The SEC’s Proposed Climate-Related Disclosures: Post Four – Risk Management

In the first post in this series, we overviewed the three main areas addressed in the SEC’s Proposed Rule for climate-related disclosures:

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

As you may have heard and can read about in this Press Release, on May 9, 2022, the SEC extended the comment period for this proposal to June 17, 2022.

The second post in this series explored proposed governance disclosures.  The third post focused on disclosures about risks, strategy, business model and outlook.  This fourth post addresses proposed disclosures for risk management processes.  This information would be required for all companies in their annual reports on Forms 10-K and 20-F, with updates on Forms 10-Q and 6-K. These disclosures fall into the following categories:

  • Climate-related risk management processes
  • Integration of climate-related risk into overall risk management processes
  • Transition plan risk management disclosures

Climate-Related Risk Management Processes

The proposed rule would require disclosure about any processes for “identifying, assessing, and managing climate-related risks.”  Disclosure about climate-related opportunities could also be included here.  Required details in the proposed rule include information about how a company:

  • Determines the relative significance of climate-related risks compared to other risks;
  • Considers existing or likely regulatory requirements or policies, such as GHG emissions limits, when identifying climate-related risks;
  • Considers shifts in customer or counterparty preferences, technological changes, or changes in market prices in assessing potential transition risks; and
  • Determines the materiality of climate-related risks, including how it assesses the potential scope and impact of an identified climate-related risk.

Disclosures related to individual risks would include information about how a company decides whether to mitigate, accept, or adapt to a particular risk.  In addition, disclosures would be made about how a company prioritizes whether to address climate-related risks and determines how to mitigate any high priority risks.

Integration of Climate-Related Risk into Overall Risk Management Processes

Companies would be required to disclose whether climate-related risk management processes are integrated into their overall risk management process.  If climate-related risks are included in a company’s overall risk management process, disclosure would include details of this integration.  Additionally, if a separate board or management committee performs risk assessment and management of climate-related risks, disclosure would include how that committee interacts with the company’s board or management committee overseeing risk management in general.

Transition Plan Risk Management Disclosures

For companies that have adopted a transition plan as part of their climate-related risk management strategy, disclosures would include a description of the plan, including details such as any metrics and targets related to physical and transition risks.  Companies would be required to update this disclosure each fiscal year by “describing the actions taken during the year to achieve the plan’s targets or goals.”

Summary

The detailed descriptions of how climate risk is managed and how the related process is or is not integrated into a company’s overall risk management process requires a level of detail not seen in many SEC disclosure requirements.  This and other issues are likely to be the subject of comments in the SEC’s rulemaking process.  Our next post will explore the disclosures in proposed S-K Item 1506 about climate-related targets and goals.

As always, your thoughts and comments are welcome!

For reference, here is proposed S-K Item 1503:

Risk management.

(a) Describe any processes the registrant has for identifying, assessing, and managing climate-related risks. If applicable, a registrant may also describe any processes for identifying, assessing, and managing climate-related opportunities when responding to any of the provisions in this section.

(1) When describing any processes for identifying and assessing climate-related risks, disclose, as applicable, how the registrant:

(i) Determines the relative significance of climate-related risks compared to other risks;

(ii) Considers existing or likely regulatory requirements or policies, such as GHG emissions limits, when identifying climate-related risks;

(iii) Considers shifts in customer or counterparty preferences, technological changes, or changes in market prices in assessing potential transition risks; and

(iv) Determines the materiality of climate-related risks, including how it assesses the potential scope and impact of an identified climate-related risk, such as the risks identified in response to § 229.1502.

(2) When describing any processes for managing climate-related risks, disclose, as applicable, how the registrant:

(i) Decides whether to mitigate, accept, or adapt to a particular risk;

(ii) Prioritizes whether to address climate-related risks; and

(iii) Determines how to mitigate any high priority risks.

(b) Disclose whether and how any processes described in response to paragraph (a) of this section are integrated into the registrant’s overall risk management system or processes. If a separate board or management committee is responsible for assessing and managing climate-elated risks, a registrant should disclose how that committee interacts with the registrant’s board or management committee governing risks.

(c)(1) If the registrant has adopted a transition plan as part of its climate-related risk management strategy, describe the plan, including the relevant metrics and targets used to identify and manage any physical and transition risks. To allow for an understanding of the registrant’s progress to meet the plan’s targets or goals over time, a registrant must update its disclosure about the transition plan each fiscal year by describing the actions taken during the year to achieve the plan’s targets or goals.

(2) If the registrant has adopted a transition plan, discuss, as applicable:

(i) How the registrant plans to mitigate or adapt to any identified physical risks, including but not limited to those concerning energy, land, or water use and management;

(ii) How the registrant plans to mitigate or adapt to any identified transition risks, including the following:

(A) Laws, regulations, or policies that:

(1) Restrict GHG emissions or products with high GHG footprints, including emissions caps; or

(2) Require the protection of high conservation value land or natural assets;

(B) Imposition of a carbon price; and

(C) Changing demands or preferences of consumers, investors, employees, and business counterparties.

(3) If applicable, a registrant that has adopted a transition plan as part of its climate-related risk management strategy may also describe how it plans to achieve any identified climate-related opportunities, such as:

(i) The production of products that may facilitate the transition to a lower carbon economy, such as low emission modes of transportation and supporting infrastructure;

(ii) The generation or use of renewable power;

(iii) The production or use of low waste, recycled, or other consumer products that require less carbon intensive production methods;

(iv) The setting of conservation goals and targets that would help reduce GHG emissions; and

(v) The provision of services related to any transition to a lower carbon economy.

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