The U.S. Securities and Exchange Commission released proposed rules on Monday that would – if enacted – require publicly-listed companies to make disclosures that outline the effects of climate change on their business (and how they plan to manage these impacts) and that detail their greenhouse gas emissions. The official release of the proposed rules – and call for public comments about them – come after SEC Chair Gary Gensler announced in 2021 that the commission would use its statutory authority to draft climate-related rules and require companies to make corresponding disclosures, citing the demands of “investors representing trillions of dollars,” who are looking for “more consistent, comparable, and decision-useful info about the climate risk of the companies in which they invest.”
At a high level, the SEC’s proposal calls for changes that do not necessarily call on companies to change their overarching operations, but that would require them to report more information in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a “material impact on their business, results of operations, or financial condition,” and “certain climate-related financial statement metrics in a note to their audited financial statements.” According to the SEC, “The required information about climate-related risks also would include disclosure of [the various Scopes of a] registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks.”
Much of the proposed regulations are based on the Task Force on Climate-related Financial Disclosures, an existing framework that aims to help public companies and other organizations disclose climate-related risks and opportunities. (If the TCFD sounds familiar, that may be because it is has been adopted by a number of luxury goods groups, such as Kering, LVMH, Hermès, and Richemont, as well as mass-market entities like Uniqlo-owner Fast Retailing and Zara’s parent Inditex, among others; it is also standard that BlackRock CEO Larry Fink has backed in his annual letter to CEOs.)
Specifically, the proposed rule changes would require publicly-traded entities – and “international companies with operations in the U.S.,” per S&P Global – to disclose information about: “(1) [their] governance of climate-related risks and relevant risk management processes; (2) how any climate-related risks [they] identified 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 [their] 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 [their] consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.”
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