REPORTING
SEC Climate Disclosures
July 2, 2022
Article Highlights
The new rule proposed by the U.S. Securities and Exchange Commission (SEC), if adopted would require public companies (registrants under SEC) to outline climate-related information in the registration statements and annual reports.
Required disclosure under three categories - (1) material impacts, (2) emissions and (3) targets and transition plans.
On March 21, 2022, the SEC proposed a new rule titled “The Enhancement and Standardization of Climate-Related Disclosures for Investors” that if adopted would require public companies (registrants under SEC) to outline climate-related information in the registration statements and annual reports include emissions, climate-related risks and net zero plans.
The SEC has recognized that a standard needs to be set for climate-related disclosures in order to assist investors with their investment and voting decisions. The SEC considers its job to protect investors and help make sure resources are allocated fairly and efficiently by outlining disclosure ground-rules. By setting ground-rules, the SEC works to ensure the effective operation of the market and investors.
The aim of SEC’s proposed climate-related disclosures is to improve data and assist investors to make better informed decisions.
Background
The proposed rule has been brought about in the context of the growth in climate action and standardization of climate-related disclosures. Canada, United Kingdom, Japan, New Zealand, Hong Kong and the European Union are all moving to adopt measures that are similar. In 2021, the Task Force on Climate-related Financial Disclosures (TCFD) had 2,600 companies across the world obtain voluntary guidance. In the past year, the International Sustainability Standards Board has been created by the International Financial Reporting Standards Foundation (IFRS).
Disclosure Requirements
The proposed rule requires disclosure under three categories:
Material Climate Impacts
Emissions
Targets and Transition Plans
1. Material Climate Impacts
The proposed rule would require public companies to outline climate-relate disclosures with respect to operational impacts, strategic impacts and financial impacts. It would also need to outline how the company plans to manage these risks with respect to governance and risk management.
2. Emissions
The Scope 1 and Scope 2 emissions would be required to be audited. The Scope 3 emissions are required to be disclosed if (1) material or (2) the public company established a target.
3. Targets and Transition Plans
The proposed rule would require disclosure of any targets or transition plans to reach those targets. The disclosure with respect to transition plans to reach targets would include disclosure related to renewable-energy credits and offsets.
Adoption
If the proposed rules take effect, the proposed rule would require climate-related disclosure requirements to certain companies.
US 10-K filers are subject to the SEC rules. Foreign private issuers that file 20-F forms with the SEC are also subject to the rulesC. Large Companies are to the proposed disclose information as of fiscal year 2023 - so the filing year would be 2024. Smaller companies are given under the proposed rule one year long grace period until 2024.
Key Takeaways
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