Physical and Transition Climate-Related Risks
The Proposed Rule would require a company to disclose:
- The impact of physical climate-related risks, including extreme weather events and conditions such as wildfires, hurricanes, and drought, acute and chronic, on the company’s operations and assets and on the line items in its consolidated financial statements and the financial estimates and assumptions used in the financial statements.
- How such risks have had, or are likely to have, a material impact on the company’s business and consolidated financial statements in the short-, medium-, or long-term;
- How the risks have affected or are likely to affect strategies, business models, and outlook; and
- Transition risks (i.e., the impacts associated with transitioning to satisfy lower carbon commitments and requirements).
GHG emissions
The Proposed Rule would also require companies to disclose information about both direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity or other forms of energy (Scope 2). Companies would be required to disclose Scope 1 emissions separately from Scope 2 emissions, and disclose both in the disaggregate (i.e., by each constituent greenhouse gas) and the aggregate (as CO2 equivalent). Companies would also be required to disclose Scope 3 GHG emissions, which are emissions from upstream and downstream activities in their value chains, if such emissions are material or if the company has set a GHG emissions target or goals that include such emissions. The Proposed Rule would provide a safe harbor for liability for Scope 3 disclosures and an exemption for smaller companies.
Governance, Oversight, and Risk Management of Climate-Related Risks
Finally, the Proposed Rule would require disclosure of companies’ governance, oversight, and risk management of climate-related risks specifically, including: (i) any assessment and risk management efforts by the company’s leadership concerning climate-related risks and the role the board plays in the oversight of such risks; (ii) what committee or board members are involved in the oversight; and (iii) anyone serving on the board who has expertise in a climate-related area.
Compliance with the Proposed Rule will occur under a phased-in approach, with disclosures other than Scope 3 GHG Emission disclosures followed by Scope 3 disclosures, if required, submitted first from large, accelerated companies, and later from accelerated and nonaccelerated filers and smaller companies.
The SEC is accepting comments until either May 20, 2022 or 30 days after its publication in the Federal Register, whichever is later.
