Proposed Regulation S-K Item 1505: Attestation of Scope 1 and Scope 2 emissions disclosure
The proposed rules would require an accelerated filer or a large accelerated filer to include, in the relevant filing, an attestation report covering, at a minimum, the disclosure of its Scope 1 and Scope 2 emissions and to provide certain related disclosures about the service provider. Proposed transition periods would provide existing accelerated filers and large accelerated filers one fiscal year to transition to providing limited assurance and two additional fiscal years to transition to providing reasonable assurance, starting with the respective compliance dates for disclosure. The proposed rules would provide minimum attestation report requirements and minimum standards for acceptable attestation frameworks, and would require an attestation service provider to meet certain minimum qualifications.
Proposed Regulation S-K Item 1506: Targets and goals
If a registrant has set any climate-related targets or goals, it would be required to disclose them, together with relevant data to indicate whether the registrant is making progress toward meeting the target or goal, among other matters.
Proposed compliance date
The proposed rule includes a phased-in compliance schedule based on a registrant’s filing status. For example, if the proposed rules are adopted effective in December 2022, the compliance date for a calendar-year-end registrant would be as follows:
- Large accelerated filers’ compliance date would be fiscal year 2023 (filed in 2024) for all disclosures, except Scope 3 GHG emissions metrics, which would be required to be disclosed in fiscal year 2024.
- Accelerated and non-accelerated filers’ compliance date would be for fiscal year 2024 (filed in 2025) for all disclosures, except Scope 3 GHG emissions metrics, which would be required to be disclosed in fiscal year 2025.
- Smaller reporting companies’ compliance date would be for fiscal year 2025 (filed in 2026) for all disclosures, as they are exempt from the required Scope 3 GHG emissions metrics disclosure requirements.
Compliance dates for non-calendar-year-end registrants would correspond to the filing years noted above (e.g., a large accelerated filer with a March year end would have a fiscal year 2024 [filing in 2024] compliance date).