The SEC has recently released a proposed rule that will, for the first time, require specifically prescribed climate-related disclosures. Learn what that means for you.
The SEC had previously published interpretive guidance in 2010 that was intended as a resource on how to disclose a company’s financial impacts and risks associated with climate change. This guidance was to be used to facilitate compliance with existing SEC disclosure rules but this newly proposed rule marks a significant development in climate-related regulation for public companies. Among the proposed requirements are the disclosure and related contextual information of a public company’s climate-related governance, risk management processes, greenhouse gas emissions, and likely material impacts.
The required disclosures in the proposed rule include both qualitative and quantitative information, but there are some additional required disclosures depending on what climate-related measures an organization has already taken. If your company has adopted a climate-related transition plan, implemented internal carbon pricing, utilized scenario analysis, or set public climate-related targets, you would be required to disclose additional information about these measures and how they were developed and integrated into the organization. For companies that have already utilized ESG frameworks to publicly report on climate-related issues, these requirements may look familiar. There is a significant overlap between the disclosures found in this proposed rule and those that are included in the recommendations developed by the Taskforce for Climate-related Financial Disclosures (TCFD) and the Carbon Disclosure Project (CDP). TCFD and CDP themselves have significant alignment in what information they include in their reporting recommendations so any organization that has previously utilized either or has begun reviewing them for future alignment will have a familiarity with what the SEC has outlined.
One specific area of contention amongst the proposed requirements will be those related to Scope 3 emissions where the reporting company is dependent on data from its partners throughout the value chain. Both Scope 1 and Scope 2 emissions disclosures would be a requirement for all covered public companies, as well as phased-in limited and reasonable assurance for the corresponding data, but the rule also extends to Scope 3 with some caveats and exceptions. Scope 3 emissions will not be required for Smaller Reporting Companies (SRCs) but for Accelerated and Non-Accelerated filers, these emissions will need to be calculated and disclosed if deemed material or if the company has set a target that includes Scope 3 emissions. The issue of materiality in the context of climate-related issues is likely to be the basis of many public comments and challenges to the proposed rule but as it currently stands, companies will need to soon begin the process of evaluating and quantifying their indirect emissions from upstream and downstream activities.
It is also important to note that the SEC has outlined a phased-in approach for these requirements, giving companies at least until 2024 before disclosures are required. Here is a breakdown of how each registrant type is currently scheduled to report:
Smaller Reporting Company – exempt
If you would like to learn more about what the SEC’s proposed climate-related disclosure rules include and how your company can begin taking steps to ensure compliance, please register to access our on-demand webinar, Demystifying the SEC's Proposed Climate Disclosure Rule.
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