On March 22, 2022, the Securities and Exchange Commission (the "SEC" or the "Commission") voted 3-1 to propose rules requiring registrants to provide additional climate-related information in their registration statements and annual reports, including in their financial statements.1 The Proposing Release provides that disclosure of this information would provide consistent, comparable, and reliable information to investors to help them make judgments about the impact of climate risks on current and potential investments.2 The proposed amendments are modeled in large part on the recommendations of the Task Force on Climate-Related Financial Disclosures ("TCFD")3 and the Greenhouse Gas Protocol.4
The Proposing Release provides that the proposed amendments set forth therein would supplement (rather than replace) the disclosures already required in SEC filings and that registrants should thus continue to assess whether disclosure of climate risks is still required in MD&A, Description of Business, Risk Factors or Legal Proceedings as per exiting guidance.5
Proposed Amendments.
The Proposing Release sets forth proposed rules dealing with (i) Climate-Related Disclosure, (ii) Climate-Related Impacts, (iii) Governance, (iv) Risk Management, (v) Financial Statement Metrics, (vi) GHG Emissions, (vii) Attestation of Scope 1 and Scope 2 Emissions Disclosures, and (viii) Targets and Goals.
- Climate-Related Disclosure
General. The proposed climate-related disclosures described below would apply to a registrant with Exchange Act reporting obligations pursuant to Section 13(a) or Section 15(d) and companies filing a Securities Act or Exchange Act registration statement. Thus, the climate-related disclosures and the proposed financial statement metrics would be required in Securities Act or Exchange Act registration statements and Exchange Act annual reports. The proposed rules would also require registrants to disclose any material change to the climate-related disclosure provided in a registration statement or annual report in its Form 10-Q.6
The climate-related disclosures would be required to be included in such statements and reports in a separately captioned "Climate-Related Disclosure" section and in the financial statements.7 A registrant would be able to incorporate by reference disclosure from other parts of the registration statement or annual report and, in most cases, from other filed or submitted reports into the "Climate-Related Disclosure" section.8
Disclosure of Risks. The proposed rules would require a registrant to disclose any climate-related risks reasonably likely to have a material impact on the registrant, including on its business or consolidated financial statements, which may arise over the short, medium and long term. "Climate-related risks" mean the actual or potential negative impacts of climate-related conditions and events on a registrant's operations, financial statements or value chains, as a whole. "Value chain" means the upstream and downstream activities related to a registrant's operations, with "upstream activities" defined to include activities by a third party that relate to the initial stages of production and "downstream activities" defined to include activities by a third party that relate to processing material into a finished product and delivery of a good or service to the end user.9 Thus, as defined, climate-related risks extend beyond a registrant's own operations to those of its suppliers and distributors.
As to determinations of materiality, the Proposing Release provides that when assessing the materiality of a particular risk, management should consider the magnitude and probability of the risk over the short, medium, and long term. 10
The proposed rules would require a registrant to specify whether an identified climate-related risk is a physical or transition risk and the registrant's plan to mitigate the risk. If a physical risk, the proposed rules would require a registrant to describe the nature of the risk, including whether it is as an acute or a chronic risk.11 If an identified physical risk is likely to have a material impact on the registrant's business or financial statements, the registrant would be required to include in its description the location (by zip code or, if not available, by postal zone or geographic location) of the properties, processes, or operations subject to the physical risk.12
For example, if flooding presents a material physical risk, the proposed rules would require a registrant to disclose the percentage of buildings, plants, or properties that are located in flood hazard areas, and their location.
The proposed rules would also require a registrant to describe the nature of transition risks, including whether they relate to regulatory, market, technological, or other transition-related factors, and how those factors impact the registrant.13
A registrant is also permitted but not required to disclose information about any "climate-related opportunities" it may be pursuing. "Climate-related opportunities" are defined as the actual or potential positive impacts of climate-related conditions and events on the registrant's financial statements, business operations, or value chains, as a whole.14
To read the full article, please click here.
Footnotes
1. See The Enhancement and Standardization of Climate-Related Disclosures for Investors (Mar. 22, 2022) (the "Proposing Release").
2. Id. at p. 7.
3. The TCFD was created in 2015 by the Financial Stability Board to develop climate-related financial risk disclosures for use by companies and investors. The TCFD has established a disclosure framework by which to evaluate material-climate-related risks through an assessment of their financial impacts on a registrant. Id. at p. 37.
4. This is an accounting and reporting standard for greenhouse gas ("GHG") emissions created through a partnership between the World Resources Institute and the World Business Center for Sustainable Development. Id. at p. 40.
5. See Proposing Release at p. 18. In 1971, the Commission first addressed disclosure of material environmental risks when it issued an interpretative release providing that registrants should consider disclosure of the financial impact of compliance with environmental laws. See Release No. 33-5170 (July 19, 1971). In 1982, the Commission adopted rules mandating disclosure of costs arising out of compliance with environmental laws. See Release No. 33-6383 (Mar. 3, 1982). In 2010, the Commission issued guidance as to how the SEC's existing disclosure rules may require disclosure of the impacts of climate change on a registrant's business or financial condition. See Commission Guidance Regarding Disclosure Related to Climate Change, Release No. 33-9106 (Feb. 2, 2010).
6. Id. at p. 285. Many of the climate-related disclosure rules are also applicable to foreign private issuers. Id. at 286.
7. The climate-related disclosure rules would be included in Regulation S-K and Regulation S-X. Id. at p. 55.
8. Id. at p. 55.
9. Id. at pp. 60-61.
10. Id. at pp. 69-71.
11. "Physical risk," "transition risk," "acute risk," and "chronic risk" are defined in the Proposing Release. Id. at pp. 61-63.
12. Id. at pp. 61-64.
13. Id. at p. 66.
14. Id. at p. 67.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
