SEC’s Climate Disclosure Proposal: Towards a Transparent and Resilient Future
February 7, 2023
Introduction
In March of 2022, the Securities and Exchange Commission (SEC) made a groundbreaking move by proposing rule changes that could revolutionize climate-related disclosures for publicly-listed companies. The proposal aims to require companies to include climate-related information in their periodic reports, such as the 10-K, as part of an effort to address the growing urgency of climate risks. This move comes in response to the increasing demand from investors and stakeholders for greater transparency on how climate-related risks can impact a company’s performance.
Financial Statement Footnote Disclosures
Under the SEC’s proposed rule, companies would be required to provide financial statement footnote disclosures related to severe weather events, natural conditions, and transition activities if the impact exceeds 1% of the related line item. These disclosures would shed light on how climate events and transition efforts could affect a company’s financial position, potentially resulting in impairment charges or increased loss reserves. Additionally, companies must report expenditures associated with mitigating climate-related risks, enabling investors to assess the effectiveness of their risk management strategies.
GHG Emissions Disclosures
The SEC’s proposal also mandates that companies disclose their greenhouse gas (GHG) emissions, including Scope 1 and Scope 2 emissions. Scope 1 emissions pertain to a company’s direct emissions from owned or controlled operations, while Scope 2 emissions refer to indirect emissions from purchased or acquired electricity, heat, or cooling. These disclosures will need to be disaggregated by each GHG and presented on both a gross basis and relative to intensity, providing a comprehensive view of a company’s carbon footprint.
Moreover, if a company has set GHG emissions targets or goals involving Scope 3 emissions (from upstream and downstream activities), or if these emissions are deemed material, the SEC requires separate disclosure of Scope 3 emissions. This move aligns with securities law safe harbor provisions, ensuring that companies provide transparent and consistent information.
Qualitative Disclosures
Beyond financial and GHG emissions disclosures, the SEC’s proposal emphasizes the importance of qualitative disclosures. Companies are expected to share insights on how climate changes have or might impact their financial position and future plans. Additionally, they must reveal their methods for identifying, reviewing, and managing climate-related risks, offering investors a glimpse into their overall risk management strategies.
Furthermore, companies using self-set carbon prices or hypothetical scenarios to assess climate risks must disclose the details of these practices. If a company has publicly shared its climate goals, the proposed rules necessitate reporting on the range of actions involved, the timeline, and yearly updates on progress and the measures taken to achieve these goals.
When and Where to Disclose Information
To comply with the proposed rule, companies would need to include climate-related disclosures in their initial statements and yearly reports. Information related to financial statements would be presented in the financial statements section, while GHG emissions data and other climate-related information would feature in a new section on the standard report form (Form 10-K).
Moreover, the proposed rules would implement a phase-in period, taking into account the registrant’s filer status. This phase-in approach aims to facilitate a smooth transition for companies while encouraging widespread adoption of climate-related disclosures.
Attestation Requirements
To enhance the credibility of climate disclosures, the SEC proposes attestation requirements for financial statement footnotes. These disclosures would be audited similarly to current financial statements, ensuring that climate-related information is subject to rigorous verification. Additionally, greenhouse gas emissions information will undergo a period of limited checks before undergoing more thorough assessments.
Conclusion
The SEC’s climate disclosure proposal marks a significant step toward achieving greater transparency and resilience in the face of climate risks. By requiring companies to disclose climate-related information in their periodic reports, investors gain valuable insights into the potential material impacts of climate risks on companies’ performance and strategies. The proposed rule aims to encourage responsible and proactive climate risk management, enabling companies to navigate the challenges of a rapidly changing world while fostering a more sustainable and prosperous future for all. As the SEC moves forward with this proposal, it brings us closer to a more transparent and sustainable business environment, setting a new standard for climate-related disclosures in the corporate world.