SEC Climate-Related Historical Disclosure Proposal: What You Need to Know – Corporate/Commercial Law

On March 21, 2022, the United States Securities and Exchange Commission (the “SEC”) issued a long-awaited proposed amendment to its rules under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). This rule would require public companies to disclose climate-related risks when filing registration statements and periodic reports under the Exchange Act.1 The proposed amendment to the rule is likely to prove highly controversial, with opponents arguing that the amendment is beyond the jurisdiction of the SEC.2

While the scope of the final rule remains subject to public comment, much of the focus has been on requiring certain filers to disclose greenhouse gas (“GHG”) emissions information. The proposed rule would define “greenhouse gases” as gases considered by the international scientific community to be the main driver of climate change and would be consistent with other important climate frameworks, including the United Nations Framework Convention on Climate Change. climate change and the Kyoto Protocol. As currently written, GHGs to be disclosed include carbon dioxide (CO2), methane (CH4), nitrous oxide (N20), nitrogen trifluoride (NF3), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulfur hexafluoride (SF6).

To facilitate consistent GHG reporting, the proposed rule adopts the Greenhouse Gas Protocol (“GHG Protocol”), a widely accepted GHG accounting method. The GHG Protocol has developed so-called emissions “scopes” to help differentiate emissions directly attributable to the reporting entity from those only indirectly attributable to the reporting entity. The GHG Protocol defines Scope 1 emissions as GHG emissions generated from emission sources “that are owned or controlled by the company, [e.g.,] boilers, furnaces, vehicles., emissions from chemical production in owned or controlled process equipment. »3 Scope 2 emissions are emissions resulting from the production of electricity purchased by the company for its operations.4 The GHG Protocol treats so-called Scope 3 emissions as a kind of catch-all to capture indirect emissions not related to purchased electricity. For example, a company may contract out the extraction and production of certain materials used in its products. Emissions generated by these extraction/production activities would be considered scope 3 emissions. Other major sources of scope 3 emissions include transportation-related activities, including transportation of goods and other supply chain emissions, business travel, employee travel, waste transportation, etc.5

The proposed rule’s GHG emissions reporting framework is being implemented using a phased approach, with reporters first required to disclose all Scope 1 and Scope 2 GHG emissions beginning in fiscal year 2023 for Accelerated Large Filers, FY2024 for Accelerated and Non-Expedited Filers, and FY2025 for Small Company Filers (“SRCs”). With the exception of SRCs, filers will be required to disclose Scope 3 GHG emissions beginning in fiscal years 2024 and 2025. The SEC has recognized the inherent difficulties in calculating Scope 3 emissions due to the unavailability of necessary data from suppliers and other third parties. As such, the proposed rule includes a safe harbor for the disclosure of Scope 3 broadcasts that would limit liability to disclosures “made or reaffirmed without reasonable basis or disclosed otherwise than in good faith”.6

The proposed rule also requires disclosure of GHG intensity, i.e. metric tonnes of carbon dioxide equivalent (CO2e) per unit of total income. Rather than developing different units of measurement for each individual gas, the GHG Protocol has developed CO2e as the unit of measurement common to all GHGs to indicate the “global warming potential” of each. This metric could be used by companies to set targets or objectives for reducing the carbon intensity of certain products or operations.

The other main source of contention in the proposed rule is the required disclosure of material “climate-related risks”.7 The rule defines “climate-related risks” as the “actual or potential adverse impacts of climate-related conditions and events on a registrant’s consolidated financial statements, business operations, or value chains.” »8 Although “climate-related risks” are defined to include what are generally considered to be the greatest consequences of climate change, for example, sea level rise, drought, forest fires, etc., it also includes the risks associated with the transition to a lower carbon economy. -intensive economy, e.g. reduced market demand for carbon-intensive products, changes in consumer behavior, etc.

Among other requirements, the proposed rule would also require disclosure of the following:

  • Oversight and governance of climate-related risks by the declarant’s board and management;

  • The registrant’s processes for identifying, assessing and managing climate-related risks and whether these 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 risk management strategy, a description of the plan, including the relevant measures and targets used to identify and manage physical and transition risks;

  • If the declarant uses scenario analysis to assess the resilience of its business strategy to climate-related risks, a description of the scenarios used, as well as the parameters, assumptions, analytical choices and the main projected financial impacts;

  • If a reporter uses an internal carbon price, information about the price and how it is set;

  • The impact of climate-related events (severe weather events and other natural conditions) and transition activities on a registrant’s consolidated financial statement line items, as well as the financial estimates and assumptions used in the financial statements; and

  • Information on climate-related targets and objectives and transition plan, if applicable.

The proposed rule is now in a public comment period until at least May 20, 2022. The rule is likely to be the subject of litigation that could delay its implementation for several years.



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6. 17 CFR 229.1504(f).

7. 17 CFR 229.1502(a).

8. 17 CFR 229.1500(c).

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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