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SEC issues proposed rule requiring disclosures on climate-change risks

The US Securities and Exchange Commission has proposed a landmark rule that would require public companies to disclose information about climate-related material risks likely to impact their businesses and other climate-related information.

If the proposed rule is implemented, it would be the first time the SEC has required public companies to specifically disclose risks related to climate change. The SEC announced the proposed rule, titled “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” on March 21.

Generally, public companies must disclose “material risks”—those risks that a reasonable investor would consider important when making decisions on investment and company votes. This left it to companies to determine whether the risks of climate change to the business were material.

The SEC previously published guidance in 2010 on how companies should apply existing disclosure requirements to climate-change risks, but stopped short of implementing a mandatory disclosure regime specific to climate-related risks. The proposed rule would be a significant change to public companies’ disclosures obligations, as well as a departure from allowing companies to determine for themselves whether climate-related risks pose material risks to their businesses.

If the SEC adopts the proposed rule, some of the disclosures a company would be required to make include:

  • How the company plans or has planned to manage climate change-related risks and the associated processes used to manage those risks.
  • How any material climate change-related risks to the business identified by the company will likely affect its business in the future.
  • The impact of any climate change-related risks on the company’s business model, and how those impacts have changed or may change the business model and strategy.
  • How climate change-related adverse events (such as increased tornadoes, wildfires, drought, etc.) and any transitional activities taken by the company to deal with these events affect the company’s line items on its consolidated financial statements.
  • Information about Scope 1 emissions, which are “direct emissions” (those greenhouse gas emissions generated by the company through its activities such as company vehicles).
  • Information about Scope 2 emissions, which are “indirect emissions” (those greenhouse gas emissions indirectly generated by the company through activities like, for example, purchasing electricity or cooling).
  • For certain companies, information about Scope 3 emissions, which are “upstream or downstream emissions” (those emissions that result from entities that a company does not control or own, but which the company indirectly impacts such as employees’ business travel and commuting, company investments, and goods and services purchased by the company).

The proposed rule phases in the reporting requirements. Depending on the reporting requirement and the size of the company, some disclosures would be required as soon as the year after the rule took effect. Other reporting requirements would not be required for up to three years after the rule took effect.

Generally, the proposed rule does not create new standards of liability for companies that report inaccurate, misleading information or omit material information from their filings. Companies are still required to make statements that are accurate, truthful and not misleading in their reports and disclosures.

However, the proposed rule does acknowledge that some information, such as the reporting of Scope 3 downstream or upstream emissions, might pose challenges to companies that have to rely on outside entities or other second-hand information about the emissions for reporting purposes. Accordingly, the proposed rule invites comments on how to balance these requirements with the potential challenges they pose for companies.

For the proposed rule, the SEC relied in large part on the framework for disclosures proposed by the Task Force on Climate-related Financial Disclosures (“TCFD”) in a 2017 report.  The proposed rule also adopts the Greenhouse Gas Protocol’s definition of emission scopes and methodology. The Greenhouse Gas Protocol’s accounting standards and framework for measuring emissions is the standard widely used by businesses around the globe.

The SEC voted 3-1 to issue the proposed rule. The public has 60 days from publication of the proposed rule in the Federal Register to submit comments to the SEC. After the SEC reviews the comments, the commissioners will consider possible changes, then vote on the final rule.

The proposed rule offers a standardized approach for climate-related disclosures as more companies in the US and around the world have begun to provide more information to investors on their climate change-related activities and risks to the business in recent years.

When the SEC announced the proposed rule, SEC Chair Gary Gensler stated that the SEC hopes the proposed rule will help issuers more efficiently meet investors’ demands for climate change-related information, and that both companies and issuers would benefit from clear rules on climate change-related disclosures.

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