On March 21, 2022, the Securities and Exchange Commission (SEC) released proposed amendments to Regulations S-K and S-X (the Proposal), designed to enhance and standardize the climate-related disclosures provided by public companies. The Proposal is aimed at providing investors with consistent, comparable, reliable, and decision-useful information, while also providing issuers with greater clarity and certainty on disclosure expectations. The proposed rules incorporate concepts and vocabulary from the Task Force on Climate-Related Financial Disclosures (TCFD), a climate-related reporting framework, and the Greenhouse Gas Protocol, an accounting and reporting standard for greenhouse gas (GHG) emissions. While proposed rules on climate disclosure were anticipated, the Proposal is more extensive and prescriptive than generally expected and would impose substantial compliance burdens on most public companies.

The Proposal would require companies to disclose specified qualitative and quantitative climate-related information in registration statements (including for initial public offerings), annual reports on Form 10-K, and audited financial statements filed with the SEC, and to disclose any material changes in quarterly reports on Form 10-Q.

The proposed required disclosures would include, among other things:

• Scope 1 and Scope 2 GHG emissions, and if material or included in a company’s GHG emissions targets, Scope 3 emissions, except that smaller reporting companies would be exempt from the Scope 3 emissions requirements. GHG intensity metrics would also be required.

• Independent attestation reports covering Scope 1 and Scope 2 emissions for large accelerated filers and accelerated filers.

• Climate-related risks that are reasonably likely to have a material impact on the company, including on its business or consolidated financial statements, which may manifest over the short, medium, and long terms, and the actual or potential impacts of such risks on the company’s strategy, business model, and outlook.

• New audited financial statement footnote disclosure of certain climate-related metrics.

• If a company has adopted targets or goals related to the reduction of GHG emissions, or any other climate-related targets or goals, detailed disclosures regarding these targets or goals.

• Detailed descriptions of board and management oversight and governance of climate-related risks and of a company’s processes for identifying, assessing, and managing climate-related risks.

Generally speaking, when disclosure is required for climate-related risks, registrants are also permitted to discuss climate-related opportunities.

Foreign private issuers would be subject to requirements similar to those of domestic registrants. The Proposal does not generally exempt emerging growth companies or smaller reporting companies, although certain accommodations are proposed for smaller reporting companies. Under the Proposal, the climate-related disclosures would be subject to potential liability under Section 11 of the Securities Act of 1933 when included in or incorporated by reference into a registration statement under that act. The disclosures would be considered “filed” for reports under the Securities Exchange Act of 1934 and therefore subject to potential liability under Section 18 of that act (except for disclosures furnished on Form 6-K). In the Proposal, the SEC notes that certain of the newly required disclosures may qualify for the safe harbors for forward-looking statements.

If the Proposal were adopted in December 2022, the rules would generally be phased in over three years beginning with fiscal year 2023 for large accelerated filers, with additional phase-in time for the disclosure of Scope 3 emissions and the attestation requirements. The public comment period for the Proposal will remain open for 30 days after the date of publication in the Federal Register or until May 20, 2022, whichever period is longer.

Proposed New Subpart 1500 of Regulation S-K

The Proposal would create subpart 1500 of Regulation S-K, containing the requirements for climate-related disclosure outside of the financial statements, which must be presented in a separately captioned section titled “Climate-Related Disclosure.” However, in an attempt to avoid repetitive disclosure and enable flexibility, the Proposal allows for the requirements to be satisfied via cross-reference to other sections of the filing, such as risk factors or management’s discussion and analysis (MD&A).

Definitions – Item 1500 of Regulation S-K

Key terms are defined in proposed Item 1500, which definitions are substantially similar to the TCFD’s definitions of climate-related risks and opportunities.

Governance – Item 1501 of Regulation S-K

Item 1501, as proposed, requires detailed disclosure regarding the board of directors’ oversight of climate-related risks and of management’s role in assessing and managing such risks. Regarding the board of directors, the company would be required to disclose:

• The identity of any board members or board committee responsible for the oversight of climate-related risks

• Whether any directors have expertise in climate-related risks and, if applicable, enough information to fully describe the nature of the expertise

• The processes by which the board or pertinent committee discusses climate-related risks, including how the board is informed about climate-related risks and the frequency of such discussions

• Whether and how the board or pertinent committee considers climate-related risks as part of its business strategy, risk management, and financial oversight

• Whether the board sets climate-related targets or goals and how it oversees progress toward these targets or goals

Regarding management’s role, the disclosure would include the following, as applicable:

• Whether certain management positions or committees are responsible for assessing and managing climate-related risks and, if so, the identity of such positions or committees and the relevant expertise of the position holder or committee member

• The processes by which the pertinent positions or committees are informed about and monitor climate-related risks

• Whether and how frequently the positions or committees report to the board or board committee.

