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SEC Proposes Rule to Enhance and Standardize Climate-Related Disclosures

SEC Proposes Rule to Enhance and Standardize Climate-Related Disclosures
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2 min 55 sec

The U.S. Securities and Exchange Commission (SEC) unveiled its proposed rule amendments designed to improve and standardize disclosures around climate change risks for public companies, an area in which the U.S. has lagged developed market peers. The SEC received a significant number of comments pertaining to this initiative from a wide variety of stakeholders and impacted parties over the past year. Impressively, the 500-page proposal includes an in-depth review of the comments and poses numerous other questions for the public to address in the current comment period, which ends June 17.

Background on the SEC Rule on Climate-Related Disclosures

In March, the SEC released its long-awaited proposal for public companies to disclose climate-related risks and greenhouse gas (GHG) emissions in financial statements. This initiative began in March 2021 at the bidding of the Biden administration, and the SEC has reviewed and considered 600 letters since that time.

The proposal seeks to provide investors more information about the impact that climate-related risks may have on company financial performance and to standardize other climate-related disclosures, to the extent possible. Importantly, the SEC also acknowledged the burden of compliance and took measures to mitigate that burden by phasing in the requirements and providing smaller companies with an exemption for certain emissions disclosures.

The SEC’s stated goal is important to acknowledge: “The disclosure of this information would provide consistent, comparable, and reliable—and therefore decision-useful—information to investors to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.”

The proposed rule was modeled after the Task Force on Climate-Related Disclosure framework and the Greenhouse Gas Protocol, both of which are globally recognized as leading reporting frameworks for climate change and GHG emissions disclosures.

Key disclosure requirements of the proposed rule to be phased in over time include:

  • How climate-related risks are being assessed by a company’s board/management
  • Whether climate-related risks are likely to have a “material” impact on financials, operations, or the business strategy over the short-, medium-, and long-term
    • opportunities related to climate change can also be addressed
  • Metrics in audited financial statements that assess the potential impact of transition activities related to a shift to a greener economy and physical climate-related events (severe weather and other environmental conditions)
    • discussion of whether and how any climate-related risks affect financial statements
    • whether estimates and assumptions used were impacted by exposures to climate-related risks
  • Disclosure of Scope 1 and 2 greenhouse gas emissions (with an attestation)
  • Disclosure of “material” Scope 3 emissions
    • exempts small firms (less than $250 million in market cap or less than $100 million in revenue)
    • given potential difficulty in data collection and measurement, required only if emissions are “material” or if the company has a stated GHG emissions reduction target or goal that includes Scope 3 emissions
  • Explanation of how publicly stated climate-related goals (including cutting emissions) will be achieved, including targets and timeframe, and how they will be measured (plan for carbon offsets must be described, if used)

Bottom Line

The proposed rule is a clear step forward in terms of improving and standardizing disclosures for public companies, but challenges remain measuring emissions in terms of complexity and varying methodologies. Further, the concept of “material”—central to the rule—is somewhat subjective. Because disclosures are currently voluntary and lack consistency in terms of content and timing, the rule in its ultimate form is expected to improve transparency and yield more consistent disclosures around a variety of climate-related issues to the benefit of investors. To help mitigate the burden of compliance, the requirements would be phased in over time and exempt smaller companies from some emissions disclosures.

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