On March 21st 2022, the Securities and Exchange Commission (SEC) proposed a rule change that would require climate-related disclosures for publicly traded companies. The rule changes include providing select metrics related to climate change, information on climate-related risks that are likely to have a material impact, and greenhouse gas emissions disclosures. These disclosures would be a part of registration statements for the SEC and periodic reports.

In more detail, the proposed changes would require SEC registered businesses to disclose:

  • Administration of climate-related risks within the business and relevant risk management processes.
  • The likely material impact of any identified climate-related risks to the business and consolidated financial statements over the short, medium, and long term.
  • How climate-related risks have or will likely affect business strategy, models, and outlooks.
  • The impact of climate-related severe weather events and transition activities and investments on a business’s consolidated financial statements and other financial estimates and assumptions.
  • Direct and indirect greenhouse gas emissions from purchased electricity or other energy forms, if a business has publicly set emissions targets or released a transition plan.
  • Greenhouse gas emissions from upstream and downstream activities in the business’s value chain, if the business has set emissions targets or goals for those (scope 3) emissions.

Disclosure Rules for Climate Risk

The disclosure rules outlined above are triggered by materiality thresholds, the likely material impact of climate change on the reporting business. The materiality determination is based on whether there is a “substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell or how to vote”, based on “both the probability of the event occurring and its potential magnitude, or significance to the [SEC] registrant.”

Required disclosure includes both physical risks as well as the dangers of transition risks. Physical risks are categorized as both the “acute” and “chronic” risks that affect a business and its direct partners:

  • Acute: Event-driven risks caused by short-term extreme weather events such as hurricanes, tornadoes, floods, and storm surge.
  • Chronic: Risks based on longer-term weather patterns such as extreme heat, drought, and sea level rise. This category also includes factors that may be related to these effects such as decreased land habitability or access to fresh water and electricity.

SEC guides for the new rules recommend that businesses supply the location (via zip code) of high-risk physical assets or operations in order to report risk at a more granular level. Tools from ClimateCheck can help businesses more accurately discover, assess and visualize their geographically-driven financial exposure from climate risks and fulfill potential SEC disclosure requirements.

Transition risk may arise from new regulatory policies, climate-related ligation, changing consumer and investor patterns, long-term shifts in market prices, technological challenges and opportunities and more.

Implications

Approximately 12,000 public companies are registered with the SEC, including 1,150 non-U.S. companies. The SEC’s authority gives it the power to prescribe the form and content of any financial statements, including “consolidated financial statements”, filed with the Commission.

The proposed rule changes would encourage transparency into potential climate-related vulnerabilities of public businesses. Setting consistent and clear reporting obligations for SEC registered public businesses will help standardize the growing field of climate-related disclosures. This move also helps fulfill the SEC’s responsibility to ensure that investors have enough information on a business's financial situation and potential exposures to make informed investment decisions.

The proposed rules include a phase in period of one to three years before compliance is necessary. Before a decision is reached on the proposed changes, the public will be allowed a comment period until May 20, 2022.