SEC proposes rule change that would require climate disclosures in financial reports

The Securities and Exchange Commission has proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports.

Disclosures would include information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements, according to a news release.

The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks, according to the release.

"I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers," SEC Chair Gary Gensler said in the release. "Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions. Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. Companies and investors alike would benefit from the clear rules of the road proposed in this release. I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance. Today’s proposal, thus, is driven by the needs of investors and issuers."

The SEC said the proposed rule changes would require a registrant to disclose information about:

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

For registrants that already conduct scenario analyses, have developed transition plans or publicly set climate-related targets or goals, the proposed amendments would require certain disclosures to enable investors to understand those aspects of the registrants’ climate risk management, according to the release.

The proposed rules also would require a registrant to disclose information about direct greenhouse gas emissions, which the SEC refers to as Scope 1, and indirect emissions from purchased electricity or other forms of energy, referred to by the SEC as Scope 2. 

In addition, a registrant would be required to disclose greenhouse gas emissions from upstream and downstream activities in the value chain, referred to as Scope 3, if material or if the registrant has set a greenhouse gas emissions target or goal that includes Scope 3 emissions. 

Under the proposed rule changes, accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering Scopes 1 and 2 emissions disclosures, with a phase-in over time, to promote the reliability of greenhouse gas emissions disclosures for investors, according to the release.

The proposed rules would include a phase-in period for all registrants, with the compliance date dependent on the registrant’s filer status, and an additional phase-in period for Scope 3 emissions disclosures.

The proposed release will be published on SEC.gov and in the Federal Register. The comment period will remain open for 30 days after publication in the Federal Register, or 60 days after the date of issuance and publication on sec.gov, whichever period is longer.