Strategy, Business Model, and Outlook – Item 1502 of Regulation S-K

Under proposed Item 1502(a), companies would have to describe any climate-related risks that are reasonably likely to have a material impact on the company, including on its business or consolidated financial statements over the short, medium, and long terms. “Climate-related risks” are defined as the actual or potential negative impacts of climate-related conditions and events on a company’s consolidated financial statements, business operations, or value chain, as a whole. The SEC stated that it proposed including a company’s value chain within the definition of climate-related risks “to capture the full extent of a registrant’s potential exposure to climate-related risks, which can extend beyond its own operations to those of its suppliers, distributors, and others engaged in upstream or downstream activities.” The SEC declined to define the time horizons in an attempt to give companies more flexibility in their disclosures. Therefore, companies must include in these disclosures what they consider to be the short, medium, and long terms.

The company must specify whether the climate-related risks identified are physical risks — whether acute (such as hurricanes or floods) or chronic (such as sea level rise or drought) — or transition risks associated with a potential transition to a less carbon-intensive economy (such as the risks arising from regulatory policies and changing consumer choices). For physical risks, the location and nature of the properties and operations subject to the physical risk would need to be identified. “Location” is defined to mean a ZIP code or, in a jurisdiction that does not use ZIP codes, a similar identifier. For properties subject to flood risk, companies must disclose the percentage of those assets located in flood hazard areas. For properties in areas of high water stress, companies must disclose the amount of assets located in those regions and the percentage of the companies’ total water usage from water withdrawn in those regions. Discussions of the nature of transition risks and their impact on the companies would be required as well.

With respect to the climate-related risks identified in response to Item 1502(a), the proposed rules require the company to describe their actual and potential impacts on the company’s strategy, business model, and outlook, including the time horizon. This includes the impacts on the company’s (i) business operations, (ii) products or services, (iii) suppliers and other parties in its value chain, (iv) activities to mitigate or adapt to climate-related risks, (v) expenditures for research and development, and (vi) any other significant changes or impacts. The company must also disclose how these impacts are considered as part of its business strategy, financial planning, and capital allocation, including how any metrics or targets disclosed pursuant to the new rules relate to the company’s business model or strategy.

If a company uses carbon offsets or renewable energy credits, it would have to disclose the roles they play in its climate-related business strategy. Additionally, if the company maintains an internal carbon price, specified information about it must be disclosed along with how it is used to evaluate and manage climate-related risks.

A company would also be required to provide a narrative discussion of whether and how any climate-related risks identified in response to Item 1502(a) have affected or are reasonably likely to affect its consolidated financial statements, including the metrics referenced in the proposed amendments to Regulation S-X, discussed below. The SEC notes that this requirement is intended to provide climate-related disclosure that is similar to MD&A and that a company may provide the disclosure as part of MD&A.

Under the Proposal, a company would be required to describe the resilience of its business strategy in light of potential future changes in climate-related risks. As part of the discussion, the company must describe any analytical tools that it uses, such as scenario analysis. If scenario analysis is used, the company must disclose the scenarios considered, including parameters, assumptions, and analytical choices, and the projected principal financial impacts on its business strategy under each scenario, including both qualitative and quantitative information.

Risk Management – Item 1503 of Regulation S-K

Item 1503 would require disclosure of any processes the company has for identifying, assessing, and managing climate-related risks and how they are integrated into the company’s overall risk management processes. For any such processes, the required disclosure must include how the company:

• Determines the significance of climate-related risks in comparison with other risks.

• Considers existing or likely regulatory requirements or policies, such as GHG emissions limits.

• Considers shifts in customer or counterparty preferences, changes in technology, or changes in market prices in assessing potential transition risks.

• Determines the materiality of climate-related risks.

With respect to processes to manage climate-related risks, the company would be required to disclose how it decides whether to mitigate, accept, or adapt to a risk; prioritizes whether to address climate-related risks; and determines how to mitigate any high-priority risks. Additionally, if a company has adopted a transition plan as part of its climate-related risk management strategy, the company would need to describe the plan, including any relevant metrics and targets, and update the disclosure at least each fiscal year.

