Thompson Hine | SEC Releases Long-Awaited Proposed Climate Disclosure Rules

On March 21, 2022, the SEC released its long-awaited climate disclosure proposal, which is modeled, in part, on the Task Force on Climate-related Financial Disclosures (TCFD) framework. Among other things, the proposed rules would require a company to disclose in its annual report on Form 10-K information regarding:
• Climate-related risks;
• Direct greenhouse gas (GHG) emissions (Scope 1 emissions), indirect GHG emissions resulting from purchased energy (Scope 2 emissions), and, if material or if the company has set a target or goal including such emissions, all other indirect GHG emissions occurring in its value chain, both upstream and downstream (such as emissions generated by purchased goods and services, transportation and distribution, processing or use of the company’s products by third parties, employee commuting or business travel, or investments) (Scope 3 emissions); and
• The financial impact of climate-related events and
transition activities.

Notably, larger companies would also be required to provide a third-party attestation report from an independent attestation service. The climate-related disclosures would need to be included in a company’s annual report on Form 10-K (with material changes to such disclosures included in quarterly reports on Form 10-Q) and in registration statements and tagged in inline XBRL. Most of the required disclosures would be provided for in a new Item 1500 in Regulation S-K. The forward-looking statement safe harbors would apply to portions of the proposed disclosures.

The proposed rules also include proposed phase-in periods for disclosure and some exemptions for smaller reporting companies.

What Do These Proposed Rules Mean for Companies?

The proposal is an expansive rulemaking, requiring, among other things, companies to collect, verify, and report their GHG emissions. While reporting of Scope 3 emissions is qualified by a materiality standard for companies that do not include Scope 3 in their public GHG reduction commitments, the release includes a soft mention of 40% as a threshold that could potentially be material. For many companies, Scope 3 emissions would exceed that threshold. Then there is, of course, a question of determining materiality, which, in itself, requires companies to collect data to measure the significance of Scope 3 emissions to the company, supplier challenges, expenses, and the likely need for additional internal or external resources.

The requirement to include these disclosures in annual reports accelerates timelines for many of the companies that currently include these disclosures in ESG reports or standalone TCFD reports, during a time that is already very busy for financial professionals in finalizing audits and annual report disclosures. Third-party verification requirements impose a further constraint on the timing.  And that is only discussing GHG emissions, let alone the proposed financial statement disclosures and other disclosures.

A substantial number of comment letters, as well as litigation and other challenges to the proposed rules, are likely. Regardless, compliance with the final rules is expected to be a significant undertaking. For those companies that have been waiting to see the SEC’s proposed rulemaking before implementing ESG programs and governance structures, the time to act is now. Companies that already have an ESG program should assess such program, with the goal of aligning the program with the SEC’s proposed requirements, as well as the company’s investor and other stakeholder expectations,  which could be a lengthy task.

Timing

Comments are due on the proposal by the later of 30 days after publication in the Federal Register or May 20, 2022. The proposal is likely to generate a substantial number of comment letters.

View the entire bulletin in PDF format.

For more information, please contact:
Jurgita Ashley
216.566.8928
Jurgita.Ashley@ThompsonHine.com

Julia Miller
216.566.5831
Julia.Miller@ThompsonHine.com

Compliments of Thompson Hine – a member of the EACCNY.