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![handle is hein.crs/govefts0001 and id is 1 raw text is: May 17, 2022
Overview of the SEC Climate Risk Disclosure Proposed Rule
On March 21, 2022, the Securities and Exchange
Commission (SEC) voted 3-1 to issue sweeping proposed
climate-related disclosure rules for public companies. In
issuing the proposed rules, the SEC cited its existing
statutory authorities under the federal securities laws-
specifically, the Securities Act of 1933 (P.L. 73-22) and the
Securities Exchange Act of 1934 (P.L. 73-291). The
proposal represents a more prescriptive and detailed
approach to climate-related disclosures relative to the
existing broad, principles-based climate-related disclosure
regime embodied in the SEC's 2010 Guidance Regarding
Disclosure Related to Climate Change. Among other
things, it would require all public companies, as a growing
number voluntarily do, to report on their direct greenhouse
gas (GHG) emissions and under certain circumstances their
upstream and downstream GHG emissions.
Public companies would also be required to report on the
impacts of climate-related natural events and transitional
activities to mitigate such impacts on their consolidated
financial statements. According to the SEC, both the current
and proposed disclosure regimes are grounded in the federal
securities laws' concept of materiality-the notion that
required disclosures should encompass the types of
information that investors consider important when they
make investment or corporate voting decisions.
Some SEC officials say that the current voluntary reporting
protocol has often resulted in incomplete and inconsistent
significant climate-related disclosures due to differences in
methodology and in assessing what is material. Various
investors and observers have said that these shortcomings
have compromised the complete disclosure of the financial
risks related to climate change. And according to some SEC
officials, the proposed rules are aimed at addressing such
perceived drawbacks.
Other SEC officials have, however, argued that the current
reporting protocol has generally resulted in firms
consistently reporting materially significant climate-related
impacts. They also asserted that the proposed rules go
beyond the SEC's statutory authority, will not result in
consistent and comparable inter-firm reporting due to
unreliable data and modeling based on potentially
speculative assumptions, and discards the materiality
qualifier for some disclosures while employing an overly
expansive definition of materiality for some others.
At the time of the vote, Chair Gary Gensler remarked,
Today's proposal would help issuers more efficiently and
effectively disclose [climate risks] ... and meet investor
demand, as many issuers already seek to do. Some
environmental groups have supported such measures based
on similar arguments. For example, the Environmental
Defense Fund said that, if finalized, the rules would help
investors price climate risks accurately and allocate capital
prudently and efficiently through access to comparable
specific, and decision-useful climate risk information.
Echoing a common criticism of the proposal, the U.S.
Chamber of Commerce asserted: [T]he prescriptive
approach taken by the SEC will limit companies' ability to
provide information that shareholders and stakeholders find
meaningful while at the same time requiring that companies
provide information in securities filings that are not
material to investors.
The proposal earned praise from Senator Sherrod Brown
and Representative Maxine Waters, the respective chairs of
the Senate Banking and House Financial Services
Committees. It was criticized by the ranking Members of
those committees-Senator Pat Toomey and Representative
Patrick T. McHenry.
If adopted, the disclosure requirements would direct
domestic or foreign SEC registrants to include climate-
related information in their registration statements, such as
Form S-1, and their periodic reports, such as Form 10-K.
The proposed disclosures can be divided into four broad
types described below: climate-related risks, GHG
emissions, targets and goals, and audited financial
statement disclosures.
Proposed Disclosures
Climate-Related Risks. The proposal includes a number of
provisions that involve non-financial disclosures
surrounding corporate climate-related risks. They are
modeled in part after the recommendations of the Task
Force for Climate-Related Disclosures-a group of
financial experts created by the Financial Stability Board.
They also draw from the Greenhouse Gas Protocol, a global
initiative that provides standards for business and
government to monitor GHG emissions. These provisions
would require a covered company to disclose:
* A description of its climate-related risks and relevant
risk management processes.
* How identified climate-related risks have had or are
likely to have a material impact on its business and
financial statements during the short, medium, or long
term.
* How identified climate-related risks have affected or are
likely to affect its strategy, business model, capital
allocation, financial planning, and outlook.
* How climate-related events (including severe weather
events and other natural conditions) and transition
activities (to help mitigate or adapt to climate-related
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