On March 21, 2022, the Securities and Exchange Commission (SEC) proposed new rules that would require registrants, including foreign private issuers, to include certain climate-related disclosures in the body of annual and quarterly reports (i.e. Forms 10-K, 10-Q and 20-F) and registration statements (i.e. Forms S-1, F-1, S-4 and F-4), as well as new disclosures in the audited notes to annual financial statements. For certain registrants, a new attestation report by an independent outside expert relating to additional quantitative disclosures on greenhouse gas (GHG) emissions may be required in certain filings.
These new proposed rules are intended to mandate the disclosure of information about a registrant’s climate-related risks that are likely to have a material impact on its business and results of operations, information about the steps the registrant’s management and board of directors are taking to identify and managing such risks and quantitative disclosures relating to GHG emissions. These rules are also intended to bring consistency to climate-related disclosure across all registrants. Additionally, the requirement that the additional disclosures be included in registration statements and annual reports filed with the SEC will subject the registrant to the full range of liability for the climate-related disclosures in their SEC filings. These proposed rules are currently subject to public comment and may differ from the final version of these rules. The SEC is seeking comments by the 30th day after the release’s publication in the Federal Register or by May 20, 2022, whichever is later.
Below is a summary of the different components of the proposed rules.
Narrative and GHG Emission Disclosure Requirements
The proposed rules make certain additions to Regulation S-K that would require robust disclosure of information regarding:
- Climate-related risks that are reasonably likely to have a material impact on the registrant’s business or consolidated financial statements over the short, medium, and long term, as well as the actual and potential impacts of those risks on its strategy, business model, and outlook. More specifically, a registrant should discuss the impact on the above risks in connection with a its:
- business operations, including the types and locations of its operations;
- products or services;
- suppliers and other parties in its value chain;
- activities to mitigate or adapt to climate-related risks, including adoption of new technologies or processes;
- expenditure for research and development; and
- any other significant changes or impacts on the registrant or its business.
- The oversight and management of climate-related risks by the registrant’s board of directors and management, including details on how the board and management exercise their oversight and engage on the setting of climate-related targets and goals, as well as disclosure regarding climate-related expertise;
- Any analytical tools, such as scenario analysis, that the registrant uses to assess the impact of climate-related risks on its business and consolidated financial statements;
- If a registrant uses an internal carbon price, details regarding the carbon price, how it is determined and implemented, and the rationale for such usage;
- The registrant’s process for assessing, identifying and managing climate-related risks and whether any such processes are integrated into their overall risk management system or processes; and
- If the registrant has adopted a transition plan as part of its climate-related risk management strategy, a description of how the registrant plans to mitigate or adapt to any identified physical or transition risks, and an annual update describing actions taken in accordance with the plan’s targets or goals.
Additionally a registrant may be required to disclose its GHG emissions data for its most recently completed fiscal year, as well as for prior fiscal years (to the extent available) in its consolidated financial statements. This information includes:
- Scope 1 GHG emissions (i.e., GHG emissions from operations that are owned or controlled by the registrant) and Scope 2 GHG emissions (i.e., GHG emissions from the generation of purchased or acquired electricity or other energy source consumed by operations owned or controlled by the registrant);
- Scope 3 GHG emissions (i.e., all indirect GHG emissions not otherwise included in Scope 2) in absolute and intensity terms, only if material or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions.
Changes to Financial Statements
The proposed rules make certain additions to Regulation S-X that would add new items to be provided in the registrant’s financial statements. Registrants would be required to provide new mandated climate-related financial statement metrics and related disclosure in a note to their consolidated financial statements, including disclosures regarding the financial impact of climate-related events and transition activities on any relevant line items in the registrant’s consolidated financial statements during the fiscal years presented. As part of the registrant’s financial statements, these financial statement metrics would be subject to audit by the registrant’s independent registered public accounting firm.
The proposed rules would require both accelerated filers1 and large accelerated filers2, including foreign private issuers, to include in certain filings an attestation report covering, at a minimum, the disclosure of its Scope 1 and Scope 2 emissions and to provide certain related disclosures about the attestation service provider. The proposed rules would provide certain minimum attestation report requirements and standards acceptable for attestation frameworks, and would require an attestation service provider to meet certain minimum qualifications, including with respect to independence.
The proposed rules contemplate a phase-in period that require large accelerated filers to begin to provide a majority of these disclosures beginning in 2024 to cover the registrant’s 2023 fiscal year period, accelerated filer and non-accelerated filers to provide these disclosures beginning in 2025 (for the 2024 fiscal year period) and smaller reporting companies to provide these disclosures beginning in 2026 (for the 2025 fiscal year period). Each filer would have an extra year to provide for the Scope 3 disclosures, with the exception of smaller reporting companies, who are excluding from making these disclosures. As noted above, these requirements and the phase-in periods apply to both domestic filers and foreign private issuers.
Assuming the SEC adopts the proposed rule later this year and a filer has a December 31 fiscal year-end, these climate-related disclosures would be required under the following deadlines:
|Registrant Type||Disclosure Compliance Date|
|All proposed disclosures, including GHG emission metrics: Scope 1 and Scope 2 and associated metrics, but excluding Scope 3||GHG emissions metrics: Scope 3 and associated metrics|
|Large accelerated filer||Fiscal year 2023 (Filed in 2024)||Fiscal year 2024 (filed in 2025)|
|Accelerated filer and non-accelerated filer||Fiscal year 2024 (filed in 2025)||Fiscal year 2025 (filed in 2026)|
|Smaller reporting company||Fiscal year 2025 (filed in 2026)||Exempted|
A number of public companies have already prepared some of the information required under the new rules in annual ESG reports. However, these rules, if adopted, represent a change in public companies’ reporting obligations with respect to climate change and environmental impact, and will require significant efforts to compile and verify the required disclosures. Importantly, mandatory inclusion of the enhanced disclosures in SEC reports and registration statements will also subject public companies to addition liability for any misrepresentation or omissions in their climate-change disclosures.
While these proposed rules remain subject to further amendments resulting from the public comment period and even to legal challenges, companies should begin to discuss these disclosure changes with their securities law counsel and auditors. Seward & Kissel will continue to monitor the progress of these important rule changes and provide additional updates to its clients. If you have any questions about these proposed rules, please contact Edward Horton (212-574-1265), Keith Billotti (212-574-1274) Debra Franzese (212-574-1353), Anthony Tu-Sekine (202-661-7150), Filana Silberberg (212-574-1308), Max Lindenfeld (212-574-1317) or your primary Seward & Kissel attorney.