SEC proposes climate-related disclosure rules

On March 21, 2022, the U.S. Securities and Exchange Commission (SEC) proposed its much anticipated rules requiring climate-related disclosure. The proposed rules, which are intended to provide investors with consistent, comparable and reliable climate-related information, are modeled in part on the Task Force on Climate-Related Financial Disclosure (TCFD) framework and also draw upon the Greenhouse Gas Protocol. 

The proposed rules would require domestic and foreign registrants to include certain climate-related information in registration statements and annual reports (on Form 10-K or Form 20-F for foreign private issuers) in:

  • A new section that would include GHG emissions data (including Scope 3 emissions if material) attested to by a third-party expert, the registrant’s targets on emissions or similar matters (including annual status updates), a forward-looking discussion highlighting expected future impacts of climate-related risks on the financial statements, and detailed disclosure on climate-related risks and the registrant’s management of those risks; and

  • A new note to the financial statements that would include quantitative disclosure of climate-related impacts on financial statement line items, capital expenditures, and key accounting assumptions.

The following is a summary of the key disclosure requirements in the proposed rules:

  • Location of disclosure: The new disclosures would be required through new Regulation S-K and Regulation S-X items that would apply to registration statements and annual reports.

    • Most of the disclosures would need to be located in a separately captioned “Climate-Related Disclosure” section in the body of the relevant filing.

    • The Regulation S-X financial disclosures noted below would need to be included in a separate note to the financial statements. 

  • Emissions disclosure requirements:

    • Separate disclosure of Scope 1 and Scope 2 emissions (excluding the impact of offsets), both in the aggregate and disaggregated by each constituent greenhouse gas, and in terms of intensity (per unit of economic value or production). Registrants would also be required to disclose the methodology for computing emissions.

    • Disclosure of Scope 3 emissions (excluding the impact of offsets), both in the aggregate and disaggregated by each constituent greenhouse gas, and in terms of intensity if (i) material (taking into account relative significance of Scope 3 emissions compared to Scope 1 and 2), or (ii) the registrant has set a Scope 3 target. 

      • Proposed rules include a liability safe harbor for Scope 3 emissions disclosures that are made with a reasonable basis and in good faith. The proposing release also notes that disclosure is not required if Scope 3 emissions are unknown and not reasonably available.

      • Determinations of materiality would be made using the same materiality standard that applies to other disclosures.

  • Emissions and other climate-related goals: If the registrant has publicly disclosed climate-related goals (e.g., emissions, energy and water usage reductions), then the registrant must disclose the (i) scope of activities and emissions covered by the goals, (ii) how targets are computed, including the baseline year, (iii) how the registrant intends to achieve the goals, (iv) interim targets and annual updates on progress made, and (v) information on the use of carbon offsets or renewable energy credits to achieve the goals (e.g., emissions reductions vs. avoidance).

  • Third-party assurance of emissions data: Accelerated and large accelerated filers would need to obtain and include in the relevant filing an attestation report from an independent GHG emissions “expert” covering, at a minimum, Scope 1 and Scope 2 emissions disclosure. Additional disclosure about the expert’s qualifications would be required. The proposed rules would not require a particular attestation standard (e.g., PCAOB or AICPA attestation standard). 

  • Financial disclosures:

    • Include in a note to the financial statements (i.e., covered by audit and the registrant’s ICFR):

      • Financial impact metrics: Unless less than 1%, disclose quantitative impact on any relevant financial statement line item during the fiscal years presented arising from severe weather events and other natural conditions (i.e., physical impacts of climate change), activities related to the transition away from a carbon-based economy and efforts to reduce emissions (i.e., transition activities).

      • Expenditure metrics: Unless less than 1%, disclose amount expensed and amount capitalized for physical impacts of climate change and transition activities.

      • Financial estimates and assumptions: Disclose whether and how the estimates and assumptions (e.g., impairment or loss contingency assumptions) used to produce the financial statements were impacted by exposures to risks associated with, or known impacts from, climate-related events.

    • Include in the climate section of the body of the relevant filing a narrative discussion and analysis focused on climate change and the anticipated short-, medium-, and long-term impacts of climate-related events and transition activities (including climate goals) on the registrant’s financial statements.

  • Risk factor disclosures:

    • Disclose any “climate-related risks” (defined consistent with TCFD definition to include upstream and downstream value chain risks) reasonably likely to have a material impact on the business or consolidated financial statements, including physical risks and transition risks. 

