More than a year in the works, the Securities and Exchange Commission unveiled its much-anticipated climate disclosure rule proposal this month, with major implications for the investor and business communities.
"It's a monumental rule-making initiative," said Erin E. Martin, a Washington-based partner with law firm Morgan, Lewis & Bockius LLP who previously worked in the SEC's division of corporation finance. "This has been a long time coming, it's been highly anticipated by the public, it's an area that's of interest to many stakeholders and so it may be something that's kind of a game-changer for a lot of public companies to the extent that these rules do actually move forward and are implemented as proposed."
The proposed rule amendments, which were approved March 21 in a 3-1 vote, with the commission's lone Republican, Hester M. Peirce, dissenting, would require public companies to disclose a host of climate-related information in their registration statements and periodic reports, including:
- The oversight and governance of climate-related risks by the registrant's board and management.
- How any climate-related risks identified by the company 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.
- How any identified climate-related risks have affected or are likely to affect the company's strategy, business model and outlook.
- If the registrant has adopted a transition plan as part of its climate-related risk management strategy, a description of the plan, including the relevant metrics and targets used to identify and manage any physical and transition risks.
The proposal would also require companies to disclose the greenhouse gas emissions they generate, and the "indirect" emissions generated from a company's supply chain, if material, though smaller companies would be exempt from the latter requirement. "These proposals for GHG emissions disclosures would provide investors with decision-useful information to assess a registrant's exposure to, and management of, climate-related risks, and in particular transition risks," the SEC said in a news release.
Large companies would have to obtain an attestation report from an independent service provider verifying their direct greenhouse gas emissions disclosure.
If approved, the rule amendments would be phased in over multiple years; the largest companies would need start disclosing climate-related information in filings made in 2024 that reflect the fiscal year ended in 2023. The comment period will be open for 60 days following publication on the SEC's website or 30 days upon publication in the Federal Register, whichever period is longer.
Many public companies already disclose some climate-related information, SEC Chairman Gary Gensler noted at the March 21 SEC meeting. SEC staff, in reviewing nearly 7,000 annual reports submitted in 2019 and 2020, found that a third included some disclosure related to climate change, he added.
"Companies and investors alike would benefit from the clear rules of the road proposed in this release," Mr. Gensler said. "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."