SEC Climate Rule Would Require Public Disclosures of Carbon Emissions
On March 21, 2022, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) proposed a rule requiring public companies to disclose their direct and indirect carbon emissions in their registration statements and annual reports. Although the SEC hopes to finalize the rule by December 2022, it is expected to face legal challenges, which may slow implementation.
Who Is Covered by the Proposed Rule, and When?
All foreign and domestic corporations that file registration statements or periodic reports with the SEC would be subject to the proposed disclosure rule.
Specific requirements and compliance timelines vary based on a public company’s size and filing history. The proposed rule would require many larger companies to make required disclosures—except their quantification of “Scope 3” emissions, discussed below—in fiscal year 2023 filings. Later reporting is proposed for other public companies and Scope 3 emissions.
What Must Be Must Be Disclosed?
The Commission’s proposed rule incorporates many concepts and much of the vocabulary set out by the Task Force on Climate-related Financial Disclosures (“TCFD”) and GHG Protocol. Covered companies would be required to disclose:
- “Any climate-related risks reasonably likely to have a material impact” on their business. For example, the proposed rule provides that food processors operating in areas subject to increasing water stress might discuss plans to develop or switch to drought-resistant crops, develop technologies to optimize the use of available water, or acquire land in other areas. In the same vein, the proposal states that an electric utility may need to disclose the vulnerability of its transmission infrastructure in regions experiencing increasingly severe summer wildfires.
- Climate-related impacts on “strategy, business model, and outlook.” This includes impacts on business operations, including the types and locations of operations; products or services; suppliers and other parties in the value chain; activities to mitigate or adapt to climate-related risks, including adoption of new technologies or processes; and research and development expenditures. Additionally, if implemented as proposed, the rule would require disclosure of the company’s internal carbon price (along with the rationale for selecting it and how it’s estimated to change over time), the role that carbon offsets or renewable energy credits (“RECs”) play in the company’s climate-related business strategy, and any analytical tools the company uses to assess impacts of climate-related risks, as applicable. Finally, for any company whose climate-risk management strategy includes a commitment such as a corporate net-zero pledge, the company would also be required to explain its plans to meet such goals, with enough clarity that investors will be able to track and predict corporate progress.
- Information around governance and climate-related risks, that is, information concerning the board’s oversight of climate-related risks and management’s role in assessing and managing those risks.
- Information concerning risk management as it relates to climate change. Specifically, the proposal would require disclosure of any processes for identifying, assessing, and managing climate-related risks as well as any transition plan the company has adopted to mitigate or adapt to climate-related risks.
- Disaggregated climate-related financial statement metrics. The rule would require companies to disclose how their climate-related risks quantitatively impact the line items of their annual consolidated financial statements, as well as the estimates and assumptions used in those financial statements. For example, financial impacts of severe weather events and other natural conditions, financial impacts related to transition activities, and climate risk mitigation expenditures must be disclosed.
- GHG emissions for their most recently completed fiscal year. The proposal adopts the emissions categorization framework of the GHG Protocol, which defines three categories, or scopes, of emissions. Scope 1 emissions include emissions from sources owned or controlled by the company, while Scope 2 emissions are those from the energy purchased by a company. Scope 3 emissions are the “result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain.” For example, emissions produced by a company’s suppliers and by customers using the company’s products are Scope 3 emissions. The proposed rule would require companies to report all Scope 1 and 2 emissions, but only material Scope 3 emissions. The proposal does not provide a standard for determining the materiality of Scope 3 emissions. Companies must also report Scope 3 emissions if they have set a GHG emissions reduction target or goal that includes Scope 3 emissions.
The Commission is proposing to treat these disclosures as “filed” with the SEC, except for climate information “furnished” by foreign private issuers on a Form 6-K. The proposal includes forward-looking statement safe harbors pursuant to the Private Securities Litigation Reform Act. And, in an acknowledgement of the “unique” difficulties associated with reliably quantifying Scope 3 emissions, the proposal also includes a safe harbor for liability for these disclosures.
The proposed rule remains subject to change based on public input. Interested stakeholders may submit written comments to the SEC before May 20, 2022.
