The SEC’s Proposed Climate-Related Disclosures – First in a New Series

With its March 21, 2022, proposal for extensive climate-related disclosures, the SEC intensified an already active discussion about how companies should provide climate-related information.  The Proposed Rule, as described in this Fact Sheet, is far reaching and complex.  It would bring SEC reporting into entirely new realms.

In this series of blog posts, we are going to first explore the overall objectives and “big picture” of the proposal.  After this “40,000-foot flyover” we will deep-dive into the details of each major area addressed by the proposed disclosures.  We will break each provision into its component parts and explore implications for reporting.

This series of blog posts will also accompany several SEC Institute One-Hour Briefings about the proposed rule.  You can find information and links to each briefing in this blog post.

This first post provides an overview of the proposal and previews subsequent posts.

To begin, the proposed disclosures would be required in annual reports on Form 10-K and 20-F with updates in Forms 10-Q and 6-K.  They would also be required in registration statements under the 1933 Act, in particular Form S-1.  The disclosures would be required for all reporting companies, including smaller reporting companies and emerging growth companies.  Smaller reporting companies are excepted from the Scope 3 disclosure requirements and non-accelerated filers are excepted from the greenhouse gas attestation report requirements.  (Asset-backed issuers would not be required to make these disclosures.)

The proposed disclosures fall into three broad areas:

  • Governance, strategy, risk and related disclosures outside the financial statements
  • Greenhouse gas emission disclosures and attestation requirements
  • Financial statement disclosures

Governance, Strategy, Risk and Related Disclosures

These non-financial statement disclosures would start with this Form 10-K instruction, solving the mystery of what Item 6 has been reserved for:

  • Item 6. Climate-Related Disclosure
    • Provide the disclosure required by Subpart 1500 of Regulation S-K (17 CFR 229.1500 through 229.1507) in a part of the annual report that is separately captioned as Climate-Related Disclosure.

The proposed new Subpart 1500 to regulation S-K would include these Items:

  • Regulation S-K Subpart 1500—Climate-Related Disclosure
    • Item 1500 Definitions
    • Item 1501 Governance
    • Item 1502 Strategy, business model, and outlook
    • Item 1503 Risk management
    • Item 1504 GHG emissions metrics
    • Item 1505 Attestation of Scope 1 and Scope 2 emissions disclosure
    • Item 1506 Targets and goals
    • Item 1507 Interactive data requirement

(Items 1504 and 1505 related to greenhouse gas emissions are discussed in a separate section below.)

The first part of the proposed addition to regulation S-K Subpart 1500 would define many terms, including:

  • Climate-related risks
  • Climate-related opportunities
  • Carbon offsets
  • Transition risks
  • Scenario analysis
  • Scope 1, 2 and 3 emissions
  • Value chain

Proposed disclosures include:

  • Climate-related risks
  • Board oversight of climate issues
  • Board climate-related expertise
  • Management of climate issues
  • Climate-related risk management disclosures
  • Climate-related targets and goals

These new non-financial statement disclosures would be subject to disclosure controls and procedures.  In addition, these new disclosures would be subject to Inline XBRL tagging.

 We will explore each of these areas in subsequent posts.

Greenhouse Gas Emission Disclosures and Related Attestation Requirements

  • These new disclosures are included in Regulation S-K Items:
    • 1504 GHG emissions metrics
    • 1505 Attestation of Scope 1 and Scope 2 emissions disclosure

The proposal would define greenhouse gases and Scope 1, 2 and 3 emissions in S-K Item 1500.  These definitions are essentially consistent with those in the Greenhouse Gas Protocol.

(p) Scope 1 emissions are direct GHG emissions from operations that are owned or controlled by a registrant.

(q) Scope 2 emissions are indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a registrant.

(r) Scope 3 emissions are all indirect GHG emissions not otherwise included in a registrant’s Scope 2 emissions, which occur in the upstream and downstream activities of a registrant’s value chain.

(1) Upstream activities in which Scope 3 emissions might occur include:

(i) A registrant’s purchased goods and services;

(ii) A registrant’s capital goods;

(iii) A registrant’s fuel and energy related activities not included in Scope 1 or Scope 2 emissions;

(iv) Transportation and distribution of purchased goods, raw materials, and other inputs;

(v) Waste generated in a registrant’s operations;

(vi) Business travel by a registrant’s employees;

(vii) Employee commuting by a registrant’s employees; and

(viii) A registrant’s leased assets related principally to purchased or acquired goods or services.

(2) Downstream activities in which Scope 3 emissions might occur include:

(i) Transportation and distribution of a registrant’s sold products, goods or other outputs;

(ii) Processing by a third party of a registrant’s sold products;

(iii) Use by a third party of a registrant’s sold products;

(iv) End-of-life treatment by a third party of a registrant’s sold products;

(v) A registrant’s leased assets related principally to the sale or disposition of goods or services;

(vi) A registrant’s franchises; and

(vii) Investments by a registrant

Measuring Scope 1, 2 and 3 emissions will clearly involve complex estimation and engineering challenges.  The proposed rule does not specify measurement methodologies but does require disclosure about measurement processes.

Companies would be required to report Scope 1 and Scope 2 emissions.  In addition, companies, except for smaller reporting companies, would be required to report Scope 3 emissions if material or if the company has published a target for such emissions.

Accelerated and large-accelerated filers would also be required to provide an attestation report about their Scope 1 and 2 emissions.  The proposed rule provides requirements for the attestation report and for the entity providing the attestation report.

The attestation report would be phased in the first two years providing limited assurance and reasonable assurance after the initial period.

We will explore each of these areas in subsequent posts.

Financial Statement Disclosures

Climate-related financial statement disclosure requirements would be provided by a new Article 14 in Regulation S-X.  This new Article would include:

  • Rule 14-01 Climate-related disclosure instructions
  • Rule 14-02 Climate-related metrics

Included in these disclosures would be information about:

  • Financial impacts of severe weather events and other natural conditions
  • Financial impacts related to transition activities
  • Financial estimates and assumptions impacted by severe weather events and other natural conditions
  • Expenditures to mitigate risks of severe weather events and other natural conditions

Generally, disclosure would be required when the absolute value of any of the provided climate metrics is over 1% of the related financial statement line-item.

These disclosures would be included in a company’s internal control over financial reporting

They would also be included in a company’s annual audit.

We will explore each of these areas in subsequent posts.

Proposed Transition Provisions

The transition provisions are complex.  The proposed rule includes this schedule, which assumes a company has a calendar year-end:

 Climate Transition One

 Climate Transition Two

If you have any specific questions or issues you would like future posts to address, please put them in the comments section.

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