United States: SEC Proposes Sweeping Climate-Related Disclosure Rules

The U.S. Securities and Exchange Commission (SEC) on March 21, 2022, proposed rules that would require registrants to disclose information regarding climate-related risks in certain periodic reports and registration statements. Totaling 510 pages, the proposed rules are the culmination of an intense focus by the SEC on climate-related issues since President Joe Biden took office. The proposed rules are far-reaching, highly specific and will require significant compliance efforts from each public company.

Summary of Required Disclosures

Under the SEC's proposed rules, registrants will be required to include climate-related risk disclosures in its annual reports and registration statements, including the following key provisions:

• Climate-Related Financial Metrics in Note to Audited Financials. Under Proposed Rule 14-02 to Regulation S-X, registrants will be required to disclose the financial impact of "severe weather events and other natural conditions" and "transition activities" on a line item in its consolidated financial statements. Similarly, registrants will be required to disclose the aggregate amount of expenditures or capitalized costs associated with expenditures to mitigate the risks of "severe weather events and other natural conditions" and "transition activities."
• Greenhouse Gas (GHG) Emissions. The proposed rules would also require registrants to disclose their GHG emissions for their most recently completed fiscal year. The SEC based the proposed GHG emissions disclosure rules on the concept of scopes, which are themselves based on the concepts of direct and indirect emissions, developed by the GHG Protocol. This would include a requirement for registrants to disclose Scope 1 emissions (emissions from operations owned or controlled by registrants) and Scope 2 emissions (indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat or cooling) separately after calculating them from all sources that are included in the registrant's organizational and operational boundaries. This, in turn, would require a registrant to set their organizational boundaries – operations owned or controlled by a registrant – to be included in the calculation of its GHG emissions.
  
  As detailed further below, some registrants will need to disclose Scope 3 emissions, defined as all indirect GHG emissions not otherwise included which occur in the upstream and downstream activities of a registrant's "value chain." Such disclosure will necessitate companies to consider activities "by a party other than the registrant" that relate to the production, sourcing, finishing and delivering a product. Scope 3 disclosure is only contemplated when such emissions are material or the registrant has set targets or goals for its Scope 3 emissions.

• Targets and Goals. The proposed regulations do not require registrants to set goals. If, however, registrants have set climate-related targets or goals, they must disclose them. The disclosure would have to include timelines for meeting each target, the registrant's plan for meeting its goals, data indicating progress made toward achieving the goals and information about carbon offsets or renewable energy certificates to the extent that the registrant uses them to meet its goals.
• Governance.  Similar to the SEC's existing rules under Regulation S-K – and mirroring the SEC's recent proposed rules around cybersecurity governance for public companies – the proposed rules would require disclosure regarding each registrant's climate-related risk governance. This would include disclosure of:
  • any board members or board committees responsible for the oversight of climate-related risks
  • whether any member of a registrant's board of directors has expertise in climate-related risks
  • a description of the processes and frequency by which the board or board committee discusses climate-related risks
  • how the board is informed about climate-related risks, and how frequently the board considers such risk
  • whether and how the board or board committee considers climate-related risks as part of its business strategy, risk management and financial oversight
  • whether and how the board sets climate-related targets or goals and how it oversees progress against those targets or goals, including the establishment of any interim targets or goals, and
  • management's role in assessing and managing climate-related risks, including (as applicable) whether certain portions of management are responsible for assessing and managing climate-related risks, the processes by which such parties are informed about climate-related risks, and whether and how frequently such parties report to the board on climate-related risks
• Strategy, Business Model and Outlook. Proposed Item 1502(b) of Regulation S-K would require disclosure of forward-looking information about a company's assessment of the materiality of climate-related risks over the short, medium and long term. This proposed item includes disclosure of physical risk, flood risk, water-stress risk and transition risk, and how it has considered the identified impacts as part of its business strategy, financial planning and capital allocation.
• Risk Management. Each registrant would be required to describe its processes for identifying and managing climate-related risks and opportunities, and how those processes fit into the registrant's greater risk management system. This section would also have to include a description of the registrant's transition plan (to lower carbon operations) to the extent the registrant has adopted one.

Attestation

To the extent that the registrant is required to provide Scope 1 and Scope 2 emissions disclosures and qualifies as an accelerated filer or a large accelerated filer, the registrant must include an attestation report covering the disclosure. The report must be prepared by an independent attestation provider with expertise in GHG emissions. Notably, as SEC Commissioners Allison Herren Lee and Caroline Crenshaw highlighted in their statements in support of the rule, this requirement would not be subject to a company's internal control over financial reporting obligations. Cf. Sarbanes-Oxley §404(b).

Phase-In

Assuming that the proposed rules are adopted and go into effect in 2022, registrants would be required to comply with the new disclosure rules in accordance with the following schedule:

Takeaways

Holland & Knight's Environmental, Social and Governance (ESG) Practice will provide a more detailed analysis of the proposed rules in the coming days and can assist clients in preparing and submitting comments to the SEC. From a cursory analysis of the proposed rules it is clear that, if approved, these rules will result in a seismic shift for public-reporting companies. As the SEC acknowledged, many issuers already report aspects of their climate- and environmental-related risks and impacts. And, much like the SEC's implementation of other significant legislation (such as Sarbanes-Oxley and Dodd-Frank), the SEC has proposed a phase-in period for the rules and certain safe harbors. However, by mandating specific reporting around climate-related governance, requiring issuers to account for climate-related risks in their "value chain," and necessitating third-party attestation reports for certain registrants, the added compliance burden to reporting companies will be significant.  

Parties may submit comments to the SEC until the later of 1) the 30th day after the proposal is published in the Federal Register and 2) May 20, 2022. If you would like assistance in submitting comments in response to the proposed regulations or evaluating how these changes will affect your business, reach out to the authors or the Holland & Knight attorney with whom you usually work.

About Holland & Knight's ESG Practice

Holland & Knight helps clients develop, organize and execute ESG strategies that increase ESG scores, protect directors, satisfy activist and institutional shareholders, mitigate regulatory compliance risk, increase market capitalization, and answer the ever-increasing demands for clients to respond to calls for environmental and social change. Our approach to ESG is comprehensive, practical, manageable and affordable. We use a disclosure-based solution designed to drive efficiency and provide results immediately without requiring significant operational changes. Our team brings to the table highly experienced and knowledgeable professionals in the key areas of climate and sustainability, diversity, equity and inclusion (DEI), corporate governance, financing, financial regulations, securities, executive compensation, data privacy and security, and litigation.  

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