 The Enhancement and Standardization of Climate-Related Disclosures for Investors (proposed Mar. 21, 2022) (to be codified at 17 C.F.R. Parts 210, 229, 232, 239, and 249), available at https://www.sec.gov/rules/prop... [hereinafter “Proposed Rule”]. The proposal has a long history. In 2010, the SEC published interpretative guidance stating that public companies must disclose the impact that climate change has on their businesses and the costs of complying with climate-related laws, to the extent that this information is “material” to the company’s current or future financial condition. U.S. Securities and Exchange Commission, Commission Guidance Regarding Disclosure Related to Climate Change, Rel. Nos. 33-9106, 34-61469, 75 Fed. Reg. 6,290 (Feb. 8, 2010). However, the 2010 Guidance’s immediate impact on disclosure practices was muted; two years later, SEC staff did not identify any notable year-over-year changes in the disclosures reviewed before and after the Guidance. Government Accountability Office, Climate-Related Risks: SEC Has Taken Steps to Clarify Disclosure Requirements, GAO-18-188 (Feb. 2018), https://www.gao.gov/products/G...; see also Ceres, Cool Response: The SEC & Corporate Climate Change Reporting (Feb. 2014) at 5, 12, https://www.ceres.org/sites/de... (concluding that while the percentage of companies making any climate-related disclosures increased from 45% to 59% between 2009 and 2013, most such disclosures “are very brief, provide little discussion of material issues, and do not quantify impacts or risks”). In 2019, Commissioners Robert Jackson and Allison Herren Lee encouraged the public to comment on the absence of required disclosures of climate-related risks as part of the SEC’s package of proposed amendments to modernize disclosures, noting “it remains tough for investors to obtain useful climate-related disclosure” and “we are long past the point of being unable to meaningfully measure a company’s sustainability profile.” U.S. Securities and Exchange Commission, Joint Statement of Commissioners Robert J. Jackson, Jr. and Allison Herren Lee on Proposed Changes to Regulation S-K (Aug. 27, 2019), https://www.sec.gov/news/public-statement/statement-jackson-lee-082719.
See Proposed Rule at 48, 224, 300.
 Id. at 42-43, 45-46.
 The rule would regulate companies as large accelerated filers, accelerated filers, non-accelerated filers, and smaller reporting companies, adopting the existing SEC definitions of these groups. See Regulation S-K, 17 C.F.R. § 240.12b-2(1) (accelerated filer); Regulation S-K, 17 C.F.R. § 240.12b-2(2) (large accelerated filer); Regulation S-K, 17 C.F.R. § 229.10(f) (smaller reporting companies). Registrants would be regulated as non-accelerated filers under the proposed rule if they do not meet the definitions of the other three categories. See Accelerated Filer and Large Accelerated Filer Definitions, 85 Fed. Reg. 17,178, 17,179 n.5 (Mar. 26, 2020).
 Proposed Rule at 299-302.
Id. at 36; see also Task Force on Climate-related Financial Disclosures, Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017), https://assets.bbhub.io/compan...; Greenhouse Gas Protocol, A Corporate Accounting and Reporting Standard (rev. ed. 2004), https://ghgprotocol.org/sites/...; Task Force on Climate-related Financial Disclosures, Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures (2021), https://assets.bbhub.io/compan...; Climate Disclosure Standards Board, TCFD Good Practice Handbook (2d ed. Nov. 2021), https://www.cdsb.net/sites/default/files/tcfd_good_practice_handbook_v5_pages.pdf.
 Proposed Rule at 59. The Commission also recognizes climate-related conditions and any transition to a lower carbon economy may “present opportunities” for companies and investors, which companies may disclose. See id. at 66-67. For example, an electric utility might choose to disclose “an increase in the amount of electricity generated from less carbon-intensive sources, such as wind turbines, nuclear, hydroelectric, or solar power to meet current or likely regulatory constraints.” Id. at 78.
Id. at 109.
Id. at 65.
 Carbon offsets allow firms to “offset” a specific amount of a company’s emissions by funding an additional, external project that reduces emissions by that same amount. Renewable energy credits, each representing one megawatt-hour of generated renewable energy, verify that the purchasing company fulfilled its energy needs using renewable energy.
 Proposed Rule at 153-217.
See, e.g., Overview of GHG Protocol scopes and emissions across the value chain, https://www.ghgprotocol.org/sites/default/files/ghgp/standards_supporting/Diagram%20of%20scopes%20and%20emissions%20across%20the%20value%20chain.pdf.
 Environmental Protection Agency, Scope 3 Inventory Guidance (last updated Dec. 22, 2021), https://www.epa.gov/climateleadership/scope-3-inventory-guidance.
 Proposed Rule at 156-157. Scope 3 emissions can be broken further into upstream and downstream emissions. Upstream emissions, also referred to as “cradle to gate” emissions, include all emissions that occur in the life cycle of a product until its point of sale. For example, while the energy purchased by an ethanol producer to run its processing facilities generates Scope 2 emissions, the energy used by farmers to grow the corn processed into the ethanol generates upstream Scope 3 emissions for the ethanol producer. Downstream emissions are those linked to a product after it has been sold. For example, the energy used by a distributor to truck the ethanol to consumers and then the ethanol’s ultimate combustion as a fuel source both generate downstream Scope 3 emissions linked to the ethanol producer. See Environmental Protection Agency, Scope 3 Inventory Guidance (last updated Dec. 22, 2021), https://www.epa.gov/climateleadership/scope-3-inventory-guidance.
 Proposed Rule at 296.
Id. at 220-221. Specifically, the proposed safe harbor would provide that disclosure of Scope 3 emissions by or on behalf of the company would not be considered a fraudulent statement unless it is shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith. See id. The proposal also includes forward-looking statement safe harbors pursuant to the Private Securities Litigation Reform Act, to the extent that disclosures include forward-looking statements. See id. at 70-71.