On March 21, 2022, the U.S. Securities and Exchange Commission (“SEC”) proposed modifications to SEC rules under the Securities Act of 1933 and Securities Exchange Act of 1934 that would mandate climate risk disclosures by public companies. If adopted, the rules will “require registrants to provide certain climate-related information in their registration statements and annual reports,” including climate-related financial risks and metrics in their financial statements. The proposed rule comes in light of a growing SEC focus on disclosures to investors related to environmental, social and governance (“ESG”) factors.
The term “climate-related risks” has nested meaning and its origins can be found in a climate-related reporting framework developed by the Task Force on Climate-Related Financial Disclosures (“TCFD”). The SEC regards TCFD’s framework as “widely accepted by both registrants and investors” and, in the proposed rule, the SEC based its definitions on TCFD’s definitions.
The proposed rule changes would require a company to disclose information about:
- Its governance of climate-related risks and relevant risk management processes.
- How any climate-related risks identified by the company have had or may have a material impact on its business and financial statements.
- How any identified climate-related risks have affected or are likely to affect the company’s strategy, business model and outlook.
- The impact of climate-related events and transition activities on the line items of a company’s consolidated financial statements, as well as on the financial estimates and assumptions used.
The proposed rules would also require a company to disclose information about its Scope 1 and Scope 2 greenhouse gas (“GHG”) emissions – emissions which “result directly or indirectly from facilities owned or activities controlled by a registrant.” Companies would also be required to disclose GHG emissions from upstream and downstream activities in their value chains if such emissions were material to investors, or if any such companies made a commitment which references Scope 3 emissions.
SEC Chairperson Gary Gensler issued a statement expressing his support for the proposal. In a dissenting statement, SEC Commissioner Hester M. Peirce conveyed the perspective that the proposal “will undermine the existing regulatory framework,” which has been implemented to provide investors with “an accurate picture of the company’s present and prospective performance through managers’ own eyes.”
While the enhanced disclosure requirements would provide useful information to investment advisers who manage ESG strategies, they should plan to update their portfolio management processes to include consideration of these disclosures, where relevant. Advisers should assume that examiners will expect documentation that these disclosures were reviewed.
If you have any questions about how this proposed rule would affect your firm or your firm’s ESG strategy, please contact your Greyline representative.
The SEC press release is here.
The proposed rule is here.