The Securities and Exchange Commission unveiled an eagerly awaited proposed rule on climate risk disclosures that public companies would need to start including in their registration statements and periodic reports as corporate America grapples with the accelerating effects of global climate change.
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The required information about climate-related risks also would include disclosure of their greenhouse gas emissions, which have become a commonly used metric to weigh exposure to such risks.
The rule would require a domestic or foreign registrant to include certain climate-related information in its registration statements and periodic reports, such as on Form 10-K, including:
- Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy and outlook;
- The registrant’s governance of climate-related risks and relevant risk management processes;
- The registrant’s greenhouse gas (GHG) emissions, which, for accelerated and large accelerated filers and with respect to certain emissions, would be subject to assurance;
- Certain climate-related financial statement metrics and related disclosures in a note to its audited financial statements; and,
- Information about climate-related targets and goals, and transition plans, if any. The proposed disclosures are similar to those that many companies already provide based on broadly accepted disclosure frameworks, such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.
“It’s important for all of us, accountants and others, to spend the time to really go through this rule,” said PwC vice chair and US Trust Solutions co-leader Wes Bricker, a former SEC chief accountant. “I think it is a real step forward, although there are a lot of details that we will analyze. There are several steps that I believe business leaders and accountants should focus on. Number one is assembling the right team to really understand ESG. This rule takes the voluntary efforts of a number of companies and standardizes the bar and in some cases raises the bar for companies. Assembling the right team is important to the work of establishing internal controls to gather data from all across the company and assign responsibilities to the right people.”
The proposed rule is likely to have an impact on audit teams at firms. “The SEC’s action underscores the imperative for businesses to understand likely reporting requirements and connect them to their strategy and operations,” said KPMG US audit vice chair Scott Flynn in a statement. “The details will be pored over, but management teams and boards must take note — the ESG moment is accelerating in the United States.”
There is a 30-day comment period on the proposal. “I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers,” said SEC Chair Gary Gensler in a statement Monday. “Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.”
He noted that the proposal would help issuers more efficiently and effectively disclose their risks and meet investor demands, as many companies already try to do. The growing popularity of environmental, social and governance (ESG) funds prompted the SEC to issue an invitation to comment last year about what types of disclosures companies should provide investors about their climate-related risks.
“Companies and investors alike would benefit from the clear rules of the road proposed in this release,” Gensler added. “I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance. Today’s proposal thus is driven by the needs of investors and issuers."
Accountants will be able to help clients adjust to the rule when it’s adopted. “The point which is especially relevant to accountants generally is helping businesses understand where they are on the journey,” said Bricker. “This is a rule proposal that sets out a minimum set of criteria and disclosure requirements. Some companies will be ahead of this. Other companies will be lagging behind, so the assessment on where a business is on the definition of metrics, and the establishment of policies for the scope and boundaries of reporting, the kinds of systems to put in place, that all goes into understanding where a company is.”
The disclosures should connect to a company’s strategy. “That’s a point that this proposal is clear about,” said Bricker. “The reporting is connected to business strategy, business prospects, its performance and the risks associated with a company’s activities. This is not just checking a regulatory box. It starts by understanding business strategy, how a business creates value and the effect of carbon on those activities. Corporate directors have a clear role. It’s explicit in the rule. The rule proposal requires a disclosure about the expertise on the board so the work of accountants and management teams in bringing forward the right information, the right board training, to corporate directors is critical so that corporate directors see how climate and ESG generally fit into the overall corporate strategy.”
The rule especially affects accountants who are attestation providers. “There is an attestation requirement from an independent attestation provider which is built on core concepts that auditors are familiar with: independence, reporting in relation to a generally accepted set of standards, transparency in reporting, communication with those with responsibility for governance,” said Bricker. “Those are all elements that this rule proposal requires for climate risk in particular.”
The proposed rule could represent a sea change in climate reporting if it’s approved. “We are crossing the Rubicon,” said KPMG US Impact audit leader Maura Hodge in a statement. “Under the proposed rules, climate-related financial disclosures will not be theoretical, but a baseline expectation with requirements for reasonable assurance for direct and indirect emissions. Further, as carbon reduction ambitions turn into actions, the impact of climate risk on many elements of financial reporting will now be required to be disclosed, including for the value chain for many filers. Today, CFOs and audit committees will need to take a hard look at their ESG reporting strategy, so it shows how they are successfully executing on their ESG strategy.”
