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SEC Proposes Extensive Climate Change Reporting Obligations for Public Companies

Energy, Infrastructure & Environment Alert Cynthia A. Faur, Jacqueline M. Vidmar, Ryan P. Morrison, Steve P. Emerick

On March 21, 2022, the Securities and Exchange Commission (SEC) proposed its long-awaited rules requiring more robust climate change disclosures for publicly traded companies. The reach of these proposed rules is extremely broad - addressing not only a company’s carbon footprint, but also its short-, medium-, and long-term plans related to climate change and its assessment of how the world’s changing climate will affect its operations and value. For some companies, the proposed rule would also mandate discussion of greenhouse gas (GHG) impacts of their supply chains and their customers use of their products. In short, if finalized, the SEC’s proposed regulations would completely overhaul the climate change disclosure obligations of public companies and create a new level of accountability and transparency related to sustainability reporting.

The proposed rules include the following key disclosures in annual reports and registration statements:

  • The processes used by the company to identify, assess, and manage climate-related risks and whether any such processes are integrated into the company’s overall risk management system or processes;
  • Short-, medium-, or long-term material impacts on the company’s business or financial statements resulting or likely to result from identified climate-related risks;
  • How identified climate-related risks have affected or are likely to affect the company’s strategy, business model, and outlook;
  • Detailed information on the company’s transition plan if one is in place to assist in climate-related risk management. Information to be disclosed includes a description of the plan and the relevant metrics and targets used to identify and manage any physical and transition risks;
  • The impact of climate-related events (e.g. severe weather events and other natural conditions, like fires) and transition activities on the line items of the company’s consolidated financial statements, as well as the financial estimates and assumptions used in the financial statements;
  • The company’s direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2). These emissions must be separately disclosed, expressed both by disaggregated constituent GHGs (e.g. carbon dioxide, methane, etc.) and in the aggregate, in absolute terms, not including offsets, and in terms of intensity (per unit of economic value or production);
  • Indirect GHG emissions from upstream and downstream activities in a company’s value chain (Scope 3), if material, or if the company has set a GHG emissions target or goal that includes Scope 3 emissions, in absolute terms, not including offsets, and in terms of intensity; and
  • If the company has publicly set climate-related targets or goals, information about:
    • The scope of activities and emissions included in the target, the timeframe by which the target is expected to be achieved, and any interim targets;
    • How the company intends to meet its climate-related targets or goals;
    • Relevant data to demonstrate whether the company is making progress toward meeting the target or goal and how such progress has been achieved, with updates each fiscal year; and
    • If carbon offsets or renewable energy certificates (RECs) have been used as part of the company’s plan to achieve climate-related targets or goals, certain information about the carbon offsets or RECs, including the amount of carbon reduction represented by the offsets or RECs.

These disclosure requirements, which the SEC believes are needed to ensure that climate disclosures are consistent, comparable, and reliable, are surprisingly extensive, and, if finalized, will require all public companies to devote significant time and effort to evaluate not only their GHG emissions but also the costs and risks associated with climate-related/impacted assets – down to the level of specific assets by zip code. With this proposed rule, the SEC will make climate a board level, C-suite issue for every public company, even those not traditionally focused in this area.

This proposed rule would also essentially require companies to open up their books as to how they evaluate climate-related risks. For manufacturing companies, this could include decisions related to facility siting in areas prone to severe weather, flooding, drought, or fire risk. For financial companies, this could include their decision-making process related to investing in assets with significant carbon impact. For companies that use an internal “price of carbon” when making decisions, information related to the “price of carbon” and how it is determined would need to be disclosed. Even the most routine aspects of work, like the commuting practices of employees, would need to be evaluated for their climate impact and subject to reporting.

This proposed rule will result in greater scrutiny of GHG emissions and sustainability reporting. As noted above, all public companies will be required to report their own annual GHG emissions and the GHG emissions associated with their energy use. Larger companies (large accelerated filers and accelerated filers) will also be required to provide an attestation report for these emissions after a phase-in period. For some companies, quantifying GHG emissions may be new and understanding sources of those emissions may be challenging. For large GHG sources that have been reporting GHG emissions to the United States Environmental Protection Agency (U.S. EPA) and/or state agencies, the deadline for submittal of information under the SEC requirements may pre-date other deadlines and require companies to estimate emissions and potentially update their filings to ensure consistency with subsequent reports made to U.S. EPA and/or the states.

This proposed rule could also significantly impact public companies that do not themselves have meaningful GHG emissions but have investments in or contract with companies that have a greater climate impact. For these companies, these indirect GHG emissions may be “material” and, therefore, reportable, but many of these companies may not have previously focused on climate change-related issues. It may be particularly challenging for them to obtain reliable GHG emission information from suppliers and third parties or to estimate the climate impact of their distributors and customers.

If finalized, the reporting and attestation requirements of the proposed rule would be phased in. Based on the SEC’s optimistic example assuming issuance of the rule prior to the end of the current calendar year, large accelerated filers with a December 31 fiscal year would be required to comply with all proposed disclosures except those related to Scope 3 emissions in their 2023 Form 10-Ks filed in calendar year 2024 and to make any required Scope 3 disclosures in their 2024 Form 10-Ks filed in calendar year 2025. Accelerated Filers and Non-Accelerated Filers would have an additional year to make both the general and Scope 3 disclosures (2025 and 2026, respectively), and small reporting companies (SRCs) would have an additional two years (2026) to make the general disclosures. SRCs would be exempt from Scope 3 disclosure requirements.

The SEC is currently seeking comment on this proposal. The comment period will end either 30 days after the rule is published in the Federal Register or May 20, 2022 (which is 60 days after issuance of the proposed rule), whichever is later.

This proposed rule is controversial due to its scope, and almost certainly will be challenged in litigation, with the result that the effective phase-in dates may be later, perhaps much later, than 2024, even for large accelerated filers. Regardless of the ultimate outcome, however, it is clear, from the proposed rules and the SEC’s September 2021 round of standardized 10-K comments on climate-related risk disclosures, that a public reporting company should now formally include transition and physical climate change risks in its risk management processes, whether or not the company has a material direct or indirect carbon footprint or exposure to climate change-related market forces.

If you have any questions concerning this proposed rule and how it may impact you, please do not hesitate to contact your Quarles & Brady attorney or:

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