{"id":2177,"date":"2022-04-28T07:55:00","date_gmt":"2022-04-28T11:55:00","guid":{"rendered":"https:\/\/seci.wpenginepowered.com\/?p=2177"},"modified":"2022-04-28T07:55:00","modified_gmt":"2022-04-28T11:55:00","slug":"the-secs-proposed-climate-related-disclosures-first-in-a-new-series","status":"publish","type":"post","link":"https:\/\/seciblog.pli.edu\/index.php\/the-secs-proposed-climate-related-disclosures-first-in-a-new-series\/","title":{"rendered":"The SEC\u2019s Proposed Climate-Related Disclosures \u2013 First in a New Series"},"content":{"rendered":"<p style=\"font-weight: 400;\">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.\u00a0 The <a href=\"https:\/\/www.sec.gov\/rules\/proposed\/2022\/33-11042.pdf\">Proposed Rule<\/a>, as described in this <a href=\"https:\/\/www.sec.gov\/files\/33-11042-fact-sheet.pdf\">Fact Sheet<\/a>, is far reaching and complex.\u00a0 It would bring SEC reporting into entirely new realms.<\/p>\n<p style=\"font-weight: 400;\">In this series of blog posts, we are going to first explore the overall objectives and \u201cbig picture\u201d of the proposal.\u00a0 After this \u201c40,000-foot flyover\u201d we will deep-dive into the details of each major area addressed by the proposed disclosures.\u00a0 We will break each provision into its component parts and explore implications for reporting.<\/p>\n<p style=\"font-weight: 400;\">This series of blog posts will also accompany several SEC Institute One-Hour Briefings about the proposed rule.\u00a0 You can find information and links to each briefing in <a href=\"https:\/\/seciblog.pli.edu\/?p=2172\">this blog post<\/a>.<\/p>\n<p style=\"font-weight: 400;\">This first post provides an overview of the proposal and previews subsequent posts.<\/p>\n<p style=\"font-weight: 400;\">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.\u00a0 They would also be required in registration statements under the 1933 Act, in particular Form S-1.\u00a0 The disclosures would be required for all reporting companies, including smaller reporting companies and emerging growth companies.\u00a0 Smaller reporting companies are excepted from the Scope 3 disclosure requirements and non-accelerated filers are excepted from the greenhouse gas attestation report requirements.\u00a0 (Asset-backed issuers would not be required to make these disclosures.)<\/p>\n<p style=\"font-weight: 400;\">The proposed disclosures fall into three broad areas:<\/p>\n<ul>\n<li>Governance, strategy, risk and related disclosures outside the financial statements<\/li>\n<li>Greenhouse gas emission disclosures and attestation requirements<\/li>\n<li>Financial statement disclosures<\/li>\n<\/ul>\n<p style=\"font-weight: 400;\"><strong>Governance, Strategy, Risk and Related Disclosures<\/strong><\/p>\n<p style=\"font-weight: 400;\">These non-financial statement disclosures would start with this Form 10-K instruction, solving the mystery of what Item 6 has been reserved for:<\/p>\n<ul>\n<li>Item 6. Climate-Related Disclosure\n<ul>\n<li>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 <em>Climate-Related Disclosure<\/em>.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p style=\"font-weight: 400;\">The proposed new Subpart 1500 to regulation S-K would include these Items:<\/p>\n<ul>\n<li>Regulation S-K Subpart 1500\u2014Climate-Related Disclosure\n<ul>\n<li>Item 1500 Definitions<\/li>\n<li>Item 1501 Governance<\/li>\n<li>Item 1502 Strategy, business model, and outlook<\/li>\n<li>Item 1503 Risk management<\/li>\n<li>Item 1504 GHG emissions metrics<\/li>\n<li>Item 1505 Attestation of Scope 1 and Scope 2 emissions disclosure<\/li>\n<li>Item 1506 Targets and goals<\/li>\n<li>Item 1507 Interactive data requirement<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p style=\"font-weight: 400;\">(Items 1504 and 1505 related to greenhouse gas emissions are discussed in a separate section below.)<\/p>\n<p style=\"font-weight: 400;\">The first part of the proposed addition to regulation S-K Subpart 1500 would define many terms, including:<\/p>\n<ul>\n<li>Climate-related risks<\/li>\n<li>Climate-related opportunities<\/li>\n<li>Carbon offsets<\/li>\n<li>Transition risks<\/li>\n<li>Scenario analysis<\/li>\n<li>Scope 1, 2 and 3 emissions<\/li>\n<li>Value chain<\/li>\n<\/ul>\n<p style=\"font-weight: 400;\">Proposed disclosures include:<\/p>\n<ul>\n<li>Climate-related risks<\/li>\n<li>Board oversight of climate issues<\/li>\n<li>Board climate-related expertise<\/li>\n<li>Management of climate issues<\/li>\n<li>Climate-related risk management disclosures<\/li>\n<li>Climate-related targets and goals<\/li>\n<\/ul>\n<p style=\"font-weight: 400;\">These new non-financial statement disclosures would be subject to disclosure controls and procedures.