SEC proposes climate reporting and assurance rules

• 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.
  

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.

• 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).

•  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).