The proposed rule changes would require an SEC registrant to disclose information about (1) the governance of its climate-related risks and relevant risk management processes; (2) how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term; (3) how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model and outlook; and (4) the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.
For companies that already do scenario analysis, have developed transition plans, or publicly set climate-related targets or goals, the proposed amendments would require certain disclosures to enable investors to understand those aspects of the registrants’ climate risk management.
The proposed rules also would require a registrant to disclose information about its direct greenhouse gas emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.
The proposals for GHG emissions disclosures would give investors useful information to assess a registrant’s exposure to, and management of, climate-related risks, and in particular transition risks. The proposed rules would provide a safe harbor for liability from Scope 3 emissions disclosure and an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies. The proposed disclosures are similar to those that many companies already provide based on broadly accepted disclosure frameworks, such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.
Standard-setters
Various ESG standard-setters such as the Value Reporting Foundation (which includes the Sustainability Accounting Standards Board and the International Integrated Reporting Council) and the Climate Disclosure Standards Board, along with the Carbon Disclosure Project and the Global Reporting Initiative have been working over the past year to try to harmonize their various standards and frameworks as demand ramps up for more standardized ESG reporting. The International Financial Reporting Standards Foundation is in the process of setting up an International Sustainability Standards Board that it will oversee alongside the International Accounting Standards Board. In June, the Value Reporting Foundation and the Climate Disclosure Standards Board plan to be consolidated into the ISSB (
“The proposal does not limit metrics,” said Bricker. “Instead, it applies a principles-based approach where the disclosure starts with TCFD, which is a framework for disclosure but does not set disclosure standards. You have to look over at SASB or GRI, etc., for specific metrics. This rule does not prohibit those metrics. In fact, the two areas that this rule proposal specifically requires are Scope 1 and Scope 2 emissions disclosures under the Greenhouse Gas Protocol. That’s a private sector protocol for specific emissions metrics. So it is clear about that. This rule proposal is also specific about an SEC set of metrics that describe that, that quantify the effect of climate on the financial statements. And that’s of interest because it’s the SEC proposing those disclosure requirements. They didn’t ask the FASB to do that. They didn’t turn to the International Accounting Standards Board, and instead the SEC itself set out what those disclosure requirements would be.”
The Center for Audit Quality is evaluating the proposed rule. “This represents a major step in giving both companies and investors clarity around information that investors have asked for and that companies in many cases are already providing to the capital markets,” said CAQ CEO Julie Bell Lindsay in a
She listened in on the SEC meeting that preceded the issuance of the proposal. “Two words or phrases you heard repeatedly during the SEC open meeting proposing the release were reliability and financial statement impacts,” said Bell Lindsay. “For close to 100 years, public company auditors have helped companies and investors by bringing reliability to company-reported financial information. Our key gatekeeper role in the capital markets was further recognized and heightened 20 years ago under the Sarbanes-Oxley Act with the requirement of attestation on the internal controls of public companies. And now with the SEC’s proposed rule, we see another example of the recognition that public company auditors bring objectivity, independence, expertise, standards-based analysis and a robust regulatory regime, including PCAOB inspections, to the review of company-reported climate information. This is vitally important so investors, from Wall Street to Main Street, can continue to have trust in the capital markets that drive our economy. The CAQ will be reviewing the lengthy proposal from the SEC, and we will continue to be an active partner in working toward a solution that meets the needs of investors and other capital market stakeholders, and that’s the purpose-driven nature of U.S. public company auditors.”
Under the proposed rule changes, accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering Scopes 1 and 2 emissions disclosures, with a phase-in over time, to promote the reliability of GHG emissions disclosures for investors. The proposed rules would include a phase-in period for all registrants, with the compliance date dependent on the registrant’s filer status, and an additional phase-in period for Scope 3 emissions disclosure.
SEC commissioner Hester Peirce registered her objection to the proposed rule. “Contrary to the hopes of the eager anticipators, the proposal will not bring consistency, comparability and reliability to company climate disclosures,” she said in a statement. “The proposal, however, will undermine the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures. We cannot make such fundamental changes to our disclosure regime without harming investors, the economy and this agency. For that reason, I cannot support the proposal.”
Outgoing commissioner Allison Herren Lee, who has been a longtime supporter of climate disclosure and issued the invitation to comment last year when she was acting chair of the SEC, expressed her support.
“This is a watershed moment for investors and financial markets as the Commission today addresses disclosure of climate change risk — one of the most momentous risks to face capital markets since the inception of this agency,” said Lee in a statement. “The science is clear and alarming, and the links to capital markets are direct and evident.”
