Aug 17, 2022 | 3 min read

At a glance: The SEC's controversial climate-related disclosure regulation

Sacha van Tuijn

This spring, the SEC proposed a new rule that if adopted would require public companies to provide detailed reporting of their climate-related risks, emissions and net-zero transition plans.

This comes at a time when investors are looking at climate risk more closely, and consumers and employees are becoming more conscientious of sustainability factors in their decision making. There is also a structural global shift in this direction as the EU works on its Sustainable Finance Disclosure Regulation, Corporate Sustainability Reporting Directive and EU taxonomy, and regions like the United Kingdom, New Zealand, Japan, Hong Kong are developing regulation based on the voluntary Task Force on Climate-related Financial Disclosures, already endorsed by 2,600 companies across the globe.

The ruling is mired in controversy, from whether or not such a ruling by the SEC exceeds their authority and is fundamentally contrary and damaging to the American capitalist economy, to the difficulty and cost of reporting Scope 3 emissions vs. value-add this information would provide.

There is also concern that while many public companies already do a fair amount of reporting, for example in their Carbon Disclosure Project reports, this will be more challenging in private markets. However, the landscape may look slightly different for the real estate sector if results from the annual GRESB Benchmark are considered. GRESB, the global ESG benchmark for real assets, recorded 366 participating funds in 2021 for the Americas region, with 301 of those specifically in the USA. Of the total, 270 funds were private, while only 95 were listed. And indeed, GRESB traditionally has a much stronger participation base in the private markets.

While the ruling was open for public comment, of which it received a lot, and there is even the possibility that the Supreme Court could strike it down, the current proposal assumes adoption this October and effective date in December 2022. If it is indeed adopted, large filers will need to report on fiscal year 2023 data in 2024. Given that standardized disclosures and increasing transparency are a global trend regardless of the SEC ruling, it is prudent to have an understanding of the ruling and keep an eye on the progression. quick facts on the SEC climate-related disclosure: who, what, when, location, where to report The proposed ruling, in a nutshell:

  • WHAT: Disclosures on certain climate-related information, including information about climate-related risks that are reasonably likely to have material impacts on business or consolidated financial statements, GHG emissions metrics that could help investors assess those risks, and climate-related opportunities. The proposed framework is modeled in part on the TCFD's recommendations, and also draws upon the GHG Protocol.
  • There are three categories:
    1. Material climate impacts: strategic impacts, financial impacts, and operational impacts, as well as governance and risk management processes to manage these risks.
    2. GHG emissions: audited Scope 1 & 2, and Scope 3 if they are material or if a filer has a target.
    3. Existing targets around emission reductions, energy use, nature conservation, or revenues from low-carbon products and disclosure of the transition plans to achieve those targets, including specific information on the use of offsets or renewable-energy credits.
  • WHO: US 10-K filers as well as foreign private issuers who file 20-F forms with the SEC
  • LOCATION: United States
  • WHEN: (assuming adoption and an effective date of December 2022)
    • Large accelerated filers - disclosure compliance starting in 2024, based on FY 2023; Scope 3 emissions reporting is delayed to 2025, based on FY 2024. Data must have limited assurance for FY 2024, filed in 2025 and reasonable assurance for FY 2026, filed in 2027.
    • Accelerated filer and non-accelerated filers - disclosure compliance starting in 2025, based on FY 2024; Scope 3 emissions reporting is delayed to 2026, based on FY 2025. Data must have limited assurance for FY 2025, filed in 2026 and reasonable assurance for FY 2027, filed in 2028.
    • SRC - disclosure compliance starting in 2026, based on FY 2025;
  • WHERE: Filers will need to provide the climate-related disclosure in their registration statements and Exchange Act annual reports, electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL, and file rather than furnish the disclosures.
    • Regulation S-K mandated climate-related disclosure in a separate, appropriately captioned section of the registration statement or annual report, or alternatively incorporate the information in the separate, appropriately captioned section by reference from another section, such as Risk Factors, Description of Business, or Management's Discussion and Analysis (“MD&A").
    • Regulation S-X mandated climate-related financial statement metrics and related disclosure in a note to the registrant's audited financial statement.
  • OTHER: See the press release and latest fact sheet from the SEC here.

Not as high profile but worth keeping an eye on is the "Rules Related to Investment Companies and Investment Advisers to Address Matters Relating to Environmental, Social and Governance Factors", which would expand disclosure requirements for investment funds and advisers that market themselves as having an ESG focus. The comment period was open until August 16.