SEC Proposes Climate Change Rules: What Public Companies Need to Know

The SEC has proposed sweeping rules that would require most public companies to make extensive disclosures about climate change. Here are the key takeaways:

What Happened

• On March 21, 2022, the SEC proposed rules that would require public companies to make climate-related disclosures and seek third-party assurance to “promote efficiency, competition and capital formation.”

How Will This Affect Public Companies?

The proposed rules envision public companies disclosing climate-related information on:

• Greenhouse Gas Emissions:

  • Direct emissions from company activities (“Scope 1” emissions).
  • Indirect emissions from purchased energy (“Scope 2” emissions).
  • Emissions in a company’s supply chain and from the sale of its products (“Scope 3” emissions) – if material or if a company has set an emissions-reduction goal that includes such emissions.
• Carbon Intensity: The proposal defines this as a ratio expressing the impact of GHG emissions per unit of economic value (e.g., metric tons of CO2e per unit of total revenues) or per unit of production (e.g., metric tons of CO2e per unit of product produced). The proposed rules would require disclosure of both measures.
• Third-Party Verification: Public companies would need a qualified third party to verify the accuracy of Scope 1 and Scope 2 emission calculations.

• Climate Change Goals: If a company publicly identifies climate change goals, the proposed rules would require the company to disclose:

  • The scope of activities and emissions included in the target and the time by which the target is to be achieved.
  • How the company plans to meet its climate-related targets.
  • Data to indicate if the company is making progress toward its target and how progress has been achieved, with annual updates.
• Risks: The proposed rules call for companies to disclose risks associated with climate change that have had or likely will have a material impact on a company’s business and consolidated financial statements, and whether the risks are likely to manifest in the short-, medium-, or long-term.
• Financial Statement Metrics. The proposed rules would require separate notes on climate-related costs, capital expenditures and reserves over a certain threshold.
• Board and Management Oversight. The proposal would require companies to describe how the board of directors and management oversees and governs climate-related risks, and the processes for identifying, assessing, and managing those risks.

10 Things Public Companies Should Consider Doing

The proposed rules may change before taking effect – or they may not go into effect at all – but public companies should act now to prepare. We recommend public companies:

1. Review climate change risk expertise among directors.

2. Work with advisers to consider whether to change practices related to the board’s role in setting climate-related goals and measuring progress toward those goals.

3. Identify any gaps among existing voluntary disclosures.

• The proposed rules would require disclosure of internal policies or procedures with respect to climate change.
• The proposed rules are based in large part on recommendations from the Task Force on Climate-related Financial Disclosures (TCFD), a voluntary climate disclosure framework that recommends companies disclose their approach to climate governance, strategy, risk-management efforts and related goals and metrics.
• Between now and the effective date of the final rules, companies that have made a disclosure aligned with the TCFD should review any gaps or differences between their previous reports and consider what the proposed rules would require.

4. Discuss creating an ESG management steering committee.

• The proposed rules would require disclosure of personnel and committees overseeing climate risk and related information.

5. Review enterprise risk management (ERM) programs to consider whether to make changes.

• The proposal would require companies to describe how they integrate climate-related risks into their enterprise risk management program. That would expose ERM programs to a new level of public scrutiny.
• Companies should consider whether to make any changes to their ERM program to address climate disclosure requirements.

6. Consider developing appropriate data and reporting structures to collect and report on GHG emissions, particularly if the company intends to adopt goals that include Scope 3 emissions.

• The proposed rules require companies to disclose Scope 3 emissions only if such emissions are material or if companies set targets that include Scope 3 emissions.

7. Consider modifying climate goals in light of disclosure requirements, and whether to state such goals in more specific or limited terms.

8. Consider how to achieve their goals and track progress, and whether the need for disclosure should affect the goals set.

9. Choose whether to disclose climate-related opportunities.

• Companies that choose to disclose climate-related opportunities should subject them to the same review applied to statements on climate-related risks.

10. Cultivate relationships with qualified independent experts.

• Companies should establish relationships now with experts who have the qualifications to review climate-related disclosures.

What’s Next?

• If adopted, the rules would be phased into effect based on when they become effective as well as the company’s fiscal year and filing status. The table below assumes that final rules are adopted and effective by the end of 2022 (consistent with the proposing release’s assumption):

Disclosure Requirement	Large Accelerated Filers	Accelerated Filers	Non-Accelerated Filers	Smaller Reporting Companies
All disclosures other than Scope 3	Fiscal year 2023 (filed in 2024)	Fiscal year 2024 (filed in 2025)	Same as for Accelerated Filers	Fiscal year 2025 (filed in 2026)
Scope 3 emissions disclosures	Fiscal year 2024 (filed in 2025)	Fiscal year 2025 (filed in 2026)	Same as for Accelerated Filers	Exempt
Attestation for Scope 1 & Scope 2 emissions disclosures	Limited Assurance Fiscal year 2024 (filed in 2025) Reasonable Assurance Fiscal year 2026 (filed in 2027)	Limited Assurance Fiscal year 2025 (filed in 2026) Reasonable Assurance Fiscal year 2027 (filed in 2028)	Exempt	Same as for Accelerated Filers or Non-Accelerated Filers (as applicable)

 

• The agency is seeking public comment. The deadline is June 9, 2022.
• To date, there has been significant opposition as well as support.