On March 21, 2022, the US Securities and Exchange Commission (SEC) released proposed climate-disclosure rules of a historic nature in “The Enhancement and Standardization of Climate-Related Disclosures for Investors.”
As stated by SEC Chair, Gary Gensler, adopting this landmark proposal would “provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.”
Content of the Proposed Rule
The proposed climate-related disclosure framework would require a domestic or foreign registrant to include certain climate-related information in its registration statements and periodic reports, such as on Form 10-K, including:
- Governance of climate-related risks, including their translation into relevant risk management processes.
- How any climate risk identified by the registrant has:
- Had, or is likely to have, material impact on the business and consolidated financial statements, which may manifest over the short-, medium-, or long-term;
- Affected, or is likely to affect, the registrant’s business model, strategy and outlook.
- The registrant’s processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes;
- The impact of climate-related events and transition activities.
The proposed rule would also require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity and other forms of energy (Scope 2). GHG emissions from upstream and downstream activities (Scope 3), if they are material to the registrant or if the registrant has set emissions targets or goals that include them, would be required to be disclosed as well. The proposed rule includes a safe harbor for liability from Scope 3 emissions disclosure, and an exemption from Scope 3 for smaller reporting companies.
The SEC Proposed Rule is in line with the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol, as widely accepted disclosure frameworks.
It is important to note that certain disaggregated climate-related financial statement metrics and related disclosures would form part of the audited consolidated financial statements, and thus be subject to audit procedures by an independent registered public accounting firm and be in scope of the registrant’s internal control over financial reporting (ICFR).
The Proposed Rule is expected to be applicable as early as fiscal year 2023 for Large Accelerated Filers, fiscal year 2024 for Accelerated Filers and Non-Accelerated Filers and fiscal year 2025 for Smaller Reporting Companies (SRC). Scope 3 emissions rules are due with a one-year lag, and SRC registrants will be exempt from disclosures.
What should registrants be considering?
The implementation of this Proposed Rule raises a number of questions for SEC registrants:
- Do we have the proper governance in place? Who is responsible for managing the impact of climate risks in my organization?
- How might climate change be a material risk to our business and its operations?
- How can we identify and analyze climate risks? How do we measure these risks properly and consistently over time?
- How do we run scenario analysis? What are the main assumptions we should consider?
- If we are a registrant that has subsidiaries outside the US, what leverage can we get from work/analysis/disclosure already in place elsewhere in the affiliate group?
- What level of disclosure will be expected from us?
- How do we ensure auditability of the metrics that will be disclosed in the consolidated financial statements?
How Mazars can help
With our global knowledge, particularly in Europe where climate-related regulations are in place or already initiated, our Sustainability and ESG teams have gained robust expertise that can help clients to understand and implement this new regulation.
We offer a suite of solutions that can help reduce risk and facilitate your transition in the areas of:
- Understanding the requirements of the final rule
- Assessing the impact of applicable disclosures
- Creating processes and controls to gather, test, and report data related to risks, emissions and disclosures
- Assisting management in creating strategy that addresses ESG risks and reporting
We can provide a range of services from the bespoke to nearly turn-key solutions. Our team of experts can address your needs, and help your business comply with regulations and gain long-term value and resilience.
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