SEC Releases Proposed Rule on Climate Risk Disclosure

The SEC's proposed amendments would require registrants to disclose information about emissions, the oversight and governance of climate-related risks, as well as their processes for identifying and managing these risks.

On March 21, 2022, the Securities and Exchange Commission ("SEC") voted 3–1 to propose amendments to Regulations S-K and S-X that would require registrants to provide certain climate-related information in their registration statements and periodic reports, including disclosures regarding direct (Scope 1), indirect (Scope 2), and, for certain registrants, up-and-downstream (Scope 3) emissions.  

Under the proposed amendments, registrants would be required to disclose information about the oversight and governance of climate-related risks by their boards and management, as well as their processes for identifying and managing these risks. They would also be required to provide a description of any transition plan adopted as part of their climate-related risk management strategy, including the metrics and targets used to manage physical and transition risks. Registrants would be obligated to provide information concerning how the climate-related risks they have identified have had, or are likely to have, a material impact on their businesses and consolidated financial statements, as well as how such risks are likely to affect their strategy, business model, and outlook. Registrants that use scenario analyses to assess the resilience of their business strategy to climate-related risks would be required to describe the scenarios used, assumptions, and projected financial impacts.  

Registrants would further be required to disclose information concerning their direct greenhouse gas emissions, indirect emissions from purchased electricity and other forms of energy, and, if material, indirect emissions from upstream and downstream activities in their value chains. These disclosed emissions must exclude the impact of any generated or purchased carbon offsets (registrants would nonetheless also be required to separately disclose if and how they use carbon offsets or renewable energy credits or certificates in their climate-related business strategy). In addition, certain registrants would be required to provide attestation reports from an independent third-party expert verifying these emissions disclosures. 

Key Takeaways 

Disclosure around climate change has been an increasing focus for investors in recent years, but companies have struggled to navigate competing frameworks. In light of those pressures, some companies have already taken steps in the direction proposed by the SEC, while others are just starting to provide more in the way of climate-related disclosure.  

The SEC's effort moves the needle significantly in terms of required disclosure and is designed to provide guidance and structure around the competing frameworks. The proposed amendments will be subject to comments from all sides, so the final outcome may change as interested parties weigh in. Whatever the final outcome, there will likely be litigation challenges. 

Companies should start to prepare by reviewing the proposed rules, the TCFD framework from which they draw, and their current climate-related disclosures. 

If the proposal is ultimately adopted by the SEC, compliance with these amendments would be subject to a phase-in period for all registrants and an additional phase-in period for certain emissions disclosures. Public comment on the proposed rule is expected to run for 60 days, after which the SEC will review the proposed rule, make relevant updates, and vote on a final rule. Jones Day will continue to monitor these issues and provide further analysis.

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