On March 21, 2022, a divided U.S. Securities and Exchange Commission (SEC) proposed enhanced and standardized climate-related disclosure rules to require disclosure of climate-related information in registration statements, annual reports, and the audited financial statements filed with the SEC, by both domestic registrants and foreign private issuers. This client alert summarizes the proposed amendments and disclosure requirements. The SEC will seek comments to the proposed rule until at least May 20, 2022.¹

Disclosure Requirements

New "Climate-Related Disclosure" Section

Under the proposed rules, the following climate-related disclosures would be required in a separately captioned "Climate-Related Disclosure" section, except for the information required in the notes to the financial statements. The information under this section could be incorporated by reference from other parts of the disclosure document (e.g., from risk factors, business, management's discussion and analysis, or the financial statements) or from other filed or furnished reports, as long as the registrant satisfies the general incorporation by reference requirements. Additionally, any forward-looking statements required under these proposed rules would be covered by the Private Securities Litigation Reform Act (PSLRA) safe harbor, subject to customary exceptions (e.g., IPO registration statements and SEC enforcement action). A short summary of the proposed disclosure requirements is bulleted below.

• Governance. Registrants would be required to describe board and management governance of climate-related risks and opportunities, including identification of the individuals and committees with oversight responsibilities, a description of any board member's expertise in climate-related risks, disclosure of how often climate-related topics are discussed by the board or its committees, and a description of the processes through which climate-related risks and opportunities are integrated into business strategy and planning, and whether and how the board sets climate-related goals and targets and how it oversees progress against such goals and targets.
• Risk Management. Registrants would be required to describe processes for identifying, assessing, and managing climate-related risks, and discuss the integration of climate-related risk management into such registrant's overall risk management system or processes. If a separate board or management committee is responsible for climate-related risks, registrants would have to disclose how that committee interacts with the board or management committee that manages other risks. These disclosures should help investors understand whether the registrant has centralized processes for managing climate-related risks.
• Identify Climate-Related Risks and Opportunities. Registrants would be required to identify material climate-related “physical”² and “transition”³ risks and opportunities that currently impact or may impact the registrant’s consolidated financial statements, business operations and value chains (including counterparties and third-parties) over the short-, medium-, or long-term.⁴ To the extent registrants disclose physical risks, they would also be required to identify the location of such physical risks.
• Greenhouse Gas (GHG) Emissions. Registrants would be required to disclose aggregate carbon dioxide equivalent (CO₂e) and disaggregated GHG, not including offsets, Scope 1 (a company's direct emissions) and Scope 2 (emissions from a company's purchase and consumption of energy) emissions for the most recently completed fiscal year and, to the extent data is reasonably available, for the other fiscal years included in the consolidated financial statements. Disclosure would include total emissions and be normalized in terms of intensity (per unit of economic value or production). If material, registrants other than smaller reporting companies would also need to disclose Scope 3 (value chain) GHG emissions. Such Scope 3 disclosures would benefit from a safe harbor protection against liability for being false or misleading. For Scope 1, Scope 2, and Scope 3 emissions, registrants may use reasonable estimates of emissions as long as they describe their assumptions underlying and reasons for using the estimates.
• Targets and Goals. Registrants would be required to disclose whether they have set any targets or goals related to the reduction of GHG emissions, or any other climate-related target or goal.⁵ If a registrant has set a climate-related target or goal, it must disclose contextual information about such target or goal, such as the scope of activities covered by the goal, the units measured, the time horizon for achievement of the goal and any interim targets. Target and goal disclosure would need to be updated each fiscal year by describing the actions taken during the year to achieve its targets or goals, and must include data that indicate whether the registrant is making progress toward meeting the target or goal.
• As Applicable Disclosures. The proposed rules include several disclosure items that a registrant would need to include only if applicable to such registrant. These include:
  • Transition Plans.⁶ Registrants would be required to describe any plan, including the relevant metrics and targets used to identify and manage any physical and transition risks. Transition plan disclosure would need to be updated each year by describing the actions taken during the year to achieve the plan's targets or goals.
  • Carbon Offsets or Renewable Energy Credits (RECs).⁷ Registrants would be required to disclose the role that carbon offsets or RECs play in the registrant's climate-related business strategy. If carbon offsets or RECs have been used as part of the plan to achieve targets or goals, registrants would need to disclose the amount of carbon reduction represented by the offsets or energy represented by the RECs, the source of the offsets or RECs, a description and location of the underlying projects, any registries or other authentication of the offsets or RECs, and the cost of the offsets or RECs.
  • Maintained Internal Carbon Price. Registrants would be required to disclose any maintained internal carbon price, a description how such internal carbon price is derived, and an explanation of how the carbon price is used to evaluate and manage climate-related risks. If the registrant uses more than one internal carbon price, it would need to provide these disclosures for each price, and explain why the registrant uses different prices.
  • Scenario Analysis.⁸ Registrants would be required to disclose both qualitative and quantitative information about the scenarios considered, including parameters, assumptions, and analytical choices, and the projected principal financial impacts on the registrant's business strategy under each scenario.

New Financial Statement Disclosure

The proposed rules also provide for disclosure of disaggregated climate-related metrics in a separate note to the financial statements. Since these metrics would be included in audited financial statements, they would be included in the scope of any required audit of the financial statements and within the scope of the registrant's internal control over financial reporting. The metrics required would be as follows:

• Financial Impact Metrics. Financial impact metrics complement disclosure of physical risks and transition risks by disclosing the financial statement impact of identified climate-related risks, such as costs due to severe weather events or to transition to a low-emissions supply chain. Registrants would need to disclose the financial impacts of climate-related risks on financial statement line items unless the aggregated impact of such risks is less than one percent of the total line item for the relevant fiscal year.
• Expenditure Metrics. Expenditure metrics cover the total amounts (i) expensed and (ii) capitalized during the fiscal years presented. The expenditures would then be categorized depending on whether they were incurred in response to climate-related events or for transition activities. Disclosure of expenditures would be subject to the same one percent threshold as financial impact metrics.

Registrants would also be required to disclose whether the estimates and assumptions used to produce the consolidated financial statements were impacted by exposures to risks and uncertainties associated with, or known impacts from, climate-related events or transition risks—and if so, provide a qualitative description of how such events have impacted the development of the estimates and assumptions used by the registrant in the preparation of such financial statements.

Attestation of Scope 1 and Scope 2 Emissions

Large accelerated filers or accelerated filers would be required to obtain limited assurance⁹ of their GHG emissions in fiscal years 2 and 3 after the date by which they need to begin providing climate-related disclosures (see the Compliance Timeline section, below), and reasonable assurance¹⁰ in fiscal year 4 and beyond. The proposed rules provide that assurance would be required on the following schedule, assuming the proposed rules are adopted with an effective date before December 31, 2022 and the registrant has a December 31 fiscal year-end:

Filer Type	Scopes 1 and 2 GHG Disclosure Compliance Date	Limited Assurance	Reasonable Assurance
Accelerated Filer	Fiscal year 2024 (filed in 2025)	Fiscal year 2025 (filed in 2026)	Fiscal year 2027 (filed in 2028)
Large Accelerated Filer	Fiscal year 2023 (filed in 2024)	Fiscal year 2024 (filed in 2025)	Fiscal year 2026 (filed in 2027)

Compliance Timeline

Large accelerated filers may need to have processes in place to comply with the proposed rules starting as early as January 2023, while other filers are given more time before their compliance date. The proposed rules provide the table below summarizing the proposed compliance dates for climate-related disclosures, assuming the proposed rules are adopted effective December 2022, and a December 31 fiscal year-end.

Registrant Type	Disclosure Compliance Date		Financial Statement Metrics Audit Compliance Date
	All proposed disclosures, including GHG emissions metrics: Scope 1, Scope 2, and associated intensity metric, but excluding Scope 3	GHG emissions metrics: Scope 3 and associated intensity metric
Large Accelerated Filer	Fiscal year 2023 (filed in 2024)	Fiscal year 2024 (filed in 2025)
Accelerated Filer and Non-Accelerated Filer	Fiscal year 2024 (filed in 2025)	Fiscal year 2025 (filed in 2026)	Same as disclosure compliance date
Smaller Reporting Company	Fiscal year 2025 (filed in 2026)	Exempted

What to Do Now?

These proposed rules are comprehensive and detailed. They are intended to encourage consistent, comparable, and reliable disclosure of climate-related information in companies' registration statements, annual reports, and financial statements. Registrants should begin to familiarize themselves with the proposed rules, participate in the comment process if they desire, and begin to prepare for the potential disclosure requirements and the implementation of the governance and operational systems necessary to satisfy them. Given the substantial effort that would be needed to comply with these disclosure requirements if adopted, companies can prepare for these proposed climate-related disclosure requirements by reviewing climate-related oversight responsibilities, data collection and review, climate-risk analyses, strategic plans, and climate-related goals and actions.

Whether or not adopted in this form, the proposed rules are a further indication of the growing importance of environmental, social, and governance (ESG) precepts in today's economy, and the expanding market opportunities for companies that embrace a climate-oriented perspective in the conduct of their business.

We expect that companies of all sizes and across all industries will have questions as they begin to familiarize themselves with the rules and the potentially far-reaching implications for their businesses. For more information on the proposed climate-related disclosure rules or any related matter, please contact any member of the firm's public company representation or sustainability and decarbonization practices.

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[1] The proposed rules, long anticipated, follow previous SEC guidance regarding disclosure related to climate change from 2010, an SEC request for public input on climate change disclosure from early 2021 to which thousands of comments were submitted, and a series of individual comment letters and follow-up letters sent by the SEC’s Division of Corporation Finance to public companies in late 2021 and early 2022.

[2] Physical risks include both acute and chronic risks. Acute risks are event-driven risks like extreme weather events. Chronic risks are risks that result from longer term weather patterns and related effects.

[3] Transition risks include such risks as increased costs attributable to climate-related changes in law or policy, reduced market demand for carbon-intensive products, changes in consumer behavior, competitive pressures associated with adoption of new technology, the devaluation or abandonment of assets, or risk of legal liability and litigation defense costs.

[4] The proposed rules do not define these time periods. Registrants must describe how they define short-, medium-, and long-term horizons, including how they take into account or reassess the expected useful life of assets, and for planning processes and goals.

[5] E.g., energy usage, water usage, conservation or ecosystem restoration, or revenues from low-carbon products.

[6] A transition plan is a registrant’s strategy and implementation plan to reduce climate-related risks.

[7] A carbon offset is an emissions reduction or removal of greenhouse gases (GHG) in a manner calculated and traced for the purpose of offsetting an entity’s GHG emissions. A renewable energy credit (REC) is a credit or certificate representing each purchased megawatt-hour of renewable electricity generated and delivered to a registrant’s power grid.

[8] Scenario analysis considers the impacts of certain temperature increases on business operations, such as temperature increases of no greater than 3⁰ C, 2⁰ C, or 1.5⁰ C above pre-industrial levels.

[9] Limited assurance is the level of assurance provided over a registrant’s interim financial statements, which primarily requires inquiries into factual assertions.

[10] Reasonable assurance is the level of assurance provided in an audit of a registrant’s audited consolidated financial statements and requires the assurance provider to obtain an understanding of the registrant’s internal controls.