The US Securities and Exchange Commission on March 21, 2022, announced a long-awaited proposal to require publicly-traded companies in the US to make climate-related disclosures. Public comment on the SEC proposal is welcome until May 20, 2022.
The SEC proposal includes disclosures on companies’ direct and indirect greenhouse gas emissions, which are classified as Scope 1 and Scope 2 emissions, and also emissions by companies’ partners and suppliers – Scope 3 emissions.
Furthermore, companies also need to disclose the effect that climate-related risks have on their business and financial statements over the short, medium, and long term as well as how those risks would affect their strategy, business model, and outlook.
Companies will have to make these climate-related disclosures in their registration statements and periodic reports, including their Form 10-Ks, and Regulation S-K and S-X statements.
The March 2022 SEC proposal comes exactly a year after the Commission sought public comment “about whether current disclosures adequately inform investors” as part of its review of the then existing disclosures.
We now list a few features of the latest SEC climate-related disclosure proposal.
SEC Proposed Disclosure Frameworks
The SEC’s proposed rules incorporate the concepts and vocabulary of the Task Force on Climate-Related Financial Disclosure (TCFD) recommendations, which provide a widely-accepted sustainability reporting framework, and the Greenhouse Gas Protocol (GHG Protocol), a leading accounting and reporting standard for greenhouse gas emissions.
Additions To Regulations S-K and S-X
The SEC proposal suggests adding a new subpart to Regulation S-K, which relates to how companies disclose qualitative descriptions of their business on registration statements, periodic reports, and other filings.
Subpart 1500 to Regulation S-K would require companies to disclose information about climate-related risks that may have a likely material impact on their business or financial statements, and the GHG emissions metrics that will help investors assess such risks. A company may also include information about climate-related opportunities. The proposal also includes an attestation requirement for accelerated filers and large accelerated filers for certain disclosures made using the GHG protocol.
Furthermore, the SEC proposal also adds a new article to Regulation S-X, which relates to how registrants disclose financial statements on registration statements, periodic reports, and other filings. Article 14 of Regulation S-X proposes climate-related metrics to be included in a note to companies’ audited financial statements. Those metrics would explain climate-related impacts on the line items of financial statements and would be subject to an audit.
How The Disclosures Must Be Made
- The SEC’s proposed rule requires both domestic and foreign issuers to make climate-related disclosures in their registration statements and Exchange Act annual reports, including Form 10-K.
- Regulation S-K mandated climate disclosures must be filed as a separate section to a company’s registration statement or annual report. Regulation S-K disclosures can also be incorporated as a separate section appropriately captioned as a reference from another section such as Risk Factors, Description of Business, or Management’s Discussion and Analysis.
- Regulation S-X mandated financial statement metrics that are climate-related must be provided as a note to a company’s audited financial statements.
- Both narrative and quantitative climate disclosures need to be electronically tagged in the inline XBRL (iXBRL format).
Disclosure Timelines For Various Filers
According to the SEC proposal, the climate-related Scope 1 and Scope 2 disclosure requirements will be phased in for all companies, with the compliance date dependent on whether a company is a large accelerated filer, accelerated or non-accelerated filer, or a smaller reporting company (SRC). The phase-in also depends on the content of the companies’ climate-related disclosures.
There would be an additional phase-in period allowed for Scope 3 emissions. SRCs would be exempt from Scope 3 emissions.
Example: The SEC proposal states that if the proposed rules come into effect in December 2022 and companies’ fiscal year ends on December 31, 2022, then the compliance phase-in for proposed annual report disclosures, other than Scope 3 disclosures, would be as follows:
- Large accelerated filers would have to file their fiscal year 2023 disclosures in 2024
- Accelerated and non-accelerated filers will have to file their fiscal year 2024 disclosures in 2025
- SRCs will have to file their fiscal year 2025 disclosures in 2026
Companies subject to Scope 3 disclosure requirements will have one additional year to comply with those disclosure requirements.
We hope the above high-level overview of the SEC’s climate-related disclosure proposal would help you understand what your company can expect as far as compliance requirements are concerned.