Legal Considerations
in Responsible Investment

SEC Proposes Long-Awaited Climate Change Disclosure Rules

Following creation of a task force focusing on ESG-related disclosures more than a year ago, the SEC has issued proposed rules that will require reporting companies to disclose specific data concerning their greenhouse gas (GHG) emissions. The public will have until May 20, 2022 to submit comments concerning the proposed rules. Additional proposed rules concerning a broader array of ESG-related topics are expected later this year.

On March 21, 2022, in response to demand for consistent and comparable climate-related information that may affect companies’ financial performance, the SEC proposed amendments to its rules under the Securities Acts of 1933 and 1934 in a notice titled, “The Enhancement and Standardization of Climate-Related Disclosures for Investors” (File No. S7-10-22). The amendments, if adopted, will require registered companies to disclose certain climate-related information in their registration statements and periodic reports.

Most notably, registrants will be required to measure and disclose GHG emissions in accordance with GHG protocol methodology, which is the most widely accepted international standard for measuring GHG emissions. The proposed rules entail separate disclosure of Scope 1 GHG emissions (i.e., direct emissions) and Scope 2 GHG emissions (i.e., indirect emissions). Scope 3 GHG emissions (i.e., GHG from upstream and downstream activities) must be disclosed if they are material.  Further, reporting companies will be required to provide information about their goals to reduce GHG emissions, if any, including any targets, defined time horizons by which the targets are intended to be met, specific information about how the targets are expected to be met, and relevant data indicating any progress towards reaching such targets, with annual updates.

In addition, under proposed changes to Regulations S-K, registered companies will be required to disclose information about their controls and processes for handing climate-related risks, including (1) the registrant’s governance of climate-related risks and relevant risk management processes; (2) how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term; (3) how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and (4) the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

Issuers and investors alike have been long anticipating the dissemination of these proposed rules. On March 15, 2021, the SEC announced that it had convened a task force to study and analyze proposed new rules to address climate change-related risks, and called for public comment.  Approximately 600 unique comments, and over 3,500 form comments, were submitted from all facets of the investing community, including large and small public companies, large institutional investors, climate-change and other ESG-related advocacy groups, and individuals.

The public debate period crystallized certain questions concerning the scope and operation of the proposed new regulations, some of which the SEC has now addressed. First, the SEC has rejected a notion of “double materiality,” which would apply a different (lower) standard of materiality to climate change related disclosures, and which some European and other foreign jurisdictions have adopted. Rather, it affirmed that, to the extent a new proposed rule calls for disclosure of “material” information, the traditional notions of materiality under US jurisprudence would apply.  Second, the SEC rejected calls for a broad safe harbor from liability for the new disclosures, but did affirm that the forward-looking safe harbor applies to statements that qualify as forward-looking under the PSLRA.

This round of proposed new regulations addresses only climate change related disclosures. The SEC is expected to issue additional regulations that will speak to other ESG-related topics such as wages, equity diversity and inclusion, and other worker-related issues.

The SEC has opened up the floor for additional public opinion about the specific rules it proposed, allowing up until the later of May 20, 2022, or 30 days after publication in the Federal Register for comment.  Information about submitting a comment may be found here.

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