GHG Emissions Metrics – Item 1504 of Regulation S-K

Item 1504, as proposed, would require companies to disclose GHG emissions data for the most recently completed fiscal year and for the historical years included in the company’s consolidated financial statements to the extent such historical data is reasonably available. The SEC has proposed definitions of GHG emissions that are substantially similar to those in the Greenhouse Gas Protocol. As such, generally speaking, GHG emissions are divided into three categories, Scope 1 (direct GHG emissions from operations that are owned or controlled by the company), Scope 2 (indirect GHG emissions from the generation of purchased or acquired energy), and Scope 3 (all indirect GHG emissions not otherwise included in Scope 2 emissions occurring in a company’s value chain).

Item 1504 would require all companies to disclose their GHG emissions for Scope 1 and Scope 2 separately. However, a company would be required to disclose Scope 3 emissions only if they are material or if the company has set a target or goal that includes its Scope 3 emissions. The Proposal exempts smaller reporting companies from the Scope 3 emissions disclosure requirements. For each required Scope 1, Scope 2, and Scope 3 disclosure, a company would need to disclose the emissions both disaggregated by each constituent GHG and, in the aggregate, expressed in terms of carbon dioxide equivalents. If Scope 3 disclosures are required, additional related disclosure requirements apply.

The proposed rule contains additional extensive disclosure requirements regarding the methodology and significant inputs and assumptions used to calculate GHG emissions, including organizational and operational boundaries. Recognizing that the methodologies pertaining to the measurement of GHG emissions are evolving, the SEC does not propose to require companies to use the standards and guidance of the Greenhouse Gas Protocol, although the SEC states that it expects many companies will choose to do so. Unlike the Greenhouse Gas Protocol, however, the Proposal would require a company to set organizational boundaries using the same scope of entities, operations, assets, and other holdings within its business organization as those included in, and based on the same set of accounting principles applicable to, its consolidated financial statements. The SEC prefers this approach in order to have a consistent basis for disclosure of financial and GHG emissions data.

In addition to disclosing GHG emissions, a company would be required to disclose GHG intensity, using the sum of Scope 1 and Scope 2 emissions, in terms of metric tons of carbon dioxide equivalent per unit of total revenue and per unit of production, for each fiscal year included in the consolidated financial statements. If Scope 3 emissions are disclosed, a separate GHG intensity metric using only Scope 3 emissions must be disclosed.

Recognizing the challenges of calculating and disclosing Scope 3 emissions, the SEC proposes a few accommodations. The SEC proposes to somewhat limit liability for any statement regarding Scope 3 emissions disclosed pursuant to the new rules and made in a document filed with the SEC. The provision states that any such statement is “deemed not to be a fraudulent statement … unless it is shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith.” As noted above, smaller reporting companies would be exempt from the Scope 3 disclosure requirements. All other companies would have an additional year for initial compliance with the Scope 3 requirements beyond the compliance date for the other climate-related disclosure rules.

Attestation of Scope 1 and Scope 2 Emissions Disclosures – Item 1505 of Regulation S-K

Item 1505 would require any accelerated filer or large accelerated filer to include an attestation report covering the Scope 1 and Scope 2 emissions data in the relevant filing. To allow additional time for companies to comply, the attestation is not required until the second year of GHG emissions disclosure. Further, the attestation is only required to be at a “limited assurance level” for the initial two years it is provided and at a “reasonable assurance level” thereafter. Limited assurance is equivalent to that provided over a company’s unaudited interim financial statements required to be included in Form 10-Q (commonly referred to as a “review”), whereas reasonable assurance is equivalent to that provided in an audit of a company’s consolidated financial statements required to be included in Form 10-K.

The attestation report by a GHG emissions attestation provider would have to be included in the “Climate-Related Disclosure” section of the relevant filing, and must be provided pursuant to standards that are publicly available at no cost and are established by a body or group that has followed due process procedures. Item 1505 requires that the emissions attestation provider be an expert in GHG emissions by virtue of having significant experience with GHG emissions and that the provider be independent of the company and its affiliates. Pursuant to existing rules, the company would be required to obtain and include in its relevant SEC filings the written consent of the attestation provider. The proposed rule contains detailed requirements regarding the content of the attestation report and qualifications of the attestation provider. Under the Proposal, a company not required to include the attestation report must nevertheless disclose certain, more limited, specified information if its GHG emissions disclosures were voluntarily subject to a third-party attestation or verification.

Targets and Goals – Item 1506 of Regulation S-K

Item 1506 would be applicable only to companies that have set any targets or goals related to the reduction of GHG emissions or any other climate-related target or goal. If the company has set a target or goal, Item 1506 would require disclosure of the target or goal, including detailed specified factors about the target or goal. The company would be required to disclose how it intends to meet its target or goal and relevant data to indicate whether it is making progress toward meeting the target or goal. This disclosure must be updated at least each fiscal year by describing the actions taken during the year to achieve the target or goal.

