Alerts

SEC Approves Rule to Mandate Climate-Related Disclosures

An energy facility of multiple reactors with smoke billowing from the top

April 4, 2022

Landmark Securities and Exchange Commission rule would require disclosing indirect emissions & auditing of disclosures

On March 21, the Securities and Exchange Commission (SEC) approved several amendments to its rules under the Securities Act of 1933 and the Securities Exchange Act of 1934 requiring companies to provide certain climate-related information in their registration statements and annual reports. The SEC intends these changes to "enhance and standardize" companies' climate-related disclosures available to investors.

As a result of these amendments, companies will need to address the requirement to disclose in their standard financial statements both their climate-related risks and the actual or material impacts on the company's business, strategy, and outlook. The SEC's actions closely follow the framework set by the Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD has been at the forefront of providing guidance and recommendations for how companies can provide effective climate-related disclosures to financial markets.

 

Notable among the new amendments is the landmark requirement mandating that all publicly traded companies disclose their scope 1 direct greenhouse gas (GHG) emissions and scope 2 indirect GHG emissions associated with energy use.

 

The SEC proposal aligns with the GHG Protocol, which has advocated for a global GHG accounting standard since the late 1990s. The SEC will mandate scope 1 and scope 2 disclosures without regard to the link between materiality of the information to the company's financial metrics or its relevance to the financial return of an investment.

The SEC opted for a different approach, however, with respect to reporting scope 3 GHG emissions. Scope 3 emissions occur as a consequence of the upstream and downstream activities of third parties along a company's business chain. In many cases, the scope 3 emissions of a company are much larger than scope 1 or 2 emissions.

The GHG Protocol's scope 3 guidance identifies 15 distinct emission source categories. Companies will be required to disclose scope 3 emissions if the company has set an emissions reduction target that includes scope 3 emissions; if emissions are considered material to investors assessing financial exposure to climate-related risks, particularly transition risks; or if companies have developed a strategy to reduce their carbon footprint in the face of regulatory, policy, and market constraints. Absent these considerations, companies may choose to omit scope 3 data from one or more source categories.

The proposed amendments will have substantial effects on how publicly traded companies in the U.S. manage their businesses. The SEC is likely to advise companies to adopt a precautionary approach and report climate-related information, particularly scope 3 GHG emissions information, in financial disclosures. The SEC is also likely to urge companies deciding to either include or omit climate-related information to, at a minimum, understand the basis for those determinations and to consider disclosing their findings and rationale to investors.

In addition to GHG emissions, the SEC's amendments require companies to disclose legacy environmental liability risks, including the physical and transition risks that may arise due to climate change. The SEC's announcement comes at the same time climate scientists in the U.S. announced unprecedented high daytime air temperatures at both the Earth's north and south poles. Global warming caused by higher GHG emissions is widely believed to be responsible for the rapid melting of the polar ice caps and rise in sea levels worldwide. The SEC's actions aim to spur all regulated companies, big and small, to plan for these and other consequences of climate change sooner rather than later and to focus on strategies that build long-term resilience and minimize economic disruptions.

The 469-page document describing the SEC's proposed amendments is open for a 60-day public comment period. Final passage is expected by fall of 2022. The SEC proposes a gradual phase-in of the compliance dates for the new requirements depending on the company's SEC filing status, with the expectation that all companies are compliant in fiscal year 2024 and providing reasonable assurance level disclosures in fiscal year 2027.

How Exponent Can Help

Exponent offers clients the scientific and engineering expertise needed to identify and assess the environmental and climate-related liabilities and risks required by the SEC's new climate-related disclosure requirements. Our team of experts understand the changing regulatory and investment landscapes prompted by these new requirements and can provide the scientific insights and technical resources needed to help clients understand the significance of climate-related information on future business operations and adapt to supply chain and market changes. Whether through advising on requirements or evaluating results before disclosure, Exponent can help clients navigate their environment and health challenges by offering integrated expertise from environmental scientists, data scientists, polymer scientists, materials chemists, chemical engineers, ecologists, toxicologists, and chemical regulation professionals.