Climate-Related Risks: SEC Releases Proposed Disclosure Rules

The Securities and Exchange Commission’s much-anticipated rules on climate-related disclosures are finally here. [1] On Monday, March 21, 2022, the federal securities regulator announced the release of a proposed rule, broadly referred by the SEC as “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” [2] The proposed rule comes to the delight of activist investors and others concerned about climate change impacts, while industry actors may fear the increased costs of the proposed mandatory disclosures.

The SEC has proposed rules which would require those registered with the SEC to disclose specific information regarding their climate-related financial risks and climate-related financial metrics. [2] This information would be disclosed to the SEC through an entity’s typical registration statements or annual reports, which already contain many other required disclosures. [2]

Importantly, the draft rules require companies registered with the SEC to disclose both their direct and indirect greenhouse gas emissions. These emissions include three discrete categories – Scope 1, Scope 2, and Scope 3. [3] Scope 1 greenhouse gas emissions are those emitted directly by the company through its operations, while Scope 2 emissions are the “indirect” emissions stemming from a company’s energy usage, such as through electricity generation. [4]

Of greater controversy, however, the proposed rules also require disclosure of any Scope 3 emissions a company deems “material” or that are included in a company’s self-appointed emissions targets. [3]  Scope 3 emissions are those emitted not directly or even indirectly by a company itself, but rather by the company’s upstream or downstream suppliers and partners. [1]

Though the emissions of a supplier or partner may appear attenuated from a company’s own operations, the breadth of today’s globally connected supply chains seems to necessitate some consideration of these emissions, particularly in the limited cases for which the SEC proposes to mandate their disclosure. In particular, the SEC has carved out a legal safe harbor to guard small companies from the potentially prohibitive costs involved in Scope 3 emissions reporting. [1]

Beyond disclosure of climate-related risks and greenhouse gas emissions, the SEC’s new draft rule also require registrants to disclose any “actual or likely material impacts” that the climate-related risks they face might have on their “business, strategy, and outlook.” [3] These “climate-related risks”  can be of any kind, meaning companies will likely need to take stock of both physical threats to their business from climate change – like risks stemming from coastal flooding or other extreme weather events – as well as financial threats – like the ways in which future climate change legislation or a potential carbon tax might impact the company’s bottom line.[3]

While conservative critics argue that the new rules on climate are an overstep of the SEC’s regulatory authority, SEC Chair Gary Gensler and many activist investors disagree. [3] Citing the rapid expansion in investor interest in environmental, social, and governance (ESG) focused funds, Gensler has noted that these rules carry out the SEC’s core mission in ensuring investors have access to “decision-useful” information about the funds in which they invest. The SEC notes that the proposed disclosure requirements are indeed “decision useful” in that they will provide investors with “consistent, comparable, and reliable” information from which investors may make informed decisions about the ways in which climate-related risks might impact their portfolios. [1]

As of today, these climate-related disclosures are still only proposed rules – meaning their next step is public comment,  followed by the issuance of a final rule, like within the next year. [3] Critics, including the U.S. Chamber of Commerce, are sure to legally challenge these rules should they be formally adopted. Yet the clear investor demand and the value of data passed on to investors relating to the climate change-causing GHG emissions and the attendant risks a company faces should not be understated.

If you have questions on how the SEC’s new climate-related disclosure rules might impact you, your investments, or your business, the attorneys at Savage Villoch Law are available for consult.






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