The U.S. Securities and Exchange Commission (SEC) has published their proposal for required climate change disclosures. This would be the first required disclosure for U.S. companies. In addition to the impact on the environment, the SEC is concerned about the risks to organizations from climate change-related events.
This would include threats to a company’s business, future strategy and economic outlook from climate-related physical and transitional risks over the short, medium and long term. Under the proposal, large accelerated filers and accelerated filers would be required to receive reasonable assurance in the near future.
The proposal would also require companies to provide their greenhouse gas emissions data and certain metrics in a note on their financial statements. The SEC’s proposal would phase in these reporting requirements over the next several years, laying the groundwork towards assurance requirements. There has already been adoption from S&P 500 companies, with roughly 95 percent of the S&P 500 voluntarily disclosing ESG information last year. Over half of those companies received some form of third-party verification or assurance.
The proposal has mandatory requirements on Scope 1 emissions (direct) and Scope 2 emissions (indirect). Many registrants and trade groups believe Scope 3 emissions (emissions from assets not owned or controlled by the organization) would be burdensome to estimate. In response, the SEC has proposed that companies and assurance providers could determine if Scope 3 emissions are material to their disclosures. However, this scope exclusion would then be subject to challenges by investors or the SEC. Smaller filers will be exempt from reporting Scope 3 emissions.
If the registrant has reported climate-related goals publicly, discussion would be required on the scope of their target, the timeline to achieve these goals and the actionable items in their plan. Relevant information on the progress toward those goals would be reportable each year. Any carbon offsets or renewable energy certificates utilized as part of the organization’s plan should also be disclosed.
Once effective, an organization would be required to provide environmental disclosure information when registering as a public company and in its annual filing. The proposed timeline envisions rules being finalized by December 2022 with Scope 1 and 2 emission metrics for 2023 to be included in 2024 filings for large accelerated filers. Scope 3 emissions would then be phased in the following year. Accelerated filers and non-accelerated filers would have one additional year for each deadline. Smaller reporting companies would have two additional years. The requirements will also be mandatory by foreign private issuers.
Limited assurance on greenhouse gas emissions would be required for 2024 filings reported in 2025, with reasonable assurance being required for 2026 filed in 2027 for large accelerated filers. Accelerated filers would also be required to have third-party assurance, but with one additional year until required at each level.
The public has until May 20, 2022 to provide comment. The SEC has stated that they want to incorporate feedback into the required metrics and financial reporting.
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