    • Required physical risk disclosure would be more granular than that typically provided now, including locations of material at-risk assets and quantitative information such as the percentage of assets exposed to material impacts.

    • Material impact would be measured using the same materiality standard that applies to other disclosures, similar to the approach taken when disclosing material trends and uncertainties in the MD&A.

  • Climate-related impacts on business and strategy:

    • Disclose how climate-related risks have affected or are likely to affect the registrant’s strategy, business model and outlook, including impacts on the registrant’s business operations, products or services, suppliers, and use of new technologies, in each case over the short-, medium-, and long-term.

    • Disclose how the climate-related impacts and goals have been integrated into the registrant’s business model or strategy.

    • Disclose role of carbon offsets or renewable energy credits in climate strategy.

  • Governance and risk management disclosures:

    • Describe board oversight of climate-related risks, including responsible committees, directors with expertise in climate-related risks, frequency of board engagement, how the board integrates climate risk into overall strategy, and board involvement in setting and monitoring climate-related targets.

    • Describe management’s role in managing climate-related risks, including the identity of leading executive, if any, and relevant expertise, process for monitoring the risks, and frequency of engagement with the board.

    • Describe processes by which the registrant identifies, assesses, and manages climate-related risks and whether such processes are integrated into overall risk management processes.

    • Describe any climate transition plan, scenario analyses (e.g., based on assumed increases in temperature) assessing resilience of the business (including projected financial impacts), or internal carbon pricing methodologies.

  • Timing considerations:

    • Comment period: The comment period will end on May 20, 2022 or 30 days after the proposal is published in the Federal Register, whichever is later.

    • Phase-in periods for compliance: There would be a phase-in period for all registrants with the compliance date dependent on a registrant’s filer status and an additional phase-in period for Scope 3 emissions disclosure and attestation reports. For example, if the rules become effective in December 2022, a large accelerated filer with a December 31 fiscal year-end would be required to provide the new disclosures (excluding Scope 3 disclosures) for fiscal year 2023 (e.g., in its Form 10-K filed in 2024), Scope 3 disclosures for fiscal year 2024 (e.g., in its Form 10-K filed in 2025), an attestation report covering Scope 1 and Scope 2 emissions disclosure at a limited assurance level for fiscal years 2024 and 2025, and an attestation report at a reasonable assurance level for fiscal year 2026 and beyond. A large accelerated filer with a different fiscal year-end that results in its fiscal year 2023 commencing before the effective date of the rules would not be required to provide the new disclosures until the following fiscal year.

The SEC’s release (No. 33-11042) and related fact sheet can be viewed here and here, respectively.

Our team is currently reviewing the full 510-page rule proposal and will provide a more detailed overview of the proposed rules and implications in a Hogan Lovells SEC Update publication as soon as practicable.

 

Authored by Michael McTiernan, Tiffany Posil, John Beckman, Alex Bahn, William Intner, and Laura Heller.

Contacts
Michael McTiernan
Partner
Washington, D.C.
Tiffany Posil
Partner
Washington, D.C.
John Beckman
Partner
Washington, D.C.
Alex Bahn
Partner
Washington, D.C.
William Intner
Partner
Baltimore
Laura Heller
Senior Associate
Baltimore
Steve Abrams
Partner
Philadelphia
Richard Aftanas
Partner
New York
Tifarah Allen
Partner
Washington, D.C.
Jessica Bisignano
Partner
Philadelphia
David Bonser
Partner
Washington, D.C.
Glenn Campbell
Partner
Baltimore
David Crandall
Partner
Denver
John Duke
Office Managing Partner
Philadelphia
Alan Dye
Partner
Washington, D.C.
Kevin Greenslade
Partner
Northern Virginia
Allen Hicks
Partner
Washington, D.C.
Paul Hilton
Senior Counsel
Denver
Eve Howard
Partner
Washington, D.C.
Bob Juelke
Partner
Philadelphia
Paul Manca
Partner
Washington, D.C.
Brian O'Fahey
Partner
Redwood City
Richard Parrino
Partner
Washington, D.C.
Les Reese
Partner
Washington, D.C.
Richard Schaberg
Partner
Washington, D.C.
Abigail Smith
Partner
Washington, D.C.
Michael Silver
Partner
New York
Hilary Tompkins
Partner
Washington, D.C.
Andrew Zahn
Partner
Washington, D.C.
Nick Hoover
Counsel
Baltimore
Stephen Nicolai
Counsel
Philadelphia

 

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