Worldwide: SEC Approves Landmark Climate-Related Disclosure Rules

On March 6, 2024, the U.S. Securities and Exchange Commission (the "SEC") adopted its long-awaited final climate-related disclosure rules S7-10-22 – The Enhancement and Standardization of Climate-Related Disclosures for Investors (the "U.S. Rules"). The U.S. Rules will require certain U.S. and foreign companies to disclose extensive climate-related information, including:

• governance and oversight of material climate-related risks;
• material climate-related risks on a company's strategy, outlook, operational results, or financial condition;
• in the case of larger issuers and subject to phased-in assurance requirements, Scope 1 and Scope 2 greenhouse gas ("GHG") emissions;¹
• material climate targets and goals, as well as scenario analysis and carbon offsets and credits, if a material component of a company's plan to meet its climate-related targets and goals; and
• financial impacts and material impacts on financial estimates and assumptions related to severe weather events and other natural conditions in a company's financial statements.

The U.S. Rules will apply equally to domestic and foreign registrants under U.S. securities laws including Canadian companies that have reporting obligations as "foreign private issuers" in the U.S. However, the U.S. Rules will not apply to Canadian registrants that use the Multijurisdictional Disclosure System ("MJDS") to file their required disclosures on Form 40-F.

The U.S. Rules are one of the most significant changes to the SEC's disclosure regime and are an important milestone for the global movement towards mandatory enhanced climate-related disclosures. However, the U.S. Rules significantly pare back the requirements in the proposed version of the rules, published in March 2022, in a number of key aspects. In particular, the U.S. Rules only require the largest registrants to make material Scope 1 and Scope 2 GHG emissions disclosures, with the requirement to disclose Scope 3 GHG emissions being dropped entirely. Financial statement disclosure requirements have also been significantly reduced. Our review of the proposed version of the U.S. Rules can be found here.

The final version of the U.S. Rules will likely face numerous legal challenges – which was made clear by the review petition filed by a coalition of 10 U.S. states on the same day that the rules were approved by the SEC. In Canada, the Canadian Securities Administrators' (the "CSA") own proposed rules for enhanced climate-related disclosures remain on hold. It is unclear to what extent the CSA will be guided by the parameters of the U.S. Rules when finalizing their own rules.

Highlights of the U.S. Rules

1. The U.S. Rules apply to all U.S. publicly traded companies, including foreign private issuers. However, Canadian issuers that file in the U.S. under the MJDS are exempt from the U.S. Rules.
2. The U.S. Rules draw inspiration from the recommendations of the Task Force on Climate-Related Disclosures ("TCFD") as well as concepts developed by the GHG Protocol, two prominent, voluntary standards for climate-related disclosures.
3. Among other disclosures, registrants will have to disclose:
   • climate-related risks that have had or are a reasonably likely to have a material impact on business strategy, results of operations, or financial condition;
   • if applicable, quantitative and qualitative descriptions of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from a registrant's activities to mitigate or adapt to material climate-related risks;
   • if applicable, activities taken to adapt to material climate-related risks, including the use of scenario analysis, transition plans, or internal carbon prices; and
   • any oversight by the registrant's board of climate-related risks and any role by management in managing material climate-related risks.
4. Large accelerated filers ("LAFs") and certain accelerated filers ("AFs") must provide information about their material Scope 1 and Scope 2 GHG emissions, on a phased basis, and with the option of disclosing on a delayed basis.²
5. Registrants can rely on well-established notions of materiality in U.S. securities laws when determining whether a climate-related risk has had a material impact on the registrant or is reasonably likely to have a material impact.³
6. Assurance reports are required where material Scope 1 or Scope 2 GHG emissions disclosures are made. Assurance reports will be at a "limited assurance" level. However, following transition periods, LAFs will be required to provide assurance reports for their material Scope 1 and Scope 2 emissions at a "reasonable assurance" level.
7. The U.S. Rules contain a "safe harbor" from private liability for certain disclosures, other than historic facts, that pertain to a registrant's transition plan, scenario analysis, internal carbon pricing, and targets and goals, and existing safe harbors for forward-looking statements will be available for other aspects of climate-related disclosures.

The final version of the U.S. Rules significantly pares back certain requirements proposed in the draft rules published in 2022. In particular, the U.S. Rules will not require:

1. Disclosures of a registrant's Scope 3 GHG emissions;
2. Disclosures describing climate-related expertise of board members;
3. Scope 1 and Scope 2 GHG emissions disclosures by small reporting companies ("SRCs") or emerging growth companies ("EGCs"); and
4. Disclosures of severe weather events and other natural conditions and transition activities on each line item of a registrant's consolidated financial statements.

