On March 21, 2022, the Securities and Exchange Commission issued long-awaited proposed rules (“Proposed Rules”) that would require specific new types of climate change disclosures. The purpose of the Proposed Rules is to provide “consistent, comparable, and reliable...information to investors to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.” The SEC also argued that the proposed disclosures “will promote efficiency, competition, and capital formation.”
If adopted as proposed, the Proposed Rules would require extensive, specific disclosures for most public companies, impose third-party verification requirements and establish liability for inaccurate reporting of climate related issues. The Proposed Rules would be phased into effect, commencing for some of the reporting requirements as soon as the year following the issuance of the final rule for the largest companies, and for other requirements and smaller companies, over the course of two or three fiscal years following issuance of the final rules.
Notably, the Proposed Rules take a prescriptive approach to disclosure, arguably departing from materiality principles and disclosure that is aimed at promoting an understanding of a company’s business, financial condition and prospects management and the board of the company. For example, the Proposed Rules specify certain types of disclosure with respect to climate change – for instance, greenhouse gas emissions and certain financial impacts and metrics above a set threshold – regardless of whether those are material. They also impose granular disclosure requirements about company governance and risk management practices regarding climate change that go beyond disclosure requirements for other issues.
The SEC is seeking public comment on the Proposed Rules for a period of up to 30 days after publication in the Federal Register or 60 days after issuance (May 20, 2022), whichever period is longer. We anticipate that significant opposition to the Proposed Rules will be voiced in comments submitted to the SEC and given the cost and extensive requirements of the Proposed Rules, that litigation concerning the final rules is likely.
The Proposed Rules would require public companies (including foreign private issuers) to provide climate-related disclosure in their registration statements under the Securities Act of 1933 and their annual reports under the Securities Exchange Act 1934 (“Exchange Act”), including information about:
Climate Change Goals. The Proposed Rules provide that if a public company has publicly identified climate-related targets or goals, it must disclose the following: