SEC Proposes Climate Disclosure Rule for Investors

The long-anticipated proposed rule for the Enhancement and Standardization of Climate-related Disclosures for Investors (the “Proposed Rule”) was released by the Securities and Exchange Commission (SEC) on Monday, March 21st, 2022[1]. The Proposed Rule is intended to strike a balance between offering investors clear, consistent and comparable information when selecting investments and the potential additional costs of compliance it might impose on SEC filers. The Proposed Rule comes after a lengthy public input period on climate change disclosures that generated significant interest and many responses from individuals, organizations, academics, investors and the like. The release of the Proposed Rule opens an additional comment period (30 days after publication in the Federal Register or 60 days after the date of issuance and publication on sec.gov (May 20, 2022), whichever period is longer) in which responses can be submitted to the SEC.

The Proposed Rule would make amendments to Regulations S-X and S-K, which set reporting requirements for registrants subject to various SEC filings. The inclusion in these regulations is not only a matter of convenience but signals the importance that the SEC is placing on climate-related disclosures, which is reflected throughout the document, as well as in public comments from Commissioner Allison Herren Lee and the current SEC Chair Gary Gensler.

Some of the key areas the Proposed Rule covers are materiality, attestation requirements, metrics, backward versus forward-looking statements and granularity of the data reported. The Proposed Rule features an intent to align with the requirements and expectations set forth in the Task Force for Climate-related Financial Disclosures (TCFD). This includes disclosures of strategies and methods of managing climate-related risks, material impacts of climate-related risks on business strategy and outlook, climate-related risk management activities, climate-related goals and targets, GHG emissions and additional climate-related financial metrics to be disclosed in a note to a company’s financial statements.

Similar to TCFD, the SEC Proposed Rule will directly tie climate-related risks and any adaptation or mitigation activities to a company’s financials, as well as call for disclosures regarding management decisions and strategies for identifying and mitigating climate-related risks. Additionally, the SEC rule has adopted TCFD’s methodology for identifying risk as “physical” (acute or chronic) or “transitional.”

Figure 1: TCFD topics and SEC Proposed Rule requirements[2]

Examples of Related SEC Proposed Rule Disclosures
Governance
  • The role of the board of directors and its ability to oversee climate-related risks
  • The role of senior leadership in identifying, assessing and managing climate-related risks
  • Reporting methods and cadence for ensuring that climate-related risks and risk management activities are communicated effectively
Strategy
  • Adaptation efforts to avoid climate-related risk exposure
  • Mitigation efforts for reducing climate-related risk impacts
  • Transition planning for moving to a low-carbon economy
Risk Management
  • Risk identification and assessment process
  • Discussion of how climate-related risk is integrated into risk appetite statements and risk assessments
  • Discussion of the use of scenario analysis to assess the resilience of business strategy to climate-related risks
Metrics & Targets
  • For filers that have set climate targets: description of climate targets and discussion of how the filer plans to reach those targets
  • Any sub-targets or significant milestones set by the organization
  • Baselines and time periods anticipated for achieving goals
Significant Disclosure Areas of Focus

Companies will need to assess the Proposed Rule’s impact and design a strategy for compliance with these new requirements. The areas we have identified as potentially large books of work for filers include the following disclosures:

  • Risk Identification and Risk Management Activities
  • Financial Metrics
  • Greenhouse Gas (GHG) Emissions

Download our article for details and related assurance considerations.

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Sources

[1] https://www.sec.gov/rules/proposed/2022/33-11042.pdf

[2] https://www.fsb-tcfd.org/about/

ABOUT THE AUTHORS

Barsendu Mukherjee
Senior Manager, DHG Advisory
barsendu.mukherjee@dhg.com

LeAnne Hill
Lead Consultant, DHG Advisory
leanne.hill@dhg.com

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