\u00a0 In addition, these new disclosures would be subject to Inline XBRL tagging.<\/p>\n<p style=\"font-weight: 400;\">\u00a0We will explore each of these areas in subsequent posts.<\/p>\n<p style=\"font-weight: 400;\"><strong>Greenhouse Gas Emission Disclosures and Related Attestation Requirements<\/strong><\/p>\n<ul>\n<li>These new disclosures are included in Regulation S-K Items:\n<ul>\n<li>1504 GHG emissions metrics<\/li>\n<li>1505 Attestation of Scope 1 and Scope 2 emissions disclosure<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p style=\"font-weight: 400;\">The proposal would define greenhouse gases and Scope 1, 2 and 3 emissions in S-K Item 1500.\u00a0 These definitions are essentially consistent with those in the Greenhouse Gas Protocol.<\/p>\n<p style=\"font-weight: 400; padding-left: 30px;\">(p<strong>) Scope 1 emissions<\/strong> are direct GHG emissions from operations that are owned or controlled by a registrant.<\/p>\n<p style=\"font-weight: 400; padding-left: 30px;\">(q) <strong>Scope 2 emissions<\/strong> 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.<\/p>\n<p style=\"font-weight: 400; padding-left: 30px;\">(r) <strong>Scope 3 emissions<\/strong> are all indirect GHG emissions not otherwise included in a registrant\u2019s Scope 2 emissions, which occur in the upstream and downstream activities of a registrant\u2019s value chain.<\/p>\n<p style=\"font-weight: 400; padding-left: 30px;\">(1) Upstream activities in which Scope 3 emissions might occur include:<\/p>\n<p style=\"font-weight: 400; padding-left: 60px;\">(i) A registrant\u2019s purchased goods and services;<\/p>\n<p style=\"font-weight: 400; padding-left: 60px;\">(ii) A registrant\u2019s capital goods;<\/p>\n<p style=\"font-weight: 400; padding-left: 60px;\">(iii) A registrant\u2019s fuel and energy related activities not included in Scope 1 or Scope 2 emissions;<\/p>\n<p style=\"font-weight: 400; padding-left: 60px;\">(iv) Transportation and distribution of purchased goods, raw materials, and other inputs;<\/p>\n<p style=\"font-weight: 400; padding-left: 60px;\">(v) Waste generated in a registrant\u2019s operations;<\/p>\n<p style=\"font-weight: 400; padding-left: 60px;\">(vi) Business travel by a registrant\u2019s employees;<\/p>\n<p style=\"font-weight: 400; padding-left: 60px;\">(vii) Employee commuting by a registrant\u2019s employees; and<\/p>\n<p style=\"font-weight: 400; padding-left: 60px;\">(viii) A registrant\u2019s leased assets related principally to purchased or acquired goods or services.<\/p>\n<p style=\"font-weight: 400; padding-left: 30px;\">(2) Downstream activities in which Scope 3 emissions might occur include:<\/p>\n<p style=\"font-weight: 400; padding-left: 60px;\">(i) Transportation and distribution of a registrant\u2019s sold products, goods or other outputs;<\/p>\n<p style=\"font-weight: 400; padding-left: 60px;\">(ii) Processing by a third party of a registrant\u2019s sold products;<\/p>\n<p style=\"font-weight: 400; padding-left: 60px;\">(iii) Use by a third party of a registrant\u2019s sold products;<\/p>\n<p style=\"font-weight: 400; padding-left: 60px;\">(iv) End-of-life treatment by a third party of a registrant\u2019s sold products;<\/p>\n<p style=\"font-weight: 400; padding-left: 60px;\">(v) A registrant\u2019s leased assets related principally to the sale or disposition of goods or services;<\/p>\n<p style=\"font-weight: 400; padding-left: 60px;\">(vi) A registrant\u2019s franchises; and<\/p>\n<p style=\"font-weight: 400; padding-left: 60px;\">(vii) Investments by a registrant<\/p>\n<p style=\"font-weight: 400;\">Measuring Scope 1, 2 and 3 emissions will clearly involve complex estimation and engineering challenges.\u00a0 The proposed rule does not specify measurement methodologies but does require disclosure about measurement processes.<\/p>\n<p style=\"font-weight: 400;\">Companies would be required to report Scope 1 and Scope 2 emissions.\u00a0 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.<\/p>\n<p style=\"font-weight: 400;\">Accelerated and large-accelerated filers would also be required to provide an attestation report about their Scope 1 and 2 emissions.\u00a0 The proposed rule provides requirements for the attestation report and for the entity providing the attestation report.<\/p>\n<p style=\"font-weight: 400;\">The attestation report would be phased in the first two years providing limited assurance and reasonable assurance after the initial period.<\/p>\n<p style=\"font-weight: 400;\">We will explore each of these areas in subsequent posts.<\/p>\n<p style=\"font-weight: 400;\"><strong>Financial Statement Disclosures<\/strong><\/p>\n<p style=\"font-weight: 400;\">Climate-related financial statement disclosure requirements would be provided by a new Article 14 in Regulation S-X.