After Small Steps, a Giant Leap for Climate-Related Disclosure in the U.S.?

After Small Steps, a Giant Leap for Climate-Related Disclosure in the U.S.?

Recent rulemaking developments at the SEC indicate that, if 2021 was a year in which it revealed its intentions about climate-related disclosures, 2022 appears to represent the realization of those intentions.  Its detailed proposal published last week would amend its Securities Act and Exchange Act rules, requiring U.S.-listed issuers and foreign private companies to disclose climate-related matters in their registration statements and periodic reports.  The rules would permit investors to more easily and accurately compare companies’ efforts on climate change, and also reflect the Biden administration’s broader policy goal of achieving a 50-52% reduction in economy-wide net greenhouse gas pollution from 2005 levels by 2030. 

Separately, financial firms should expect additional ESG regulatory developments in 2022 that would impact them directly, for example in their roles as investment advisors or retirement plan fiduciaries.

To understand the SEC’s existing rules on climate-related disclosures, currently investors and public companies are still relying on its guidance from 2010, which provides examples of how climate change matters could trigger disclosure requirements, based largely on the SEC’s concept of materiality.  These include material impacts from regulation or international agreements, indirect consequences stemming from regulation of business (e.g. decreased demand for goods that produce GHG emissions), and material physical impacts on business (e.g. the effect of climate change-related weather events on business operations).  

This has proven to be insufficient from the SEC’s point of view, as have voluntary efforts by companies to reveal their contribution to climate change, in part because investors lack the ability to compare such company disclosures against one another.  In March 2021, the SEC therefore announced new efforts on several fronts, including a request for public input on whether climate reporting standards should change.  In response, issuers and investors submitted many hundreds of comments which would be reviewed by the SEC, and by October 2021 Commissioner Allison Herren Lee would state confidently, “regulators can now pick up the baton to help achieve what a voluntary system alone cannot”.

As expected, eventually the SEC followed up with its rule proposal and a press release on 21 March 2022, reiterating its stance and noting that its proposed disclosures are based on based on frameworks already broadly accepted across the world, such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.  The SEC is accepting public comments on its proposal until 20 May 2022, or 30 days after its publication in the Federal Register, whichever is later.

Compliance dates

The SEC establishes phased-in compliance dates for its new rules.  Assuming the rules become effective in December 2022, and for issuers with a fiscal year-end of 31 December, they would apply as follows:

Fiscal year 2023 (filing in 2024):

Large accelerated filers[i] submit climate-related disclosures (including Scopes 1 & 2 GHG emissions with intensity metrics)

Fiscal year 2024 (filing in 2025):

Large accelerated filers include provide “limited assurance” attestation for Scopes 1 & 2 GHG emissions 

Large accelerated filers disclose Scope 3 GHG emissions with intensity metrics

Accelerated filers[ii] and non-accelerated filers submit climate-related disclosures (including Scopes 1 & 2 GHG emissions with intensity metrics)

Fiscal year 2025 (filing in 2026):

Accelerated filers provide “limited assurance” attestation for Scopes 1 & 2 GHG emissions

  • Note that non-accelerated filers need not provide attestations

Accelerated filers and non-accelerated filers disclose Scope 3 GHG emissions with intensity metrics

SRC (small reporting companies)[iii] submit climate-related disclosures (including Scopes 1 & 2 GHG emissions with intensity metrics)

  • Note that SRCs are exempt from having to disclose Scope 3 GHG emissions

Fiscal year 2026 (filing in 2027):

Large accelerated filers provide “reasonable assurance” attestation for Scopes 1 & 2 GHG emissions

Fiscal year 2027 (filing in 2028):

Accelerated filers provide “reasonable assurance” attestation for Scopes 1 & 2 GHG emissions

Regarding the required attestations, the SEC notes that “limited assurance” is equivalent to that provided for interim financial statements in a Form 10-Q (i.e. a “review”), while “reasonable assurance” is equivalent to that provided in an audit of consolidated financial statements in a Form 10-K.  

The SEC further notes the usefulness of “intensity metrics”, which measure emissions per unit of economic output.  It proposes to require disclosure of GHG intensity (or “carbon intensity”) in terms metric tons of CO2 per unit of revenue as well as per unit of production.  The SEC illustrates with the example of car manufacturer A that has a higher overall CO2 emissions output than car manufacturer B, but has a better “emissions efficiency” because A produces more cars and lower CO2 emissions per car than B.[iv]

Greenhouse gas (GHG) emissions

The SEC stresses the importance of GHG emissions information for investment decision-making, and makes it a focus of the proposed rules.  As many issuers already disclose their GHG emissions according to the GHG Protocol (including under separate Environmental Protection Agency reporting standards), the SEC sees fit to borrow from the GHG Protocol’s concepts and definitions for its proposal.  Thus greenhouse gases mean carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), nitrogen trifluoride (NF3), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulfur hexafluoride (SF6).  Further reflecting the GHG Protocol, the reportable direct and indirect GHG emissions are defined as follows:

  • Scope 1 Direct GHG emissions from operations that are owned or controlled by a company.
  • Scope 2 Indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a company.
  • Scope 3 All indirect GHG emissions not otherwise included in a company’s Scope 2 emissions, which occur in the upstream and downstream activities of a company’s value chain.  Upstream emissions include emissions attributable to goods and services that the company acquires, the transportation of goods (for example, to the company), and employee business travel and commuting. Downstream emissions include the use of the company’s products, transportation of products (for example, to the company’s customers), end of life treatment of sold products, and investments made by the company.

