On March 21, 2022, the Securities and Exchange Commission (“SEC”) proposed rule amendments (the “Amendments”) requiring registrants to specifically disclose climate-related risks in registration statements and periodic reports. In line with the SEC’s focus on Environmental, Social and Governance (“ESG”)issues, the proposed Amendments reflect the ESG recommendations of the SEC Investor Advisory Committee Relating to ESG Disclosure. The Amendments also respond to perceived investor demand for standardized disclosure regarding the potential impacts of climate-related risks on individual businesses.
The Amendments would require a registrant to disclose information regarding:
- The oversight and governance of climate-related risks by its board and management;
- The actual or likely impact of climate-related risks on its business, consolidated financial statements, strategy, and outlook;
- Its transition plan as part of its climate-related risk management strategy;
- Testing of its business strategy in light of climate-related risks;
- The impact of climate-related events and transition activities on the line items of a registrant’s consolidated financial statements; and
- Specific to carbon issues:
- Information about its internal carbon price;
- Aggregated and disaggregated data regarding its direct (“Scope 1”) and indirect (“Scope 2”) GHG emissions, as well as indirect emissions from upstream and downstream activities in its value chain (“Scope 3”); and
- Significant additional disclosures relating to any publicly set climate-related targets.
Disclosure in Registration Statements and Annual Reports
The Amendments would require a registrant to:
- Provide climate-related disclosure in a separate, appropriately captioned section of its registration statement or annual report;
- Provide climate-related financial statement metrics and related disclosure in a note to its consolidated financial statements; and
- If an accelerated or large accelerated filer, obtain an attestation covering Scopes 1 and 2 emissions disclosure from an independent attestation service provider. The attestation would not be required for smaller reporting companies (“SRCs”).
Phase-In Periods and Safe Harbors
The Amendments would include:
- Phase-in periods for the compliance date, Scope 3 emissions disclosure, and attestation requirement, which will vary in timing and the type of assurance required based on filer status;
- Forward-looking statement safe harbors pursuant to the Private Securities Litigation Reform Act; and
- A safe harbor providing that Scope 3 disclosure will not be deemed fraudulent unless it is shown that the statement was made or reaffirmed without a reasonable basis or not in good faith.
See the table below summarizing the phase-in periods and required assurances:
If adopted, the Amendments would significantly increase the disclosure obligations of registrants. The Amendments are controversial and are expected to generate substantial comments about whether they are within the scope of the SEC’s authority, as noted by Commissioner Hester M. Peirce in her statement explaining her vote against the proposed rules. For interested parties, the Amendments are open to public comment until May 20, 2022.
Public companies should recognize that the SEC has had climate disclosure guidance in place since 2010 (Interpretation: Commission Guidance Regarding Disclosure Related to Climate Change (michaelbest.com)) and be sure that their current disclosures are consistent with that guidance. Companies should also be aware of a broader trend by the SEC to see ESG matters as falling within the scope of its regulatory authority.
How We Can Help
The Michael Best ESG team provides an integrated, strategic approach customized for each client’s situation. Our Securities and Capital Markets attorneys within the team frequently counsel public companies as they navigate ESG legal issues that have become a focus for many investors, the SEC, and other regulatory bodies. Please reach out to a member of our team or your Michael Best attorney for more information.
Michael Best Strategies is also monitoring the proposal and adoption of these rules. If you have any questions about the adoption process, please contact a member of the Michael Best Strategies team.