\u00a0 This new Article would include:<\/p>\n<ul>\n<li>Rule 14-01 Climate-related disclosure instructions<\/li>\n<li>Rule 14-02 Climate-related metrics<\/li>\n<\/ul>\n<p style=\"font-weight: 400;\">Included in these disclosures would be information about:<\/p>\n<ul>\n<li>Financial impacts of severe weather events and other natural conditions<\/li>\n<li>Financial impacts related to transition activities<\/li>\n<li>Financial estimates and assumptions impacted by severe weather events and other natural conditions<\/li>\n<li>Expenditures to mitigate risks of severe weather events and other natural conditions<\/li>\n<\/ul>\n<p style=\"font-weight: 400;\">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.<\/p>\n<p style=\"font-weight: 400;\">These disclosures would be included in a company\u2019s internal control over financial reporting<\/p>\n<p style=\"font-weight: 400;\">They would also be included in a company\u2019s annual audit.<\/p>\n<p style=\"font-weight: 400;\">We will explore each of these areas in subsequent posts.<\/p>\n<p style=\"font-weight: 400;\"><strong>Proposed Transition Provisions<\/strong><\/p>\n<p style=\"font-weight: 400;\">The transition provisions are complex.\u00a0 The proposed rule includes this schedule, which assumes a company has a calendar year-end:<\/p>\n<p style=\"font-weight: 400;\">\u00a0<a href=\"https:\/\/seciblog.pli.edu\/wp-content\/uploads\/Climate-Transition-One.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-large wp-image-2175\" src=\"https:\/\/seciblog.pli.edu\/wp-content\/uploads\/Climate-Transition-One-1024x436.png\" alt=\"Climate Transition One\" width=\"604\" height=\"257\" srcset=\"https:\/\/seciblog.pli.edu\/wp-content\/uploads\/Climate-Transition-One-1024x436.png 1024w, https:\/\/seciblog.pli.edu\/wp-content\/uploads\/Climate-Transition-One-150x64.png 150w, https:\/\/seciblog.pli.edu\/wp-content\/uploads\/Climate-Transition-One-250x106.png 250w, https:\/\/seciblog.pli.edu\/wp-content\/uploads\/Climate-Transition-One.png 1696w\" sizes=\"auto, (max-width: 604px) 100vw, 604px\" \/><\/a><\/p>\n<p style=\"font-weight: 400;\">\u00a0<a href=\"https:\/\/seciblog.pli.edu\/wp-content\/uploads\/Climate-Transition-Two.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-large wp-image-2176\" src=\"https:\/\/seciblog.pli.edu\/wp-content\/uploads\/Climate-Transition-Two-1024x290.png\" alt=\"Climate Transition Two\" width=\"604\" height=\"171\" srcset=\"https:\/\/seciblog.pli.edu\/wp-content\/uploads\/Climate-Transition-Two-1024x290.png 1024w, https:\/\/seciblog.pli.edu\/wp-content\/uploads\/Climate-Transition-Two-150x42.png 150w, https:\/\/seciblog.pli.edu\/wp-content\/uploads\/Climate-Transition-Two-250x71.png 250w, https:\/\/seciblog.pli.edu\/wp-content\/uploads\/Climate-Transition-Two.png 1562w\" sizes=\"auto, (max-width: 604px) 100vw, 604px\" \/><\/a><\/p>\n<p style=\"font-weight: 400;\">If you have any specific questions or issues you would like future posts to address, please put them in the comments section.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>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.\u00a0 The Proposed Rule, as described in this Fact Sheet, is far reaching and complex.\u00a0 It would bring SEC reporting into entirely new realms. In this series of blog posts, we are &hellip; <a href=\"https:\/\/seciblog.pli.edu\/index.php\/the-secs-proposed-climate-related-disclosures-first-in-a-new-series\/\" class=\"more-link\">Continue reading <span class=\"screen-reader-text\">The SEC\u2019s Proposed Climate-Related Disclosures \u2013 First in a New Series<\/span> <span class=\"meta-nav\">&rarr;<\/span><\/a><\/p>\n","protected":false},"author":9,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"_wpas_customize_per_network":false},"categories":[1],"tags":[],"coauthors":[154],"class_list":["post-2177","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"post_mailing_queue_ids":[],"_links":{"self":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/posts\/2177","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/users\/9"}],"replies":[{"embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/comments?post=2177"}],"version-history":[{"count":0,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/posts\/2177\/revisions"}],"wp:attachment":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/media?parent=2177"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/categories?post=2177"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/tags?post=2177"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/coauthors?post=2177"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}