The Proposed Presentation of Climate-Related Disclosures

The U.S. Rules require that registrants:

• Provide their climate-related disclosures in their registration statements and annual reports;
• Provide, in accordance with Regulation S-K, their required disclosures (other than Scope 1 and/or Scope 2 disclosures) in an appropriately captioned section or within another appropriate section (g., Risk Factors, Description of Business, or Management's Discussion and Analysis ("MD&A")), or in the alternative, incorporate such disclosures by reference to another regulatory filing with the SEC;
• If applicable, disclose their material Scope 1 and Scope 2 GHG emissions in (1) for domestic registrants, their annual reports (on Form 10-K), in their quarterly reports (on Form 10-Q) for the second fiscal quarter in the fiscal year immediately following the year to which the disclosure relates, or in an amendment to its Form 10-K, (2) for foreign registrants, their annual reports (on Form 20-F) or in an amendment to their annual report, and (3) if filing a registration statement, as of the most recently completed fiscal year that is at least 225 days prior to the date of effectiveness of said statement;
• If applicable, provide the attestation report relating to the registrants' material Scope 1 and Scope 2 GHG emissions in the same filing that contains the GHG emissions disclosures;
• Provide, in accordance with Regulation S-X, the mandated financial statement disclosures and, to the extent required or previously disclosed, related disclosure in a note to their audited financial statements; and
• Electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL, an open standard used by the SEC that enables documents to provide both human-readable and structured, machine-readable data.

Timetable for Compliance with the U.S. Rules

The U.S. Rules contain phase in periods for each category of filers and across varied aspects of the required disclosures. Notably, certain phase in periods have been extended beyond those first proposed in 2022 in order to provide registrants with time to prepare to comply with the new disclosure regime as illustrated in the tables below.

A) Phase in for Disclosures and Electronic Tagging

*Other than those disclosures required by Items 1502(d)(2), 1502(e)(2), and 1504(c)(2), which have further phased-in compliance dates as set out above.

B) Phase in for GHG Emissions Disclosures and Assurance Reports

Impact of the US Rules

The U.S. Rules were approved by only a 3:2 majority of the SEC's commissioners. Within hours of the SEC's announcing its decision to approve the U.S. Rules, the attorneys-general of ten Republican-led states (including West Virginia, Georgia, Alabama, and Alaska) filed a petition with the 11^th U.S. Circuit Court of Appeals, submitting that the U.S. Rules "...exceed... [the SEC]'s statutory authority and otherwise... [are] arbitrary, capricious, an abuse of discretion, and not in accordance with law" and requesting that the court declare the U.S. Rules unlawful and vacate the SEC's decision in approving them. With a U.S. presidential election this fall, it remains to be seen whether the U.S. Rules will withstand both political and judicial scrutiny.

The approval of the U.S. Rules may nevertheless serve as an inflection point for regulators in Canada. The CSA, who first published their own proposal for a climate-related disclosure regime in 2021, will have to now grapple with SEC's decision to move forward with a regulatory framework with limited disclosure obligations in respect of GHG emissions. The U.S. Rules also come shortly before the Canadian Sustainability Standards Board's (the "CSSB") publication of its draft sustainability standards for Canada. The CSSB's drafts, which will adapt the International Sustainability Standards Board's IFRS S1 and IFRS S2 sustainability standards for use in Canada, will likely include GHG emissions disclosure requirements. How the Canadian market and the CSA would respond to such disclosure expectations following the approval of the U.S. Rules remains to be seen.

We're Here to Help

McCarthy Tétrault's national, multidisciplinary ESG and Sustainability team works closely with our firm's leading capital markets practice and is especially well-equipped to provide clients with a full suite of advice and support to assist them in integrating ESG thinking into their organizational DNA. With a robust understanding of business, industry, and market drivers, we can deliver contextualized advice and guidance.

Footnotes

1. Scope 1 emissions are direct emissions from a disclosing entity's owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased energy. Scope 3 emissions are all indirect emissions not accounted for in Scope 1 and Scope 2 that occur in the value chain of the disclosing entity, including upstream and downstream GHG emissions. Due to their nature, Scope 3 emissions tend to be the largest component of a disclosing entity's GHG emissions inventory.

2. Canadian companies classified as "foreign private issuers" that must make material Scope 1 or Scope 2 GHG emissions disclosures may file on a delayed basis through an amendment to their annual reports on Form 20 F. These disclosures must be made in the second fiscal quarter in the fiscal year immediately following the year to which the GHG emissions disclosure relates, which is the same accommodation provided to domestic registrants.

3. The U.S. Rules, at pp. 103 - 105: "As defined by [the SEC] and consistent with [U.S.] Supreme Court precedent, a matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote or such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available. The materiality determination is fact specific and one that requires both quantitative and qualitative considerations."

To view the original article click here

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.