The Securities and Exchange Commission officially proposed rule changes that would require companies to include climate-related disclosures as well as periodic reports when they register to be public, including how Scope 1, 2 and 3 emissions impact their business operations and financial results.
The proposed rule changes would require registrants to disclose information regarding their direct Scope 1 emissions and indirect Scope 2 emissions from purchased electricity or other forms of energy. Companies would be required to disclose Scope 3 emissions if they have set up targets that include them.
The rules would also require companies to disclose their climate-related risks and management processes, how those risks have had or are likely to have a material impact on its business, how they have impacted their business model, and how climate-related events such as severe weather and other natural occurrences will impact their financial statements.
The SEC’s proposal does provide a safe harbor from liability from Scope 3 emissions disclosures for smaller companies.
SEC Chair Gary Gensler announced last week the enhanced disclosure rules were coming. He says investors who manage more than $130 trillion in assets have requested companies make such disclosures.
The SEC says that in analyzing 7,000 annual reports submitted in 2019 and 2020, a third included some sort of disclosures on climate-related targets. The proposal draws on existing SEC rules as well as standards from the Task Force on Climate-related Financial Disclosures.
“Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions,” Gensler said in a statement regarding the proposed rules. “I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance.”
The proposed rules include a phase-in period for all registrants with compliance dates dependent on their filer status, with an additional phase-in period for Scope 3 emissions disclosure. NPR reported the phase-in would mean companies may not have to file their disclosures until at least 2024.
Reuters reported that the SEC may face legal challenges regarding the proposal, especially with the Scope 3 rules where there is a lack of standards for calculating Scope 3 emissions. Reuters also reported any legal challenges will say the SEC does not have the authority to require Scope 3 information.
The public will have 60 days to comment on the proposed rules.
“The SEC is finally heeding the calls from institutional investors, companies, regulators, and the public,” says Mindy S. Lubber, Ceres CEO and President. “The thoughtful climate disclosure proposal announced today would allow investors and companies to better tackle climate-related financial risks across investment portfolios and global supply chains and seize the opportunities that come with acting on those risks.”