Why Many Companies Will Feel the Impact of the SEC’s Proposed Climate-Disclosure Rule

What’s Happening

On Monday, March 21, following a 3-1 vote, the SEC issued proposed rules that would require public companies to make substantial climate-related disclosures in their periodic reports and financial statements. Intended to address investor concerns about the impacts of climate-related risks, the over 500 pages of proposed rules provide for a detailed, standardized, and prescriptive disclosure framework. Companies may be required to disclose direct and indirect greenhouse gas emissions, conduct a climate-risk impact analysis, and publish detailed financial metrics relating to those risks. Disclosure requirements would be phased in, with the earliest reporting period beginning the first full fiscal year following the effective date of the rules, which could arrive in 2023 assuming an effective date of later this year.

What Does This Mean?

The proposed rules contain onerous and granular disclosure requirements, a burden that increases if companies had previously set climate-related goals or targets. For example, the climate-risk impact analysis is both current and forward looking, must address various aspects of the company’s business, and goes so far as to require the specific locations of properties and operations that could be impacted by climate risks. Moreover, all companies are required to provide, on an aggregated and disaggregated basis, their direct greenhouse gas emissions, the indirect emissions from purchased energy, and depending on the circumstances, then indirect emissions from customers and suppliers in the company’s supply chain. In some cases, companies will also need to obtain independent attestations to support their emissions disclosures. Published financial statements must address the impacts of material climate-related risks on individual line items and include the assumptions and estimates used in those statements.

What’s Next?

Legal challenges to the SEC’s rule-making authority are possible, but should the proposed rules become effective and maintain their current scope and volume, compliance will be costly and time-consuming. Companies may need to rework internal processes and controls and implement new reporting teams and technologies, even if they are accustomed to making climate-related disclosures. Companies that have set climate goals or emissions targets will now need to follow through with those plans. Even private companies not subject to the disclosures could be asked to assist with reporting by providing accurate data on their own climate risks and emissions. What is clear is that the burden of the SEC’s proposed rules will not be borne solely by public companies – industry participants throughout the supply chain should consider how they factor into the SEC’s proposal and how they could assist with any required disclosures.