The Securities and Exchange Commission (SEC or Commission) published proposed rules on March 21 that, for the first time, would codify the Commission’s expectations regarding what kinds of climate-related disclosures public companies must make in their required filings to the SEC. Prior to now, companies have had to rely on 2010 guidance from the Commission to determine what information they should disclose to investors regarding their climate-related risks.
The proposed rules would require companies to disclose the following types of climate-related information, among others, in their registration statements and periodic reports:
- Climate-related risks and their anticipated impacts on the business;
- The company’s strategy for governance of climate-related risks;
- The company’s greenhouse gas (GHG) emissions;
- Information about any internal carbon prices used by the company; and
- Information about the company’s climate-related goals and targets.
In seeking information about a company’s GHG emissions, the SEC is requiring disclosure of both direct emissions (known as Scope 1), as well as indirect emissions from purchased energy (known as Scope 2). The rule would also require disclosure of emissions from upstream and downstream activities in the company’s value chain (known as Scope 3) if they are material or if the company has set a GHG emissions target that includes Scope 3 emissions. While many companies already report Scope 1 and 2 emissions to EPA on an annual basis, this rule would extend to even more companies. The materiality assessment to determine whether Scope 3 disclosures are required will be a challenge. In addition, companies required to disclose Scope 3 emissions may also face significant challenges in identifying and determining the reliability of that information since it is often not readily available.
For companies that have announced public-facing targets for reducing their GHG emissions, the SEC proposal would require disclosure of:
- The scope of the activities and emissions included in the target, including any interim targets and the time horizon for achieving the target;
- How the company intends to meet the target;
- Data to show whether and how progress is being made toward meeting the target, including updates on a fiscal-year basis; and
- If carbon offsets or renewable energy credits are being used to meet the target, information quantifying the amounts.
These disclosure requirements would force companies to take a hard look at public statements about their GHG reduction efforts and goals to make sure they can back them up. With greenwashing claims already on the rise due to additional scrutiny of corporate environmental marketing from investors, environmental groups, and the public, the SEC’s new rule would provide additional incentives for companies to carefully vet and substantiate any aspirational statements about reducing their carbon footprint.
The disclosure requirements in the proposed rules are modeled on the broadly accepted disclosure framework from the United Nations Task Force on Climate-Related Disclosures and the international GHG accounting standards of the Greenhouse Gas Protocol, both of which are already used by many entities. The rule would be phased in, depending on the filing status of the company, with an additional phase-in period and a safe harbor from liability for disclosure of Scope 3 emissions. The rule outlines expected compliance deadlines based on an expected rule effective date of December 2022. For a more detailed description of the proposed rule and its applicability, see SEC Proposes New Rules to Enhance and Standardize Climate-Related Disclosures. Once finalized, the proposed rule will have broad implications not only for SEC disclosures, but also for corporate Environmental, Social, and Governance (ESG) policies and related reporting and, as discussed above, environmental marketing.