The original invitation to comment attracted a great many comments. “I think it’s really notable how much engagement there was at the time of because the solicitation for comment that acting chair Allison Lee put out in March of last year was a little bit unusual in that was it was disconnected from the proposal,” said Kristina Wyatt, former SEC senior counsel for climate and ESG, who now works with the climate disclosure technology company Persefoni. “It was sort of a general request for comment to get background information to help inform the rulemaking process. The extent of the engagement was remarkable, which just shows there’s so much interest in this topic, and I think it’s probably safe to guess there will be quite significant engagement once the proposal comes out, and that’s all to the good because the SEC really needs to have that public input from all sides in order to help inform the final rules that they ultimately end up adopting.”
Technology can help with the calculation and reporting that will be required. “There seems to be a directional move toward some harmonization globally in the disclosure requirements that different countries seem to be focusing on,” said Wyatt. “The next really big challenge is how do we as investors or companies or governments get our arms around what our emissions are, and how do you do those calculations.”
Other tech companies are also seeing an opportunity. “Today’s proposal on the public disclosure of greenhouse gas emissions by the Securities and Exchange Commission was as expected by many,” said Joe Schloesser, senior director at ISN, a company that offers technology to help clients track and report ESG data, in a statement. “Regarding the inclusion of Scope 1 and Scope 2 emissions in the proposal, I’d say there were no surprises. Given the more nuanced context of disclosure for Scope 3 emissions, more details will need to be worked out in regards to how the materiality of Scope 3 will be measured and how it impacts a company’s public emission reduction goals. However, it’s beneficial that Scope 3 emissions are being included in public disclosure as between 80 to 90% of an organization’s total emissions are related to Scope 3, and the exclusion of Scope 3 emissions would likely have made this new rule much less effective.”
He believes the current proposal will accelerate the pace of investment in services provided by companies that help track supply chain emissions and enterprise reporting. “For businesses that aren’t already, they must look into leveraging services to collect reliable, auditable Scope 3 data from their entire supply chain and use specific emissions factors to translate available information into a reportable emission data point,” he added. “Not only will the technological aspect in measuring emissions need to become more accurate, but buying organizations will also need to engage with their supply chain now more than ever to reach their ESG objectives. Organizations should be setting interim target goals to track movement toward goals, and take into account how their suppliers play into their progress.”
Industry pushback
Some critics weighed in quickly on the proposal. “The Securities and Exchange Commission’s plans for new climate disclosure requirements is a problematic and misguided expansion of the agency’s traditional authority,” said Richard Morrison, a research fellow with the Competitive Enterprise Institute, in a statement. “The SEC claims that focusing on climate-related risk is about protecting investors, but that is clearly a secondary concern. The real goal is to create a framework by which corporations can be pressured, threatened, and cajoled into adopting operations consistent with the political demands of climate change activists. New disclosure requirements will be expensive and complex and generate greater legal risk for public companies. Shareholders will shoulder those costs.”
The petroleum industry also expressed its concerns. “The U.S. oil and natural gas industry has a long history of sustainability reporting, and achieving greater comparability and transparency across those efforts is a leading priority,” said American Petroleum Institute senior vice president of policy, economics and regulatory affairs Frank Macchiarola in a statement. “We are concerned that the Commission’s sweeping proposal could require non-material disclosures and create confusion for investors and capital markets. As the Commission pursues a final rule, we encourage them to collaborate with our industry and build on private-sector efforts that are already underway to improve consistency and comparability of climate-related reporting.”
The proposal has also attracted criticism from the U.S. Chamber of Commerce and elsewhere (
PwC and other accounting firms have made commitments to reach net zero emissions in the future and the rule proposal could help firms and their clients reach those objectives. “We see this as an area where trust is important to be built,” said Bricker. “This is an area where there are concerns about greenwashing, of accuracy of disclosures. To us, this is an area where trust is relevant and needed. Companies have been leading on a voluntary basis in this area. They’ve made net zero commitments. They provided reporting on their websites on a voluntary basis. The SEC’s proposal brings that information into the investor document, the 10-K. In doing so it reinforces the consistency of reporting, the comparability of reporting and elevates the quality of reporting, and to me that’s a step in the right direction.”
The comment period on the proposed rule will stay open for 30 days after it’s published in the Federal Register, or 60 days after the date of issuance and publication on sec.gov, whichever period is longer.