Additionally, if a company uses carbon offsets or renewable energy credits as part of its plan to achieve the target or goal, it must disclose the amount of carbon reduction represented by the offsets or the amount of generated renewable energy represented by the credits, the source of the offsets or credits, a description and location of the underlying projects, any registries or other authentication of the offsets or credits, and the cost of the offsets or credits.

Interactive Data Requirement – Item 1507 of Regulation S-K

Proposed Item 1507, and related rules in Regulation S-T, would require companies to tag climate-related disclosures in Inline eXtensible Business Reporting Language, including block text tagging and detail tagging of narrative and quantitative disclosures provided pursuant to Subpart 1500 of Regulation S-K and Article 14 of Regulation S-X, discussed below.

Proposed New Article 14 of Regulation S-X

The Proposal would add Article 14 to Regulation S-X, requiring companies, including smaller reporting companies, to include certain climate-related financial statement metrics and related disclosures in the notes to their audited financial statements. The new disclosures would be required for the most recently completed fiscal year and for the fiscal years included in the consolidated financial statements contained in the relevant filing. Given the proposed placement of these new disclosures in the company’s audited financial statements, the disclosures would be included in the scope of the required audit of the financial statements and within the scope of the company’s internal control over financial reporting.

Financial Impacts of Severe Weather Events and Other Natural Conditions, Transition Activities, and Identified Climate-Related Risks

A company would be required to include information about the impact of severe weather events and other natural conditions, as well as transition activities, on the financial statements included in the relevant filing, unless the impact is below a specified threshold. Severe weather events and other natural conditions include flooding, hurricanes, drought, wildfires, extreme temperatures, and sea level rise and are intended to cover physical risks. Transition activities would include any efforts to reduce GHG emissions or otherwise reduce exposure to transition risks. A company would also be required to include the impact of any climate-related risks identified by the company pursuant to Regulation S-K Item 1502(a), described above.

To satisfy Article 14 as proposed, a company would have to determine the impacts of these severe weather events, other natural conditions, transition activities, and identified climate-related risks described above on each financial statement line item. However, if the aggregated impact (using absolute values of each impact) is less than 1% of the total line item for the relevant fiscal year, disclosure is not required. If the aggregated impact meets the specified threshold, a company would need, at a minimum, to disclose on an aggregated, line-by-line basis the negative impacts and, separately, on an aggregated, line-by-line basis the positive impacts.

Expenditures to Mitigate Risks of Severe Weather Events and Other Natural Conditions and Expenditures Related to Transition Activities

Article 14, as proposed, also requires companies to disclose the amount of expenditure expensed and capitalized costs incurred to mitigate the risks from severe weather events and other natural conditions, and to reduce GHG emissions or otherwise mitigate exposure to transition risks. A company that has disclosed GHG emissions reduction targets or other climate-related goals must disclose the expenditures and costs related to meeting its targets and goals. Disclosure is not required if such amounts are less than 1% of the total expenditure expensed or total capitalized costs incurred for the relevant fiscal year.

Financial Estimates and Assumptions

The Proposal would also require a company to disclose whether the estimates and assumptions used to produce the consolidated financial statements were impacted by risks and uncertainties associated with, or known impacts from, severe weather events and other natural conditions. If the estimates and assumptions were impacted, the company would need to provide a qualitative description of how they were impacted.

Similarly, the Proposal requires disclosure if the estimates and assumptions were impacted by risks and uncertainties associated with, or known impacts from, transition activities. If there was an impact, the company would be required to provide a qualitative description of how the estimates and assumptions were impacted.

Compliance Dates

The Proposal, if adopted, will be phased in for all companies, with the initial compliance date depending on a company’s filer status. The compliance dates included in the tables below assume the Proposal is adopted in December 2022 and that a company has a December 31 fiscal year-end.

Conclusion

Overall, compliance with the Proposal, if adopted, will require a significant undertaking on the part of most public companies. Companies are encouraged to review the Proposal and submit comments to the SEC. There will likely be legal challenges to the proposed rules, as they have already drawn stark criticisms, including in Commissioner Hester Peirce’s dissent titled “We are Not the Securities and Environment Commission - At Least Not Yet.” In the meantime, companies may wish to consider the Proposal and what steps they may need to take to reach compliance during the proposed phase-in periods.

The full SEC release and text of the proposed rules can be found here.