Defining Issues | March 2022

 

Insight

SEC proposes climate reporting and assurance rules

Proposal aims to provide more consistent, comparable and reliable information for investors.

Maura Hodge

Maura Hodge

IMPACT ESG Audit Leader, KPMG US

+1 803-606-8370

Julie Santoro

Julie Santoro

Partner, Dept. of Professional Practice, KPMG US

+1 212-954-1086


The SEC’s proposed rules are the culmination of activities that began in February 2021 when then-Acting SEC Chair, Allison Herren Lee, released a statement that she was directing the SEC’s Division of Corporation Finance to enhance its focus on climate-related disclosures in public company filings. In March 2021, the SEC requested public input on climate-related disclosures to help evaluate current rules. The comment period closed in June 2021, with SEC Chair Gary Gensler reporting that of the 550 unique comment letters received, 75% supported mandatory climate disclosure rules.


Applicability

SEC Release Nos. 33-11042 and 34-94478

  • Registrants with Exchange Act reporting obligations pursuant to Exchange Act Section 13(a) or Section 15(d), and companies filing a Securities Act or Exchange Act registration statement
  • Includes Foreign Private Issuers

Relevant dates


Possible disclosure compliance dates

Assuming an effective date of December 2022 for the final rule and a registrant with a December 31 year-end:

  Disclosures excluding Scope 3 disclosure Scope 3 disclosure
Large accelerated filer Fiscal 2023 Fiscal 2024
Accelerated and non-accelerated filers Fiscal 2024 Fiscal 2025
Smaller reporting companies Fiscal 2025 Exempt


Possible assurance compliance dates

Assuming an effective date of December 2022 for the final rule and a registrant with a December 31 year-end:

  Scope 1 and 2 disclosure Limited assurance thereon Reasonable assurance thereon
Large accelerated filer Fiscal 2023 Fiscal 2024 Fiscal 2026
Accelerated filer Fiscal 2024 Fiscal 2025 Fiscal 2027


“The SEC’s action underscores the imperative for businesses to understand likely reporting requirements and connect them to their strategy and operations. The details will be pored over, but management teams and Boards must take note – the ESG moment is accelerating in the United States.”

— Scott Flynn, KPMG US Audit Vice Chair


Key impacts

The proposed rules are intended to provide more consistent, comparable and reliable information so that investors can better evaluate the impact of climate-related matters on a registrant.

Financial statement disclosures would include:

  • Financial impact metrics, line item basis
  • Expenditure metrics, disaggregated
  • Financial estimates and assumptions
  • Financial statement audit and audit of internal controls over new information

Greenhouse Gas (GHG) emissions disclosures would include:

 

  • Scopes 1 and 2, with limited assurance for accelerated filers and large accelerated filers, moving to reasonable assurance after two years
  • Scope 3, if material or part of goals/targets under a phased transition

 

Other disclosures would include:

  • Governance and risk management processes
  • Physical and transition risks, actual or likely impacts
  • Targets, goals and any transition plan
  • Scenario analysis, if used
  • Carbon offsets or renewable energy credits (RECs), if used
  • Internal carbon pricing, if established

Proposed applicability

  • Domestic and foreign filers
  • Registration statements
  • Periodic reporting
  • Scope 3 safe harbor; smaller reporting companies exempt
  • Phased transition possibly starting fiscal 2023; limited assurance one year later

 


Background

  • In February 2021, then-Acting SEC Chair, Allison Herren Lee, released a statement that she was directing the SEC’s Division of Corporation Finance to enhance its focus on climate-related disclosures in public company filings; this statement was based on existing disclosure guidance released in 2010. Lee’s statement was followed by inclusion of the topic in the SEC’s 2021 examination priorities, and the announcement of a new enforcement taskforce to focus on climate and ESG issues.
  • In March 2021, the SEC requested public input on climate-related disclosures to help evaluate current rules. The comment period closed in June 2021, with SEC Chair Gary Gensler reporting that of the 550 unique comment letters received, 75% supported mandatory climate disclosure rules.
  • In September 2021, the SEC staff released a sample letter indicating extensive questioning of the quality of public companies’ climate disclosures. The SEC staff  sent follow-up letters, including requests for support for materiality assessments. To date, the related correspondence with nearly 30 registrants (totaling around 160 comments) has been made public.
  • These activities culminated in the SEC issuing its proposed climate reporting rules on March 21, 2022.

Qualitative and quantitative disclosures

Example qualitative disclosures:

  • Oversight and governance of climate-related risks.
  • Material impact of identified climate-related risks on the registrant’s business and consolidated financial statements over the short-, medium- and long-term.
  • Processes for identifying, assessing and managing climate-related risks and integration into overall risk management.
  • Climate-related targets or goals and transition plan, if any.
  • Description of scenario analysis used to assess registrant’s business strategy to climate-related risk, including parameters and assumptions.

Example quantitative disclosures:

  • Impact of climate-related events and transition activities on consolidated financial statement line items and related expenditures, financial estimates and assumptions.
  • Scope 1 (direct) and Scope 2 (indirect) GHG emissions metrics, separately disclosed. Disclose by disaggregated constituent GHG and aggregated in absolute and intensity terms, excluding offsets.
  • Scope 3 (indirect emissions in registrant’s value chain), if material or if the registrant has set Scope 3 GHG emissions targets or goals. Smaller reporting companies would be exempt from Scope 3 disclosures; other registrants would have safe harbor from certain forms of liability in connection with the disclosures.

Location and timing of disclosures

  • The following disclosures would be required in the financial statements:
    • Financial impact metrics on a line-item basis
    • Expenditure metrics on a disaggregated basis
    • Financial estimates and assumptions.
  • Other disclosures would be made annually in Form 10-K and in registration statements.
  • Registrants would be required to disclose in Form 10-Q (or 6-K) any material changes to the climate information reported in their Form 10-K (or 20-F).

Assurance

  •  The disclosures in the notes to the financial statements would be subject to audit as part of the audit of the financial statements.
  • Using a phased-in approach, Scope 1 and Scope 2 GHG emissions metrics outside the financial statements would be subject initially to limited assurance, and then reasonable assurance, for large accelerated and accelerated filers. Assurance would be provided under publicly available attestation standards (e.g. those of the AICPA).
  •  



Related content

Subscribe to our newsletter

Receive timely updates on accounting and financial reporting topics from KPMG.

Receive timely updates on accounting and financial reporting topics from KPMG.

ARO

Use our Accounting Research Online for financial reporting resources.

Use our Accounting Research Online for financial reporting resources.