Preparing for the SEC’s Climate Disclosure Rules

By MICHAEL LITTENBERG AND MARC ROTTER

In March 2022, the Securities and Exchange Commission (SEC) proposed new rules aimed at requiring SEC-reporting companies to provide extensive and comparable disclosure of climate-related risks. The proposed rules are arguably the most significant expansion of the SEC’s disclosure and compliance regime for reporting companies in decades.

Currently, the SEC’s rules take a principles-based approach to disclosure of climate-related risks. In lieu of specific line items that require climate disclosure, guidance has been issued (first in the form of a concept release in 2010, and more recently in the form of a sample comment letter) highlighting areas where the disclosure requirements that apply to all aspects of a registrant’s business may require discussion of climate-related issues.

In contrast, the proposed rules would create a series of new, highly prescriptive disclosure requirements that apply solely to climate-related issues. In drafting the proposed rules, the SEC drew heavily from voluntary reporting frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Greenhouse Gas (GHG) Protocol.

The proposed rules would require a new financial statement footnote with disclosure of climate-related impacts (above a de minimis threshold) on each individual line item; Scope 1 and Scope 2 greenhouse gas emissions data, with third-party assurance over that data and, in many cases, Scope 3 emissions; a discussion of climate-related risks and impacts over the short, medium and long-term, including granular disclosure regarding any use of scenario analysis and internal carbon pricing; details regarding the company’s processes for identifying and managing climate-related risks; disclosure regarding oversight of climate risk, including identifying board members who have climate expertise; and a discussion of climate-related goals and targets set by the company. As proposed, all of that information would be included in annual reports and registration statements filed by reporting companies.

If the proposed rules are adopted, companies would need to develop new procedures and internal controls over financial reporting, and develop methods for disclosing greenhouse gas emissions.

If the proposed rules are adopted, companies would need to develop new disclosure controls and new internal controls over financial reporting, adopt new accounting policies, and develop methods for disclosing greenhouse gas emissions. Many will also need to undertake new or enhanced education efforts, and are likely to strongly consider adding new personnel with relevant expertise.

There were extensive public comments on the proposed rule, which the SEC is required to review and consider before adopting final rules. The comment period ended in June 2022. Areas likely to be subject to revisions include the proposed financial statement requirements, greenhouse gas emissions disclosure and assurance requirements, and phase-in periods for various aspects of the proposed rules.

After the final rules are adopted, they will likely face legal challenges, so we believe it is premature to devote extensive resources to complying until that process is complete. There are, however, steps that companies should take to position themselves so they are prepared when any final rules come into place.

First, companies should consider whether to build climate-related expertise internally or hire additional personnel. Financial reporting, and legal and internal audit functions, are likely to require expertise, as will boards and senior management. The learning curve for climate-related issues is steep. Competition for qualified persons with climate-related expertise is likely to become increasingly fierce, so it is worthwhile for companies to begin identifying gaps, and making efforts to educate and/ or recruit appropriate personnel.

Second, because the SEC’s rules will draw heavily from the TCFD and GHG Protocol frameworks, companies should continue efforts to comply with or evaluate readiness to comply with those frameworks.

Finally, companies should keep an eye on comments submitted on the proposed rules by significant industry groups, other market participants and academics, as well as emerging international disclosure requirements (such as the recently published draft International Sustainability Standards Board standards), as these will inform the directions the SEC is likely to consider when finalizing the proposed rules.

Michael Littenberg is a partner and Global Head of the ESG, CSR, and business and human rights practice at Ropes & Gray. Michael.Littenberg@ropesgray.com

Marc Rotter is counsel in the capital markets group at Ropes & Gray. marc.rotter@ ropesgray.com