The SEC Unveils Proposed Climate Disclosure Rules
The U.S. Securities and Exchange Commission (SEC) announced today the release of its long-awaited proposals for climate disclosures for U.S. public companies. The proposals would for the first time require U.S. companies to provide information on climate risks facing their businesses, and plans to address those risks, along with metrics detailing the companies’ climate footprint including Scope 1, 2 and in some cases Scope 3 greenhouse gas (GHG) emissions.
The move to introduce sustainability reporting rules in the U.S. has been gaining momentum for over a year. In February 2021, the SEC initiated a review of the commission’s guidance for public company obligations for disclosures related to climate change risk, citing increased demand by investors for material, comprehensive and consistent information. Several months later, In July, SEC Chair Gary Gensler announced that the commission was aiming to have proposed rules in place for mandatory climate risk reporting by companies by the end of the year, though these plans were pushed off to the spring as the commission as details of the comprehensive proposals were considered and worked out.
Disclosure requirements for companies under the proposed rules would include information about the oversight and governance of climate-related risks by the company’s board and management, how identified climate related risks impact strategy, business model and outlook, and the process used by the company to identify, assess and manage these risks.
For companies that have adopted a transition plan, the rules would require a description of the plan, including the metrics and targets used to identify and manage physical and transition risks, and for companies that use scenario analysis to assess resilience to climate-related risks, required disclosures would include information on the scenarios used including the parameters, assumptions, analytical choices and projected financial impacts from the scenarios. The rules also would require information about company’s use of an internal carbon price, including information about the price and how it is set.
The proposals would require companies to disclose information on the impact to financial statement line items of climate-related events, such as severe weather events, and of risks related to the transition to a low carbon economy, such as regulatory, market or competitive changes.
Under the new rules, companies would be required to report on their Scopes 1 and 2 emissions, or those from direct operations and those created indirectly through energy purchases, respectively, as well as Scope 3 emissions (more on Scope 3 below). For larger companies, Scope 1 and 2 emissions will be required for FY 2023, and for smaller companies for FY 2024. The proposals would require assurance for the emissions disclosures, beginning in a limited fashion for larger companies for FY 2024, and on a “reasonable assurance” basis for FY 2026, with phase-in for smaller companies a year later for each.
Scope 3 emissions
One of the key issues investors and businesses were anticipating was the SEC’s treatment of companies’ Scope 3 emissions, or those beyond companies’ direct operational control, such as emissions generated by suppliers, or from customers’ use and disposal of products. The new proposals recommend requiring companies to report on Scope 3 emissions if they are material, or if the company has a stated emissions reduction goal that includes Scope 3.
Scope 3 emissions typically account for the vast majority of most companies’ climate footprint, yet they are often the most difficult to track, measure and address. In order to address these challenges, the proposals recommend exempting smaller companies from the Scope 3 reporting requirements, utilizing a longer phase-in period relative to Scope 1 and 2 disclosures, and including a safe harbor for liability for Scope 3 emissions disclosure.
The implications of this reporting requirement are significant, likely leading to considerable investment in tools and services by companies to understand and track emissions across their value chains, and placing pressure on smaller organizations across supply chains to address their own impact.
In a statement introducing the rules, SEC Chair Gary Gensler said that the proposals were “driven by the needs of investors and issuers.” Gensler said:
“Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions. Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. Companies and investors alike would benefit from the clear rules of the road proposed in this release.”
Following the announcements, ESG Today spoke with PwC’s US ESG Leader Casey Herman, for his thoughts on the proposed rules and the impact on US public companies. Overall, Herman said that the rules were in line with expectations for the Scope 1 and 2 reporting requirements, and that the SEC appeared to take a middle-ground approach on Scope 3, straddling the challenges in measuring and relying on information outside of companies’ direct control, while acknowledging the importance of including this data to implementing meaningful rules and to meeting the needs of investors.
We also asked Herman about the likely reaction by companies to the SEC’s proposed rules, and he pointed out that the comment letters provided by companies in the lead up to the release were broadly supportive of rules that would provide clarity and consistency around company reporting requirements. In terms of the cost and reporting burden for companies, Herman noted that while companies may need to augment their reporting staff and capabilities to comply with the new requirements, many companies are already providing some form of climate risk and emissions disclosures, often according to the multiple reporting frameworks already out there, and the simplification offered by the SEC’s establishment of a consistent framework may actually be seen as a benefit by many.
The proposals will now be open to a 60-day comment period before the SEC initiates the process to finalize its climate disclosure rules.
Click here to view the SEC’s proposed climate disclosure rules fact sheet.