Regarding Scope 3 emissions, the SEC acknowledges the challenges of obtaining such information, and therefore offers some relief for its disclosure.  It would only be required “if material, or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions”.  A targeted safe harbor is also provided: incorrect information about Scope 3 emissions would not be deemed a fraudulent statement unless it is shown to have been made without a reasonable basis or other than in good faith.  (This seeks to allay liability concerns of reporting parties, who base their Scope 3 disclosures on information obtained from third parties.)

Contents of disclosure

The new rules propose to revise the contents of disclosures required under Regulation S-K (regulating how SEC registrants must disclose qualitative information in periodic reports, registration statements and other filings) and Regulation S-X (regulating the content of quantitative information).  The SEC goes into detail within its voluminous proposal (more than 500 pages), but also provides a 3-page Fact Sheet summarizing it, including the climate-related content required from SEC registrants (i.e. the reporting parties that would be subject to the rules) which must include:

  • oversight and governance of climate-related risks by the registrant’s board and management
  • how climate-related risks identified by the registrant had or are likely to have a material impact on its business and financial statements, over the short-, medium-, and long-term
  • how climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook
  • the registrant’s processes for identifying, assessing, and managing climate-related risks, and whether such processes are integrated into the registrant’s risk management processes
  • the impact of climate-related events (severe weather events and other natural conditions, as well as physical risks) and transition activities (including transition risks identified by the registrant) on the line items of a registrant’s financial statements and related expenditures, and disclosure of financial estimates and assumptions impacted by climate-related events and transition activities
  • Scopes 1 and 2 GHG emissions metrics, separately disclosed, expressed (1) by disaggregated constituent greenhouse gases and in the aggregate, and (2) in absolute and intensity terms
  • Scope 3 GHG emissions and intensity, if material, or if the registrant has set a GHG emissions goal that includes its Scope 3 emissions
  • the registrant’s climate-related targets or goals, and transition plan, if any

Companies would not need to address solely risks and negative impacts; under the proposal they could also furnish information about any climate-related opportunities they have identified. 

Method of disclosure

The proposal calls for the relevant qualitative information to be disclosed in a separately captioned section of the report (e.g. registration statement or annual report).  This can include incorporating by reference, within such separate section, other sections containing the relevant information (e.g. Risk Factors, Description of Business, or Management’s Discussion and Analysis).  Quantitative data, meanwhile, should be included in a note to the audited financial statements.  Both the narrative and quantitative information must be tagged electronically in Inline XBRL.

Company compliance officers and regulatory counsel will also want to take note of the particular SEC forms that would be subject to the enhanced disclosures:

  • Form S-1 (Registration Statement Under the Securities Act of 1933)
  • Form F-1 (Registration statement for securities of certain foreign private issuers)
  • Form S-3 (Registration Statement Under the Securities Act of 1933)
  • Form F-3 (Registration statement for securities of certain foreign private issuers)
  • Form S-4 (Registration Statement Under the Securities Act of 1933)
  • Form F-4 (Registration statement for securities of certain foreign private issuers issued in certain business combination transactions)
  • Form S-11 (Registration Under the Securities Act of 1933 of Securities of Certain Real Estate Companies)
  • Form 6-K (Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 Under the Securities Exchange Act of 1934)
  • Form 10 (General Form for Registration of Securities Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934)
  • Form 10-Q (Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934)
  • Form 10-K (Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934)  
  • Form 20-F (Registration Statement Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934, or Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934, or Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934, or Shell Company Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934)

Many commentators have observed that the proposal could be challenged in court, based in part on a notion that SEC disclosure requirements should be limited to material information.[v]  While the SEC did not address this point in its proposal, a glimpse of its possible view on it can be found in remarks Commissioner Lee made in 2021:

It is often made without citation and appears to be a widely held assumption.  However, this is affirmatively not what the law requires, and thus not how the SEC has in fact approached disclosure rulemaking.

Indeed our statutory rulemaking authority under Section 7 of the Securities Act of 1933 gives the SEC full rulemaking authority to require disclosures in the public interest and for the protection of investors.  That statutory authority is not qualified by ‘materiality’.  Similarly, the provisions for periodic reporting in Sections 12, 13 and 15 of the Securities Exchange Act of 1934 are not qualified by ‘materiality’.  

