The Securities and Exchange Commission (SEC) has proposed a sweeping new climate-driven financial risk reporting rule titled “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” The SEC unveiled the 510-page proposal on March 21, 2022. Comments are due thirty (30) days after the proposed rule is published in the Federal Register, or May 20, 2022, whichever is later.

As proposed, every SEC registrant would have climate-related disclosure obligations.

Currently about a third of public companies make any climate-related disclosure. These disclosures are either largely voluntary or, under a 2010 SEC guidance, principles-based and depend on management judgment, leading to highly variable scope, content, and level of detail. In the proposed rule, the SEC concludes that such reporting has “not resulted in consistent and comparable information about climate-related risks” necessary for informed investing and stakeholder decisions.

Disclosures Required Under the Proposed Rule

The SEC seeks input on a significant number of details in the proposed rule, but core components of the proposal appear likely to be promulgated.  If enacted as proposed, every company with publicly traded stock will be required to include climate-related disclosures in its 10-K (and other SEC forms), including on the following topics: 

• Specific disclosures for the registrant’s Scope 1 and Scope 2 greenhouse gas (GHG) emissions, and disclosures of Scope 3 emissions if they are material.[1]  These disclosures would involve a calculation of the overall intensity of emissions expressed in terms of metric tons of CO2e per unit of total revenue, and a description of the methodology of the calculation.
  
  
• The oversight and governance of climate-related risks by the registrant’s board and management, including the processes used for identifying, assessing, and managing climate-related 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.
  
  
• How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook.
  
  
• 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.
  
  
• The impact of climate-related events on the registrant’s business (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).
  
  
•  The registrant’s climate-related targets or goals, and transition plan, if any.
  
  
• The role of carbon offsets or renewable energy credits, if used, in the registrant’s climate-related business strategy.
  
  
• If used, the registrant’s internal carbon pricing, estimates of pricing changes over time, and rational for selecting the applied price. 

Proposed Compliance Deadlines

SEC proposes a phased approach for compliance deadlines, depending in the first instance on the registrant’s filer status, with an additional phased deadline for Scope 3 emissions disclosures (along with safe harbor provisions and an exemption as to Scope 3 emissions for certain registrants meeting the definition of a smaller reporting company).  To explain the phasing, SEC offers an example: Assuming a final rule becomes effective in December 2022 and the registrant has a December 31 fiscal year-end, initial disclosure obligations would occur as follows. 

• For large accelerated filers, fiscal year 2023 (filed in 2024).
  
  
• For accelerated and non-accelerated filers, fiscal year 2024 (filed in 2025).
  
  
• For smaller reporting companies, fiscal year 2025 (filed in 2026).
  
  
• Registrants required to add Scope 3 disclosures would then have one additional year to further comply with those disclosure requirements.

KMCL attorneys have been tracking developments in this area. Please do not hesitate to contact KMCL if you have questions about the effects of these potential new disclosure requirements or have an interest in commenting on the proposed rule.

[1] The proposed rule incorporates an emissions accounting framework derived from the Greenhouse Gas Protocol (https://ghgprotocol.org/about-us), which defines and differentiates among three different “Scopes” of GHG emissions. Scope 1 emissions are direct GHG emissions occurring for sources owned or controlled by the company. Scope 2 emissions are those primarily resulting from the generation of electricity purchased and consumed by the company. Scope 3 emissions are all other indirect emissions not accounted for by Scope 2, such as those generated from production and transportation of goods the company purchases from third parties, or from the processing or use of the company’s products by third parties.