SEC proposes sweeping rules on climate-related risk disclosures

By Linda Hsieh, Editor & Publisher

We knew it was coming, but now it’s really on our doorstep: The US Securities and Exchange Commission (SEC) has finally announced its proposal to require companies to include climate-related disclosures as part of their audited financial statements. The required information also would include disclosure of a company’s greenhouse gas (GHG) emissions.

In a statement, SEC Chair Gary Gensler said he believes the proposal would provide investors with “consistent, comparable and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.” The goal, he said, is to ensure that climate-related risks are disclosed more efficiently and effectively to meet investor demand.

The proposed changes would require a registrant to disclose information about:

The registrant’s governance of climate-related risks and relevant risk management processes;

How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements;

How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model and outlook; and

The impact of climate-related events and transition activities on the line items of a registrant’s consolidated financial statements.

For registrants that have publicly set climate-related targets or goals, the proposed amendments also would require certain disclosures.

Further, the proposed rules would require a registrant to disclose information about its direct GHG emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3). 

The SEC asserts that the proposed disclosures are similar to those that many companies already provide based on disclosure frameworks like the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.

What now?

The SEC’s 500+ page proposal is already widely deemed to be not only far-reaching but also prescriptive. Obviously, it will require time for companies and industry groups like API and IADC to fully review and assess the changes being proposed before they can understand how companies and industries will be impacted. On the other hand, it’s not hard to see the potential for unintended, negative consequences when a federal agency tries to implement such large-scale changes.

“We are concerned that the Commission’s sweeping proposal could require non-material disclosures and create confusion for investors and capital markets,” API said in a statement issued on 21 March. “As the Commission pursues a final rule, we encourage them to collaborate with our industry and build on private-sector efforts that are already under way to improve consistency and comparability of climate-related reporting.” 

The proposal is open for public comment through 21 May (or longer as industry groups like IADC request extensions), and it’s expected that there will be a flood of comments and perhaps even legal challenges. While the proposal will likely undergo a multitude of changes before a final rule is in place, and even though it may be years before there’s an effective date for requiring the disclosures, the time to pay attention is now.  DC 

Click here to view a Fact Sheet for the SEC’s proposed rule.

Linda Hsieh can be reached at linda.hsieh@iadc.org.