MVA White Collar Defense, Investigations, and Regulatory Advice Blog

On March 21, 2022, the U.S. Securities and Exchange Commission (“SEC”) announced a proposed rule (the “Proposed Rule”) that will require registrants to make certain climate disclosures in their registration statements and periodic filings with the SEC. Chairman Gary Gensler stated that the goal of the Proposed Rule is to “provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.” The Proposed Rule would require three main categories of disclosures from registrants: (1) information about climate-related risks that are reasonably likely to have a “material impact” on their business, results of operations, or financial conditions (including the methodology of any such scenario analyses used to assess these risks); (2) reports to investors on progress towards any publicly-set climate-related targets or transition plans; and (3) disclosures about the company’s greenhouse gas emissions.

The disclosures about greenhouse gas emissions are further subdivided into three “scopes” which the registrant must track and disclose to investors. Scope 1 refers to the direct emissions produced by the registrant (e.g., emissions as byproduct from a manufacturing process). Scope 2 refers to indirect emissions from purchased electricity or other forms of energy. Finally Scope 3 refers to emissions from any upstream or downstream activities in the registrant’s supply chain. According to the SEC, registrants will only be required to disclose Scope 3 emissions if they are “material” or “if the registrant has set a greenhouse gas emissions target or goal that includes Scope 3 emissions.” Information is “material” if there is a “substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information available.”

The Proposed Rule would require disclosures in registration statements and Exchange Act annual reports such as the registrant’s Form 10-K. The annual reports would need to include the Regulation S-X mandated climate-related financial statement metrics, and there would need to be a separately captioned section for Regulation S-K mandated climate-related disclosures. The timeline for implementation is tiered based on whether the filer is a Large Accelerated Filer, Accelerated Filer, Non-Accelerated Filer, or a Smaller Reporting Company.

The public will have 60 days (until May 20, 2022) to submit comments to the SEC, which they will then consider in connection with the rule proposal.