Audit, Compliance and Risk Blog

When must organizations evaluate and disclose how climate change will affect their operations?

The US Securities and Exchange Commission (SEC) administers reporting requirements for companies listed on national securities exchanges (“listed companies” or “public companies”), under federal securities laws including the Securities Act of 1933 and the Securities Exchange Act of 1934. Some of the SEC’s requirements provide detailed specifications, such as financial reporting consistent with Generally Accepted Accounting Practices (GAAP). Others are less quantified, requiring reporting of information that might be “material” to investors’ evaluation of a public company. Over time, SEC has added topics subject to reporting of material information, and some of these generalized requirements have evolved into more specific ones. In the latest example of this evolution, in March 2022 SEC is proposing regulatory requirements for disclosures about “climate-related risks and metrics” by public companies, enhancing and standardizing existing agency guidance (I’ve written about these several times over the years, most recently HERE). The remainder of this note summarizes SEC’s proposal.

What reporting requirements is SEC proposing to revise?

SEC is proposing to add similar climate-related disclosure requirements in:

• non-financial statements (Regulation S-K, 17 CFR part 229)

• financial statements (Regulation S-X, 17 CFR part 210)

As summarized below, these include requirements for disclosures by companies, attestation by company auditors, and audits as part of accounting reviews. These may apply in prospectus and registration statements, and in annual reports. SEC is choosing to codify climate-related disclosures in existing disclosure requirements, to integrate them into general regulation rather than isolate them in separate requirements.

What non-financial information would be required?

The proposed rules would require a registrant to disclose information about:

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

• How any identified climate-related risks have or are likely to have a material impact on its business and consolidated financial statements, over the short-, medium-, and/or long-term (as these are defined by the registrant);

• How any identified climate-related risks have or are likely to affect its strategy, business model, and outlook;

• The registrant’s processes for identifying, assessing, and managing climate-related risks and whether they are integrated into its overall risk management system or processes;

• The impact of climate-related events (such as severe weather events and any identified physical risks) and transition activities (including identified transition risks) on line items of its consolidated financial statements and related expenditures, and disclosure of financial estimates and assumptions impacted by such climate-related events and transition activities.

• GHG emissions metrics for Scope 1 (direct company emissions) and Scope 2 (from energy purchased by the registrant), separately disclosed and attested to by auditors of larger companies (accelerated filers and large accelerated filers, in SEC’s jargon), expressed:

  • Both by disaggregated constituent greenhouse gases and in the aggregate, and

  • In absolute and intensity terms;

• Scope 3 GHG emissions (from the registrant’s entire value chain) and intensity, if material, or if the registrant has a GHG emissions reduction target or goal that includes Scope 3 emissions; and

• The registrant’s climate-related targets or goals, methods employed (direct and any offsets), and transition plan, if any.

How and where is this information to be reported?

SEC proposes to require a registrant (both domestic and foreign private issuers) to:

• provide the climate-related disclosure in its registration statements and annual reports;

• provide mandated climate-related disclosure in a separate, appropriately captioned section of its registration statement or annual report, or incorporate that information in a separate, appropriately captioned section by reference from another section (such as Risk Factors, Description of Business, or Management’s Discussion and Analysis (MD&A)) (Regulation S-K);

• provide mandated climate-related financial statement financial impact metrics, expenditure metrics, and financial estimates and assumptions metrics and related disclosure (Regulation S-X);

• electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL (eXtensible Business Reporting Language) in reports required to be electronic; and

• file rather than furnish the climate-related disclosure (triggering potential liabilities for misleading or false filings).

How would the new requirements by phased in?

SEC is proposing to provide transitions with phase-in periods for some requirements:

• A phase-in for all registrants, with the compliance date dependent on the registrant’s filer status (large accelerated filer, accelerated filer, or smaller reporting company;

• An additional phase-in period for Scope 3 emissions disclosure;

• A safe harbor for Scope 3 emissions disclosure;

• An exemption from the Scope 3 emissions disclosure requirement for a registrant that qualifies as smaller reporting company.

What happens next?

SEC has called for comments on its proposed rules within 30 days after publication of the proposal in the Federal Register (pending as of this writing), but in no case later than May 22, 2022. This request for comments includes 52 specific questions about detailed elements in its proposal or as alternatives to elements of its proposal, to which it solicits responses in comments. Although SEC has not set a formal target for finalizing these rules, it consistently uses December 2022 as the example date when demonstrating deadlines associated with phase-in of reporting requirements. Public companies should begin to prepare for requirements substantially similar to those in this proposal, and non-public companies should keep in mind that investor and marketplace expectations for voluntary disclosures are likely to track these provisions.

Self-Assessment Checklist

Is the organization a “public company” subject to SEC reporting requirements?

Whether or not a public company, does the organization provide formal disclosures to shareholders, regulators, market or non-profit reporting organizations, or other stakeholders?

Has the organization assessed potential impacts of climate change on its activities and investments?

• If so, has the organization quantified any of these impacts, and assessed whether they are or woold be material to its operations and results?

• If so, is the organization undertaking efforts to adapt to these impacts by reducing negative impacts and enhancing positive impacts?

Has the organization identified which of these activities and investments are presently or potentially insured for climate-related impacts?

Where can I go for more information?

•  SEC proposal (pre-publication version on SEC website)

About the Author

Jon Elliott is President of Touchstone Environmental and has been a major contributor to STP’s product range for over 30 years. 

Mr. Elliott has a diverse educational background. In addition to his Juris Doctor (University of California, Boalt Hall School of Law, 1981), he holds a Master of Public Policy (Goldman School of Public Policy [GSPP], UC Berkeley, 1980), and a Bachelor of Science in Mechanical Engineering (Princeton University, 1977).

Mr. Elliott is active in professional and community organizations. In addition, he is a past chairman of the Board of Directors of the GSPP Alumni Association, and past member of the Executive Committee of the State Bar of California's Environmental Law Section (including past chair of its Legislative Committee).

You may contact Mr. Elliott directly at: tei@ix.netcom.com