On March 21, 2022, by a 3-1 vote, the Securities and Exchange Commission (“SEC”) issued proposed amendments to its rules (the “Proposed Rules”) that would require registrants to provide certain climate-related information in their registration statements and annual reports. The Proposed Rules are aimed at enhancing and standardizing climate-related disclosures in order to address investor demands for more consistent and comparable information, and to guide them in making informed judgments about the impact of climate-related risks on current and potential investments. The full text of the Proposed Rules can be viewed here.

Proposed Subpart 1500 of Regulation K

Under the Proposed Rules, the SEC would add a new subpart to Regulation S-K, which would require a registrant to disclose certain climate-related information, including information about its climate-related risks that are reasonably likely to have material impacts on its business or consolidated financial statements, as well as greenhouse gas (“GHG”) emissions metrics that could help investors assess those risks. A registrant would also be permitted, but not required to, include disclosures about its climate-related opportunities.

The additional subpart, as proposed, would also include an attestation requirement for accelerated filers and large accelerated filers regarding certain proposed GHG emissions metrics disclosures (discussed further below).

Proposed Article 14 of Regulation S-X

The Proposed Rules would add a new Article 14 to Regulation S-X, which would require certain climate-related financial statement metrics and related disclosures to be included in a note to a registrant’s audited financial statements. The proposed financial statement metrics would consist of disaggregated climate-related impacts on existing financial statement line items.  As part of the registrant’s financial statements, the financial statement metrics would be subject to audit by an independent registered public accounting firm, and come within the scope of the registrant’s internal control over financial reporting.

Content of Climate-Related Disclosures

Drawing upon recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (“TCFD”) as well as the GHG Protocol, the Proposed Rules would require a registrant to disclose information about the following topics:

• Governance. The oversight and governance of climate-related risks by the registrant’s board and management.
• Climate Risks. How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term.
• Climate Impacts. How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook.
• Risk Management System. 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.
• Scope 1 and 2 GHG Emissions Metrics. Scope 1 GHG emissions (i.e., GHG emissions from operations that are owned or controlled by the registrant) and Scope 2 GHG emissions (i.e., GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a registrant) metrics, separately disclosed, expressed (i) both disaggregated by each constituent greenhouse gas and in the aggregate, and (ii) in absolute and intensity terms.
• Scope 3 GHG Emissions Metrics. Scope 3 GHG emissions (i.e., all indirect GHG emissions not otherwise included in Scope 2) and intensity, if material, or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions.
• Targets and Transition Plans. The registrant’s climate-related targets or goals, and transition plan, if any.
• Carbon Price and Offsets. The registrant’s internal carbon price, if any, and how it is set, and information about the use of any carbon offsets or renewable energy certificates in achieving climate-related targets.
• Financial Statement Metrics. The impact of climate-related events (severe weather events and other natural conditions, as well as physical risks identified by the registrant) and transition activities (including transition risks identified by the registrant) on the line items of a registrant’s consolidated financial statement and related expenditures, and disclosure of financial estimates and assumptions impacted by such climate-related events and transition activities.

When responding to any of the Proposed Rules’ required disclosures concerning governance, strategy, and risk management, a registrant may also choose to disclose information concerning any identified climate-related opportunities.

Attestation for Scope 1 and Scope 2 GHG Emissions Disclosure

The Proposed Rules would require accelerated filers and large accelerated filers (including foreign private issuers) to include, in the relevant filing, an attestation report covering, at a minimum, the disclosure of its Scope 1 and Scope 2 GHG emissions and to provide certain related disclosures about the service provider. The Proposed Rules would provide for minimum attestation report requirements and minimum standards for acceptable attestation frameworks, but do not adopt a specific attestation standard for assuring GHG emissions or define a single methodology for calculating GHG emissions. An attestation service provider would need to meet certain independence and expert criteria, but need not be a registered public accounting firm.

Phase-In Periods and Other Accommodations

The Proposed Rules requirements would be phased in for all registrants, with the compliance date dependent upon the status of the registrant as a large accelerated filer, accelerated or non-accelerated filer, or smaller reporting company, and the content of the disclosure. For example, assuming that the effective date of the Proposed Rules occurs in December 2022 and that the registrant has a December 31^st fiscal year-end, the compliance date for the proposed disclosures in annual reports would be:

Existing accelerated filers and large accelerated filers would be permitted one fiscal year to transition to providing “limited assurance,” followed by two additional fiscal years to transition to providing “reasonable assurance,” in each case, calculated from the respective compliance dates for Non-Scope 3 disclosures.

In addition, the Proposed Rules provide a “safe harbor” for Scope 3 emissions disclosure, which is intended to mitigate potential liability concerns associated with providing emissions disclosure based on third-party information. Under the Proposed Rules, 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.

Opposition

In a separate statement, Commissioner Hester Peirce explained her vote in opposition to the Proposed Rules, arguing that the Proposed Rules are deficient, and potentially damaging, in that they lack the following key components:

• A credible rationale for such a prescriptive framework when existing disclosure requirements already capture material risks relating to climate change;
• A materiality limitation;
• A compelling explanation of how the Proposed Rules will generate comparable, consistent, and reliable disclosures;
• An adequate statutory basis;
• A reasonable estimate of costs to companies; and
• An honest reckoning with the consequences to investors, the economy, and the SEC.

The full text of her statement is available here.

While the SEC has proposed a phase-in period for these new requirements and certain safe harbors, the Proposed Rules, if adopted, will impose a substantial compliance burden on reporting companies, including those who already report aspects of their climate- and environmental-related risks and impacts. The SEC 500+ page release on the Proposed Rules includes over 200 specific requests for comment across a wide array of applicable sub-topics. Specific responses to these requests, as well as general comments on the Proposed Rules, are due 30 days after publication in the Federal Register or May 22, 2022, whichever is later.

For additional information related to Proposed Rules, please contact one of the authors listed, or any member of our Securities Law Practice Group.