The concept of materiality arises under anti-fraud rules such as Rules 10b-5 and 14a-9, where it plays a role in limiting how much information must be provided.  In other words, materiality places limits on anti-fraud liability; it is not a legal limitation on disclosure rulemaking by the SEC.[vi]

The SEC’s vote for the proposal was not unanimous, with Commissioner Hester M. Peirce issuing a dissent entitled “We are Not the Securities and Environment Commission – At Least Not Yet”.  In it, she cites a law professor to assert a materiality requirement for SEC disclosure rules, deriving from First Amendment protections that limit compelled speech:

The objective of Congress’s instruction for us to regulate in the public interest and for the protection of investors is to protect investors in their pursuit of returns on their investments, not in other capacities.  For this reason, to qualify as uncontroversial and thereby stay within First Amendment bounds, our disclosure mandates must be limited to information that is material to the prospect of financial returns.  In Professor Griffith’s view, disclosures of information material to financial returns are uncontroversial because the quest for financial returns is the common goal that unites all investors.  Their other individualized goals—whether ameliorating climate change, encouraging better labor relations, pursuing better treatment of animals, protecting abortion rights, or any other number of issues—are material for purposes of our disclosure regime only to the extent they relate to the financial value of the company.

Commissioner Peirce and others have criticized other aspects of the rule as well, including its cost burden.  Given the significant interest in the proposal and number of comments submitted leading up to it, some observers believe that court challenges, even if not ultimately successful, could nevertheless delay it.

Mounting ESG regulatory considerations for financial firms

While the SEC’s proposed disclosure rules would indirectly affect private financial entities (who would depend on such filings to make their investment decisions), other regulatory developments should impact them more directly.  In an April 2021 Risk Alert, the SEC highlighted its examinations of investment advisors and funds to evaluate the accuracy of their ESG investing approaches and related procedures.  It followed up with consideration of a new rule to address these matters, as part of its Fall 2021 rulemaking agenda.  Chairman Gary Gensler also expressed concern about fund naming, noting that one of the SEC’s priorities for the asset management industry is to consider whether funds should reveal the criteria they use when they market themselves as “sustainable” or “green” or “low-carbon”.  Separately, in October 2021 the Department of Labor, which sets standards of conduct for fiduciaries of ERISA retirement and benefit plans, proposed new rules that would expand their ability to consider ESG factors when selecting investments.

In 2022, investment managers and other financial entities therefore will need to closely monitor ongoing ESG regulatory developments, to understand how they will be impacted and what corresponding actions they will need to take.


[i]  A “large accelerated filer” is an issuer that first meets all of the following conditions, as of the end of its fiscal year:

“(i) the issuer had an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of $700 million or more, as of the last business day of the issuer’s most recently completed second fiscal quarter;

(ii) the issuer has been subject to the requirements of Section 13(a) or 15(d) of the Exchange Act for a period of at least twelve calendar months;

(iii) the issuer has filed at least one annual report pursuant to Section 13(a) or 15(d) of the Exchange Act; and

(iv) the issuer is not eligible to use the requirements for SRCs under the SRC revenue test).”

SEC, Proposed rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors (21 March 2022), I. Introduction, sec. E, ft. 123 (p. 43), citing 17 CFR 240.12b-2.

[ii]  An “accelerated filer” is an issuer that first meets all of the following conditions, as of the end of its fiscal year: 

“(i) the issuer had an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of $75 million or more, but less than $700 million, as of the last business day of the issuer’s most recently completed second fiscal quarter;

(ii) the issuer has been subject to the requirements of Section 13(a) or 15(d) of the Exchange Act for a period of at least twelve calendar months;

(iii) the issuer has filed at least one annual report pursuant to Section 13(a) or 15(d) of the Exchange Act; and

(iv) the issuer is not eligible to use the requirements for SRCs under the SRC revenue test).”

SEC, Proposed Rule on Climate Disclosures for Investors (21 March 2022), I. Introduction, sec. E, ft. 123 (p. 43), citing 17 CFR 240.12b-2.

[iii]  A “small reporting company” is an issuer that: 

(i) is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company; and

(ii) either had (A) a public float of less than $250 million or (B) annual revenues of less than $100 million and a public float of less than $700 million (or no public float). 

See SEC, Proposed Rule on Climate Disclosures for Investors (21 March 2022), I. Introduction, sec. E.4, ft. 143 (p. 47), citing 17 CFR 229.10(f)(1), 230.405 and 240.12b-2.

[iv] See SEC, Proposed Rule on Climate Disclosures for Investors (21 March 2022), II. Discussion, sec. G.1.c (pp. 187-89).

[v]  See, e.g., Davis Polk, “SEC Proposes climate disclosure regime” (22 March 2022), at https://www.davispolk.com/insights/client-update/sec-proposes-climate-disclosure-regime.

[vi]  “Living in a Material World: Myths and Misconceptions about ‘Materiality’” (24 May 2021), Commissioner Allison Herren Lee, Keynote Remarks at the 2021 ESG Disclosure Priorities Event Hosted by the American Institute of CPAs & the Chartered Institute of Management Accountants, Sustainability Accounting Standards Board, and the Center for Audit Quality”, at https://www.sec.gov/news/speech/lee-living-material-world-052421.