Comprehensive Analysis of the SEC’s Proposed Rule on Climate Disclosure Requirements (March 29, 2022)

Comprehensive Analysis of the SEC’s Proposed Rule on Climate Disclosure Requirements

by Emily Abraham, Doug Rand, Laura McCracken, Kristen Sullivan, and John Wilde, Deloitte & Touche LLP

Overview

On March 21, 2022, the SEC issued a proposed rule 1 that would enhance and standardize the climate-related disclosures provided by public companies. In his statement expressing support for the proposal, SEC Chair Gary Gensler emphasized that “if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions and would provide consistent and clear reporting obligations for issuers.”

Under the proposed rule, a registrant would be required to provide disclosures in its registration statements and annual reports (e.g., Form 10-K). These would include climate-related financial impact and expenditure metrics as well as a discussion of climate-related impacts on financial estimates and assumptions, all of which would be presented in a footnote to the audited financial statements. Such disclosures would also be subject to management’s internal control over financial reporting (ICFR) and external audit.

Outside of the financial statements, a registrant would need to provide quantitative and qualitative disclosures in a separately captioned “Climate-Related Disclosure” section that would immediately precede MD&A. These disclosures would address:

Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions.
Climate-related risks and opportunities.
Climate risk management processes.
Climate targets and goals.
Governance and oversight of climate-related risks.

Such disclosures would be subject to management’s disclosure controls and procedures and certifications. In addition, the Scope 1 and Scope 2 GHG emission disclosures would be subject to attestation requirements consisting of limited assurance during a phase-in period, followed by reasonable assurance2 thereafter.

All disclosure requirements under the proposed rule would be subject to phase-in over several years, depending on the size of the registrant and the specific disclosures, as illustrated in the table below (assuming that the proposed rule’s requirements are finalized by December 2022 and the registrant has a calendar year-end3):

Registrant Type	All Disclosures Except Scope 3 GHG Emission Disclosures	Scope 3 GHG Emission Disclosures	Attestation on Scope 1 and Scope 2 GHG Emission Disclosures
Large accelerated filer	2023	2024	Limited assurance — 2024 Reasonable assurance — 2026
Accelerated filer	2024	2025	Limited assurance — 2025 Reasonable assurance — 2027
Nonaccelerated filer	2024	2025	Not required

Smaller reporting companies would be exempt from the Scope 3 GHG emission disclosure requirements and would have an additional year of transition (i.e., all other disclosures would be required in 2025).

Key Components of the Proposed Climate Disclosure Requirements

In the proposing release, the SEC noted that certain aspects of the required disclosures would be similar to those that some companies already provide under existing disclosure frameworks and standards, such as the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) and the GHG Protocol. The proposed rule’s specific disclosure requirements on the following topics are discussed in the sections below:

Financial Statement Disclosures

The proposed rule would require registrants to disclose, in a footnote to the financial statements, the financial statement impacts of (1) climate-related events, including severe weather events and other natural conditions such as flooding, drought, wildfires, extreme temperatures, and sea level rise, and (2) transition activities, including “efforts to reduce GHG emissions or otherwise mitigate exposure to transition risks.” A registrant’s calculations should take into account, if applicable, the impact of identified climate-related risks (see the Climate-Related Risks section below). For both climate-related events and transition activities, the disclosures would include financial impact metrics, expenditure metrics, and a discussion of the impact on financial estimates and assumptions.

Financial Impact Metrics

The proposed rule provides examples of the types of disclosures registrants would provide to reflect the impact of climate-related events and transition activities. These include the following:

Examples of Financial Impact Disclosures
“Changes to revenue or costs from disruptions to business operations or supply chains” “Impairment charges . . . of assets (such as inventory, intangibles, and property, plant and equipment)” “Changes to loss contingencies or reserves (such as environmental reserves or loan loss allowances)” “Changes to total expected insured losses due to flooding or wildfire patterns”	“Changes to revenue or cost due to new emissions pricing or regulations resulting in the loss of a sales contract” “Changes to . . . cash flow[s] from changes in upstream costs, such as transportation of raw materials” “Changes to the carrying amount of assets . . . due to a reduction of the asset’s useful life or a change in the asset’s salvage value” “Changes to interest expense driven by financing instruments such as climate-linked bonds issued”

Examples of Financial Impact Disclosures

Climate-Related Events

Transition Activities

“Changes to revenue or costs from disruptions to business operations or supply chains”
“Impairment charges . . . of assets (such as inventory, intangibles, and property, plant and equipment)”
“Changes to loss contingencies or reserves (such as environmental reserves or loan loss allowances)”
“Changes to total expected insured losses due to flooding or wildfire patterns”

