Enhancement and Standardization of Climate-Related Disclosures for Investors: Securities and Exchange Commission Proposed Rule | Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C.

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The Securities and Exchange Commission (“SEC”) on March 21 announced a proposed rule that would require domestic or foreign registrants to include certain climate-related information in registration statements and periodic reports.

The proposal would change the SEC’s rules under the Securities Act of 1933 and the Securities Exchange Act of 1934.

Examples of climate-related information that the SEC believes would be required:

  • Climate-related risks and their actual or likely significant impact on the registrant’s business, strategy and prospects
  • The registrant’s governance of climate-related risks and relevant risk management processes
  • The registrant’s greenhouse gas (“GHG”) emissions
  • Certain climate-related financial statement disclosures
  • Information on climate-related targets and targets and transition plan, if applicable

Registrants would also have to disclose information about:

  • Your direct GHG emissions (Scope 1)
  • Indirect emissions from purchased electricity or other forms of energy (Scope 2)
  • GHG emissions from upstream and downstream activities in their value chain (Scope 3)
  • If the registrant has set a GHG emission target or target

The SEC’s position is that:

  • It has far-reaching powers to waive disclosure requirements because they are necessary or appropriate in the public interest or to protect investors
  • It was determined that the proposed disclosure will promote efficiency, competition and capital formation
  • Requiring such disclosures about climate-related risks and metrics reflecting those risks is necessary because such information may impact the financial performance or position of publicly traded companies and may be relevant to investors when making investment or voting decisions
  • Existing disclosures on climate-related risks do not adequately protect investors, so additional disclosure requirements are needed to improve the consistency, comparability and reliability of climate-related disclosures

The SEC notes that the Financial Stability Oversight Council on Climate-Related Financial Risk 2021 report found that businesses, financial institutions, investors and households could experience direct financial impacts from climate-related risks. It also notes that the costs of such risks could be passed through supply chains and to customers if they impact companies’ ability to service debt or generate returns for investors.

Concern is expressed that such climate-related risks and their financial implications could adversely affect the economy and create systemic risk for the financial system. In response, the SEC notes that its disclosure rules are an essential part of the system for protecting investors.

The SEC lists the following as climate-related risks that could impact a company’s business and financial performance:

  • Severe and frequent natural disasters damage assets, disrupt operations and increase costs
  • Transition to lower-carbon products, practices, and services, triggered by changes in regulations, consumer preferences, availability of finance, technology, and other market forces leading to changes in a company’s business model
  • Global government commitments to transition to a lower-carbon economy to meet greenhouse gas emission reduction targets could have a significant impact on registrants

Note that the SEC issued guidance on climate-related disclosures back in 2010, as the existing rules might require disclosure of the impact of climate change on a registrant’s business and financial condition. See Commission Guidance on Disclosures Related to Climate Change, Publication No. 33-9106 (February 2, 2010), (75 Fed. Reg. 6290), (February 8, 2010).

The proposed rule provides for what is referred to as “phase-in periods and provisions” for the proposed disclosures. This includes:

  • A phase-in phase for all registrants, with the compliance date depending on the registrant’s status, an additional phase-in for scope 3 emissions disclosure
  • A phase-in phase for the assurance requirement and required assurance level for Accelerated Filers and Large Accelerated Filers
  • A Safe Haven for Scope 3 Emissions Disclosure Liability
  • A scope 3 emissions disclosure exemption for smaller reporting entities
  • Forward-looking statements are safe harbors under the Private Securities Litigation Reform Act to the extent proposed disclosures would require forward-looking statements

A link to the 510-page pre-publication of the proposed rule and preamble can be downloaded Here.

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