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It’s Getting Hot in Here: Proposed Climate-Related Disclosure Requirements

Ellen Rose Drought, Yamilett Lopez, and Brian D Anhalt

It’s Getting Hot in Here: Proposed Climate-Related Disclosure Requirements
temizyurek via Getty Images

The Securities and Exchange Commission (SEC) recently published proposed rules— “The Enhancement and Standardization of Climate-Related Disclosures for Investors”—that would require public companies to include substantial climate-related disclosures in their registration statements and annual reports on Form 10-K.


The proposed rules would apply to public companies with reporting obligations under the Securities Exchange Act of 1934 (with certain disclosure exemptions for smaller reporting companies) but, as currently written, would not apply to registered investment companies or business development companies.

As proposed, the “rules would require information about a [company]’s climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition. The required information about climate-related risks would also include disclosure of a company’s greenhouse gas [(GHG)] emissions,” including an attestation report required for accelerated filers and large accelerated filers. Companies would be required to disclose direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2). Indirect emissions from upstream and downstream activities (Scope 3), if material, also would be disclosed. “[C]ertain climate-related financial metrics [also] would be required in [the] . . . audited financial statements.”

Key Disclosure Aspects of the Proposed Rules

The proposed rules would require a company to include disclosures regarding, among other matters, the following:

  • Impact of client-related risks on business and financials. Disclosure detailing “[h]ow any climate-related risks identified by [a company] have had or are likely to have a material impact on its business” and financial condition. “Climate-related risks” are “the actual or potential negative impacts of climate-related conditions and events on a [company]’s consolidated financial statements, business operations, or value chains [that is, the upstream and downstream activities related to a company’s operations], as a whole.” A company would also need to identify and describe any material risks to its business operations related to (1) physical risks, i.e., the physical impacts of climate-related conditions, such as extreme weather events or longer-term weather patterns; and (2) transition risks, i.e., any risks related to a potential transition to a less carbon-dependent economy. “Physical risks include both acute risks and chronic risks to [a] [company]’s business operations or the operations of those with whom it does business.”
  • Effect of climate risks on strategy, business model, and outlook. Disclosure detailing “[h]ow any identified climate-related risks have affected or are likely to affect [a company]’s strategy, business model, and outlook.”

As proposed, a [company] would be required to disclose [actual and potential] impacts on its:

  1. [b]usiness operations, including the types and locations of its operations;
  2. [p]roducts or services;
  3. [s]uppliers and other parties in its value chain;
  4. [a]ctivities to mitigate or adapt to climate-related risks, including adoption of new technologies or processes;
  5. [e]xpenditure for research and development; and
  6. [a]ny other significant changes or impacts,

as well as “the time horizon for each described impact.” The proposed rules would also require a company “to discuss how it has considered the identified impacts as part of its business strategy, financial planning, and capital allocation.”

  • Governance. Disclosure of the “oversight and governance of climate-related risks by the [company]’s board and management.”
    • Board of directors. “The proposed rules would require a [company] to disclose a number of board governance items,” including “identify[ing] any board member[] or board committee[] responsible for the oversight of climate-related risks,” “disclos[ing] . . . whether any [board] member . . . has expertise in climate-related risks,” and describing “the processes and frequency by which the board or board committee discusses climate-related risks.” The rules also “would require disclosure about whether and how the board sets climate-related targets or goals and how it oversees progress against those targets or goals, including the establishment of any interim targets or goals.”
    • Management oversight. A company “would be required to disclose, as applicable, whether certain management positions or committees are responsible for assessing and managing climate-related risks and, if so, to identify such positions or committees and disclose the relevant expertise of the position holders or members.” The company would also need to disclose “the processes by which the responsible managers or management committees are informed about and monitor climate-related risks,” and if they “report to the board [of directors] . . . on climate-related risks and how frequently this occurs.”
  • Risk management systems and processes. Disclosure of the company’s “processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the [company]’s overall risk management system or processes.”
    • Identifying and assessing risks. The company would be required to disclose, as applicable:
      1. [h]ow it determines the relative significance of climate-related risks compared to other risks;
      2. [h]ow it considers existing or likely regulatory requirements or policies, such as GHG emissions limits, when identifying climate-related risks;
      3. [h]ow it considers shifts in customer or counterparty preferences, technological changes, or changes in market prices in assessing potential transition risks; and
      4. [h]ow it determines the materiality of climate-related risks, including how it assesses the potential size and scope of any identified climate-related risk.
    • Managing risk. A company “would be required to disclose, as applicable: [i] [h]ow it decides whether to mitigate, accept, or adapt to a particular risk; [ii] [h]ow it prioritizes addressing climate-related risks; and [iii] [h]ow it determines how to mitigate a high priority risk.”
    • Transition plan. If a company has adopted a “transition plan” to help mitigate or adapt to climate-related risks, “the proposed rules would require it to describe its plan, including the relevant metrics and targets used to identify and manage physical and transition risks,” among other requirements.
  • Climate-related financial statements. Disclosure of “[t]he impact of climate-related events (severe weather events and other natural conditions . . .) and transition activities . . . on the line items of a [company]’s consolidated financial statements,” as well as “disclosure of [the] financial estimates and assumptions” used in the financial statements. The disclosure would be required for the company’s “most recently completed fiscal year and for the historical fiscal years included in the [company]’s consolidated financial statements in the applicable filing.”
  • GHG emissions. Disclosure of “its GHG emissions for its most recently completed fiscal year.” The proposed rules break down GHG emissions into three categories: (1) Scope 1 emissions, which are “direct GHG emissions from operations that are owned or controlled by a [company]”; (2) Scope 2 emissions, which are “indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a [company]”; and (3) Scope 3 emissions, which are “all indirect GHG emissions not otherwise included in a [company]’s Scope 2 emissions, which occur in the upstream and downstream activities of a [company]’s value chain.”
    • Scope 1 and Scope 2 emissions. Under the proposed rules, the company would be required to separately disclose its Scope 1 and Scope 2 emissions “by disaggregated constituent greenhouse gases and in the aggregate” and also in absolute terms and in terms of intensity (per unit of economic value or production).
    • Scope 3 emissions. A company would be required to disclose Scope 3 emissions “if those emissions are material”; or if the company “has set a GHG emissions target or goal that includes its Scope 3 emissions,” it would be required to disclose the emissions in absolute and intensity terms.
    • Attestation report. Under the proposed rules, an accelerated filer or large accelerated filer must include an “attestation report covering the disclosure of its Scope 1 and Scope 2 emissions and . . . provide certain related disclosures about the service provider.” The attestation report “must, at a minimum, be at the following assurance level for the indicated fiscal year for the required GHG emissions disclosure”