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SEC Climate-Related Disclosure Proposal: Charting the Path Forward
- The SEC has issued a proposal requiring companies to disclose information about corporations' climate change risks within their filings.
- This proposal includes new requirements for qualitative and quantitative disclosures, attestations, and audit reporting requirements for Scope 1 and 2 Greenhouse Gas emissions.
- The SEC’s goal in creating this new proposal is to drive greater transparency from registrants to protect investors and solidify climate-related disclosures as required reporting.
SEC Proposed climate disclosure requirementsThrough its independent research of 6,644 annual filings, the SEC found that many companies were already disclosing both qualitative and quantitative metrics related to climate change (i.e., on a voluntary basis). Additionally, the SEC found that a subset of those companies was doing so in line with two of the most common frameworks and standards:
- Task Force on Climate-Related Financial Disclosures (TCFD) - The framework primarily used by companies that make qualitative, climate-related disclosures around governance, strategy, and risk management as well as certain quantitative disclosures (i.e., the metrics and targets used by a company to measure and assess climate risks, opportunities, and targets)
- Greenhouse Gas Protocol - The standardized framework used by most organizations to inventory, calculate, and manage greenhouse gas (GHG) emissions (i.e., the quantitative disclosures commonly referred to as Scope 1, Scope 2, and Scope 3 GHG emissions)
- New qualitative disclosures (under Regulation S-K) in a separate, captioned section of the annual filing, including but not limited to descriptions of:
- The governance of climate-related risks (e.g., board and management oversight)
- Material climate-related impacts on strategy, business model, and outlook
- Approaches to climate-related risk management
- GHG emissions metrics (e.g., Scope 1, Scope 2, and potentially Scope 3 emissions)
- Climate-related targets and goals, if any (e.g., net-zero commitments)
- Usage of an internal carbon price and how this price was determined
- New quantitative disclosures (under Regulation S-X) included as a note within the audited financial statements, including:
- Disaggregated information about the climate-related impacts, events, and transition activities to existing financial statement line items (FSLIs) above a certain threshold (e.g., increases to reserves, impairment charges, expenditures specific to transition activities, etc.)
- Incremental attestation and audit requirements
- Scope 1 and Scope 2 GHG emissions disclosures (under Regulation S-K) would be subject to an attestation requirement; however, the disclosures would initially be subject to an audit under the limited assurance standard and followed by an audit under the reasonable assurance standard two years later
- Climate-related impacts, events, transition activities, etc. to existing FSLIs would be subject to existing audit requirements (i.e., consistent with procedures performed over historical financial statement footnotes, including internal controls over financial reporting [or ICFR])
When would the proposed climate-disclosure updates go into effect?Under the proposed rule (which is subject to change after the comment period), domestic and foreign registrants would be required to adhere to the following phase-in timelines:
MGO's PerspectiveThrough our experience to date, and corroborated through the review of the SEC’s analysis of 6,644 annual filings (refer to pages 311-320 of the 506 page proposal for the analysis), many registrants across all industries are already voluntarily disclosing climate-related information. However, for the companies that have not yet moved to establish climate-related governance, evaluate their existing business strategies, analyze the emerging risks, or inventory the data required for climate-related metrics, the compliance effort is expected to be considerable. In the end, the SEC’s goal with the proposed rule appears to be two-fold:
- The first is to drive transparency from registrants to protect investors. As many issuers already disclose climate-related information voluntarily, standardizing the requirements will provide more comparable information while reducing compliance costs in the long run
- The second is a recognition that climate-related disclosures are not only here to stay but set to grow in importance in the coming decades. Given that anticipated growth, the SEC’s proposal will ensure the US regulatory environment is able to keep pace — especially with its international counterparts
Questions to consider about the SEC’s proposed ESG ruling
- Who is responsible for governance and oversight (at both the board and management level) of climate-related risks and opportunities?
- Which climate-related frameworks and/or standards has the company considered adopting or are already following for existing disclosures?
- Are existing qualitative and quantitative climate-related disclosures robust (i.e., considered investor-grade)?
- Are there sufficient processes and controls in place to ensure climate-related disclosures are complete, accurate, and timely?
- Is a communication plan in place to make employees aware of climate-related risks, opportunities, commitments, and progress?
- Does the board understand why ESG-related information (which is broader than the information in the climate-disclosure proposal) is important to investors and other stakeholders?