Coping with SEC’s New Climate Disclosure Requirements
The impact of climate change affects every facet of society in today’s fiercely interconnected world. Capable of wiping up to 18% of GDP off the worldwide economy by 2050, it is a force to be reckoned with; and the US Government, along with the SEC, have taken note.
As recently as March 21, 2022, the SEC proposed rule amendments to compliance reports requiring public companies to include certain climate-related information in their registration statements and periodic reports. The data that the companies will need to furnish extends to oversight and governance, operational and financial impacts, risk identification and management, and emissions.
SEC’s suggested rules also call for enhanced disclosure on behalf of companies that have taken specific climate actions, such as setting shared goals or targets or adopting transition plans.
These suggested changes, if adopted, are said to cause a sweeping shift in public companies’ disclosure obligations. The SEC argues that the proposed rules’ breadth, specificity, and complexity must supply adequate information on climate-related risks to investors.
However, the naysayers, including a few within the SEC, consider the suggested mandate a significant regulatory overreach that would impose massive disclosure and compliance burdens on companies.
DataTracks provided a background on the SEC’s climate disclosure activities that gave stimulus to the current set of suggested rules. Since then, the appetite for climate disclosure has only increased from many large institutional investors. The SEC voted to bring these new rules to the table for improving transparency.
Critical Aspects of Proposed Rule
The Proposed Rule calls for public companies (including foreign private holders) to provide climate-related disclosure in periodic reports (Forms 10-K, 10-Q, and 20-F) and registration statements (Forms S-1, S-3, F-1, and F-3). Disclosures regarding the following aspects are mandatory:
the oversight and governance of climate-related risks by the company’s board and management;
- How climate-related risks identified by the company have had or are likely to have a material impact on its business and consolidated financial statements, as well as how climate risks affect its strategy, business model, and outlook;
- The company’s processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the company’s overall risk management system or processes;
- Scope 1 and 2 greenhouse gas (“GHG”) emissions, separately disclosed, expressed in absolute terms (not including offsets) both:
– by disaggregated constituent greenhouse gases and in the aggregate, and
– in terms of intensity; - Scope 3 GHG emissions and intensity, if material, or if the company has set a GHG emissions reduction target or goal that includes its Scope 3 emissions; and
- To the extent applicable, details on the company’s public climate-related targets or goals (including any use of carbon offsets or renewable energy certificates [“RECs”] to achieve such targets and goals), transition plan, use of scenario analysis, and/or use of internal carbon pricing.
The Proposed Rule would require companies to:
(i) provide the climate-related disclosures in a separately captioned section of their registration statement or periodic report,
(ii) provide climate-related financial statement metrics addressing the impact of various climate-related events and mitigation and transition expenditures, together with related estimates and assumptions, in a note to the company’s financial statements addressing the impact on line items in companies’ financial statements,
(iii) electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL, and
(iv) generally file rather than furnish the climate-related disclosure.
If we assume that these rules get mandated in 2022, the earliest they could be put to action is in the fiscal year 2023 and begin to apply to SEC filings in 2024.
While it may seem like there is plenty of time, there never really is when it comes to compliance. Be on the road to preparing for this monumental change to your disclosures. Talk to a reliable, agile, and trustworthy iXBRL expert at DataTracks and understand what it would entail to integrate climate-related information in your compliance process.