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How the proposed SEC climate disclosure rules may affect public companies and their vendors
ARTICLE | June 16, 2022
The SEC requires publicly traded companies to keep investors informed about key operating and financial information. Because climate change stands to significantly impact a number of businesses, directly and indirectly, the SEC has found it fitting to require companies to disclose climate-related risks to investors.
On March 22, 2022, the Securities and Exchange Commission (SEC) released a proposal for new rules that would require publicly traded companies to disclose their climate-related risks and climate-related financial metrics in companies’ audited financial statements.
While the rules have not been finalized, they are anticipated to have an effective date of December 2022. This means SEC registrants, and companies that provide goods and services to registrants, need to start considering how they will implement these changes.
This article will provide an overview of the proposal and discuss some of the potential implications for businesses.
What are the new climate change disclosure requirements?
The SEC proposed rule would require domestic and foreign SEC registrants to include certain climate-related information in their 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 plan, if any.
What does the proposed rule mean for businesses?
The new rule stands to affect both large public companies and small to medium-sized enterprises (SMEs) alike.
Large, publicly-traded companies with annual SEC reporting obligations will need to start including specific climate-related disclosures in their public filings. They will also need to have attestation reports performed on certain disclosures. Attestation reports must be conducted by an independent service provider and must cover Scope 1 (direct GHG emissions) and Scope 2 (indirect GHG emissions from purchased energy) emissions.
For privately-held SMEs involved in the supply chain of public companies, these regulations will likely have an impact as well. This is because the new rules will require SEC registrants to disclose information about any material indirect emissions, also known as Scope 3 or supply chain emissions. As a result, SMEs that supply products to public companies should expect the demand for emissions reporting to trickle down as soon as the new regulations go into effect.
What is the timing for these proposed changes?
For public companies, the proposed rules include a transition period based on their size and filing history. Essentially, larger companies have one fiscal year to transition to “limited assurance” and two fiscal years to provide “reasonable assurance,” as outlined in the table below. Smaller reporting companies, or SRCs, have three fiscal years to phase-in the new rules and are exempt from Scope 3 disclosures, meaning they won’t require reports from their supply chain.
Disclosure Compliance Date
All proposed disclosures, including GHG emissions metrics: Scope 1, Scope 2, and associated intensity metric, but excluding Scope 3
GHG emissions metrics; Scope 3 and associated intensity metric
Large Accelerated Filer
Fiscal year 2023
Fiscal year 2024
Accelerated Filer and Non-Accelerated Filer
Fiscal year 2024
Fiscal year 2025
Smaller Reporting Companies
Fiscal year 2025
While registrants have some time to prepare for the new changes, it’s wise to begin developing and implementing controls over these disclosures as soon as possible, as these processes are likely to take time.
What is the path forward for the new regulation?
Although the proposed regulations are receiving scrutiny from Congressional Republicans, the proposed rules are predicted to pass with an effective date of December 2022. Even if the new regulations do not pass, many SEC registrants are expected to make such disclosures voluntarily to appeal to shareholders’ demands for climate-related information.
Essentially, SEC registrants and SMEs involved in the supply chain of SEC registrants need to consider the impact of these rules and prepare to implement the changes well ahead of time.
Contact our office for more information
This article is intended to provide an overview of the SEC’s new proposed regulations and is not a substitute for speaking with one of our expert advisors. If you’d like to discuss these proposed rules and what they may mean for your business, please contact our office.
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