SEC Proposes Rules to Require Climate-Related Disclosures | Alston & Bird

The Securities and Exchange Commission recognizes increasing investor interest in environmental, social and governance issues and is taking action to standardize ESG disclosures. Our Securities Group summarizes what applicants can expect from the SEC’s construction of a specific legal framework for disclosure of climate-related commitments, risks and data.

  • The proposed rules include examples of required climate-related disclosures
  • Materiality is an important component in determining what needs to be disclosed
  • Phase-in periods vary based on applicant status

On March 21, 2022, the Securities and Exchange Commission (SEC) proposed rule changes that would “improve and standardize” climate-related disclosures. These proposed changes are the next step in the Biden administration’s ongoing drive for increased climate-related disclosure requirements and represent a significant step toward increased disclosure requirements.

The SEC proposed changes to regulations SK and SX that would require foreign and domestic registrants to provide more information about climate risks, greenhouse gas (GHG) emissions and energy transition activities in disclosures in both periodic reports and financial statements. The proposed changes would require disclosure of Scope 1, Scope 2 and, if material, Scope 3 GHG emissions. The commissioners voted 3 to 1 to propose the changes discussed, with Hester Peirce voting against.


Climate change has become a growing concern for the SEC, investors, and the general public. The Biden administration and the SEC have encouraged companies to provide higher levels of climate-related disclosure to better inform investors about climate risks. On February 24, 2021, Acting Chairman Allison Herren Lee directed the Division of Corporation Finance (DCF) to increase its focus on such disclosure, and a few weeks later the SEC announced the creation of the Climate and Environmental, Social, and Governance ( ESG) task force.

On September 22, 2021, DCF staff released a sample comment letter with examples of possible comments staff could leave to request specific climate risk information in SEC filings.1

These proposed changes are the SEC’s next step in creating a concrete legal framework for disclosure of climate-related commitments, risks and data. Although a significant number of companies voluntarily provide similar disclosures under other standards, such as the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol, the proposed changes – those based on the TCFD framework and the GHG Protocol Build – mark a significant departure from the current legal landscape by standardizing and imposing requirements for all registrants and requiring a significant amount of new information for registrants.

Summary of proposed rule changes

  • The proposed changes would require disclosure of information about direct GHG emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2).
  • Noting the challenges of calculating, verifying and reporting Scope 3 emissions (GHG emissions from activities upstream and downstream in a registrant’s value chain, most of which come from third parties), the SEC is proposing a tailor-made liability safe harbour the disclosure of Scope 3 emissions. and delayed fulfillment dates.
  • A registrant that is not a minor reporting company would also need to disclose Scope 3 emissions if they are material or if the registrant has set a GHG emissions target or target that includes Scope 3 emissions.
  • The proposed changes would require a registrant to:
    • Providing climate-related disclosures in its registration statements and Exchange Act annual reports.
    • Provision of Regulation SX climate-related accounting measures and related disclosures in a note to its consolidated financial statements.

Examples of climate-related information that a registrant would need to submit include:

  • A description of significant climate-related risks and their actual or likely significant impact on the registrant’s business (short, medium and long term) and the processes a registrant uses to identify, assess and manage such risks.
  • A description of a registrant’s governance of climate-related risks and relevant risk management processes.
  • Assessments of how climate change and climate policies will impact a registrant’s financial results, operations and business strategy.
  • Costs, risks and impacts of energy transition activities, as far as companies and the state strive for the transition to a climate-neutral economy.
  • Information on scenario analysis when a registrant uses such an analysis to assess its business strategy related to climate-related risks.
  • Information about a registrant’s internal carbon price, if used, e.g. B. for assessments of climate-related risks and opportunities, energy efficiency measures and capital investments.
  • Scope 1 and Scope 2 greenhouse gas emissions, broken down by greenhouse gas and aggregated, in absolute numbers without offset and in terms of intensity.
  • Scope 3 GHG emissions where material or where a registrant’s target includes such emissions.
  • Physical and financial impacts of climate-related events.
  • The registrant’s climate and emissions targets and related strategies, timelines and progress indicators, including:
    • The scope of activities included.
    • Relevant data to indicate progress status and updates.
    • Certain information about carbon offsets or renewable energy certificates, including the associated CO2 reduction, when used as part of a net emissions reduction strategy.

Materiality Provisions

Materiality is said to be the lens through which a company should consider the impact of climate change on its business as part of proposed changes, including whether Scope 3 emissions are material to its business.

Although the proposed changes refer to the traditional definition of materiality,2 The SEC believes there is a significant likelihood that a reasonable investor will consider the impact of climate change important when deciding whether to buy or sell securities or how to vote. Therefore, the SEC has placed great emphasis on a registrant’s individual materiality assessment. The determination of materiality is largely fact-specific and requires quantitative and qualitative considerations. A materiality determination for uncertain future events requires an assessment of both the likelihood of the event occurring and its potential magnitude or importance to the registrant, which is particularly problematic for the potential impacts of climate change over long time horizons. Therefore, it is ultimately up to a registrant to determine whether specific climate risks, scope 3 emissions or other information achieve the level of materiality that would justify disclosure.

While many of the proposed changes address the issue of materiality, other sections would be essential, such as: B. Disclosure of Scope 1 and Scope 2 greenhouse gas emissions.

Phase-in periods and compliance dates

The table below lists the phase-in timeframes and compliance dates for companies with each applicant status when the proposed changes are accepted. If accepted, the final rule would come into effect one year after the date of acceptance. The proposed transition periods would allow existing expedited applicants and large expedited applicants one fiscal year to transition to providing limited assurance and two additional fiscal years to transition to providing adequate assurance. The data below assumes a December 2022 launch date.

Next Steps

It will likely take months for final rules to be adopted and the proposals are predicted to spark fierce opposition, including legal challenges. The proposed changes can be published in the until May 20, 2022 or 60 days after publication federal register.

After the comment period has passed, the proposed changes may be revised before voting again. Regardless of the bottom line, companies should review their climate-related disclosure policies and ensure they are prepared to comply with increased disclosure thresholds where necessary.

2 See 17 CFR 240.12b-2 (definition of “material”).

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