Earlier this week, the SEC announced proposed rules (Release No. 33-11042) for new, climate-related disclosures. The proposals dramatically expand the requirements of the SEC’s 2010 guidance on climate-related disclosures. While most large companies have been providing some climate-related information as part of ESG reporting in CSR or Sustainability Reports outside of their SEC filings, these rules, if adopted, will necessitate a significant overhaul of companies’ climate-related analysis, procedures, and reporting and will subject any climate-related disclosure to stricter securities law liability standards.
The proposed amendments modify Regulation S-X and Regulation S-K to require the following disclosures:
Notably, disclosures regarding GHG emissions by accelerated filers and large accelerated filers will require an attestation from an independent third-party expert. The proposed rules establish guidelines for this new type of attestation provider based on some of the approaches used for independent financial audits.
Mitigating Aspects of the Proposed Rules
The SEC made some choices reflecting the expected costs and difficulties:
The proposed rules are based on existing voluntary sustainability reporting frameworks: the G-20 affiliated Taskforce on Climate-Related Financial Disclosure (TCFD) and the Greenhouse Gas Protocol (GHG Protocol). The SEC says it selected TCFD because of its wide use internationally, with the EU and the UK indicating their intention to base mandatory climate-risk disclosures on it. The SEC says it chose the GHG Protocol because it is recommended by the EPA and incorporated into TCFD and other widely used sustainability reporting frameworks.
The TCFD framework is used by many companies, though it is not currently the most-used framework in the US. More companies use other frameworks, such as CDP, GRI, CDSB and SASB, and of the companies that do use TCFD and the GHG Protocol, many do not entirely follow those frameworks.
The proposed rules will provide a phase-in period depending on the company’s filer status. The earliest disclosure requirements will come into effect in 2024 (filing for fiscal year 2023) for Large Accelerated Filers. Smaller Reporting Companies, on the other hand, will not have any required disclosures until 2026 (filing for fiscal year 2025).
Because a majority of S&P 500 companies are disclosing ESG information outside of SEC submissions and very few are obtaining assurance from a public auditing firm regarding ESG information, a two or three year phase-in period means that most companies will need to take prompt action to prepare for compliance.
The proposed rules discuss two types of safe harbors. The first is an entirely new safe harbor for Scope 3 emissions disclosures. This safe harbor addresses Scope 3 disclosure liability concerns for inaccurate statements based on information provided by third parties, as long as such statements are reaffirmed with reasonable basis and in good faith.
The second is a pre-existing safe harbor pursuant to the Private Securities Litigation Reform Act (PSLRA) for forward-looking statements. While the proposed rules incorporate this safe harbor, it is important to note that there are limitations to its protection. This safe harbor will not apply to forward-looking statements made in connection with an IPO, or to MLPs and other non-corporate entities. It also will not limit the SEC’s ability to bring enforcement actions.
Smaller Reporting Companies are exempted from Scope 3 emissions disclosure requirement.
However, the proposed rules do not contain any exemption for newly public issuers, and so would require the mandated disclosures in registration statements for IPOs. The proposed rules also would not exempt foreign issuers.
In anticipation of the new rules adoption, companies should be prepared to address the following:
The SEC has been tightening comment periods, so comments on the proposed rules are due on the later of May 20, 2022 or 30 days after their publication in the Federal Register.
If you have any questions about these or related topics, your regular Locke Lord contact or any of the authors can discuss these matters with you.
The post SEC Proposes Climate-Related Disclosure Requirements appeared first on Capital Markets.
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