“Changes to revenue or cost due to new emissions pricing or regulations resulting in the loss of a sales contract”
“Changes to . . . cash flow[s] from changes in upstream costs, such as transportation of raw materials”
“Changes to the carrying amount of assets . . . due to a reduction of the asset’s useful life or a change in the asset’s salvage value”
“Changes to interest expense driven by financing instruments such as climate-linked bonds issued”

Registrants would be required to separately disclose all negative and all positive impacts of climate-related events as well as separately disclose all negative and all positive impacts of transition activities. These disclosures would be required for each affected financial statement line item if, on an aggregated basis, the absolute value of all such impacts (i.e., the absolute value of both negative impacts and positive impacts for both climate-related events and transition activities) exceeds 1 percent of the related line item.

Connecting the Dots

When disclosing financial impact metrics and expenditure metrics (discussed below), registrants would use a “bright line” 1 percent threshold for disclosure purposes. Accordingly, registrants would need to have appropriate processes, procedures, and internal controls in place for tracking this information and developing the disclosures when preparing financial statements.

Example 1

For the year ended December 31, 20X2, Company A records (1) an impairment expense related to inventory damaged in a significant wildfire (a climate-related event) and (2) a reduction in manufacturing expense due to its energy conservation initiative (a transition activity). To determine its financial impact disclosures, A performs the following calculation:

Cost-of-Sales Line Item	Impact of Wildfire	Impact of Energy Conservation Activities	Absolute Value of Positive and Negative Impacts	Approximate Percentage Impact
$200 million	$1 million of additional expense	$1.5 million of reduced expense	$2.5 million	1.25%

Because the absolute value of the aggregated impacts of climate-related events and transition activities exceed 1 percent of cost of sales, A would separately disclose the positive and negative impacts on its cost-of-sales balance in a footnote to its financial statements. For example, A may provide the following footnote disclosure:

Note XX. Climate-related financial metrics:

Financial Statement Line Item	Negative Impact From Climate-Related Events	Positive Impact From Transition Activities
Cost of sales	$1 million	$1.5 million

Expenditure Metrics

The proposed rule provides examples of expenditures that a registrant may incur, and therefore be required to disclose, to mitigate exposure to climate-related events and transition activities, including the following:

Examples of Expenditures
Climate-Related Events	Transition Activities
Expenditures intended to: “[I]ncrease the resilience of assets or operations” to climate-related events “[R]etire or shorten the estimated useful lives of impacted assets” “[R]elocate assets or operations at risk” of climate-related events	Expenditures related to “research and development of new technologies, purchase of assets, infrastructure or products” that are intended to: “[R]educe GHG emissions” “[I]ncrease energy efficiency” “[O]ffset emissions ([including] purchase of energy credits)” “[I]mprove other resource efficiency” Expenditures related to disclosed climate targets and goals

If the total amount expensed for climate-related events and transition activities or the total amount capitalized for such events and activities exceeds 1 percent of the registrant’s total expenditures or capitalized costs, respectively, separate disclosure of those amounts would be required, disaggregated by climate-related events and transition activities. A registrant would perform this calculation relative to total expenditures and capitalized costs, regardless of the financial statement line items in which the amounts are included.

Example 2

For the period ended December 31, 20X2, Company B incurred (1) $1.5 million of expenses related to relocating certain assets that may be affected by climate-related events and (2) $1.5 million of training expenses related to new equipment intended to reduce GHG emissions. Company B also capitalized $5 million of costs related to the new equipment. Total expenses were $250 million, and total capitalized costs were $30 million. To determine its disclosures related to expenditure metrics, B performs the following calculations:

Because the expenses and capitalized costs exceed 1 percent of total expenses and total capitalized costs, respectively, B would disclose the expenses related to both climate-related events and transition activities and capitalized costs related to transition activities in a footnote to its financial statements. For example:

Note XX. Climate-related financial metrics:

Connecting the Dots

In a manner consistent with the requirements related to financial impact metrics under the proposed rule, registrants may need to put additional processes, procedures, and internal controls in place to track the information needed to provide expenditure metrics when preparing their financial statements. However, it may be difficult for registrants to identify expenditures specifically associated with climate-related events and transition activities. For example, the portion of a newly acquired fixed asset or the change in an insurance premium that is directly attributable to climate may be difficult to ascertain, particularly when other factors are at play (e.g., technological advances or other factors that contribute to insurance cost). During our review of the SEC’s Division of Corporation Finance (DCF) publicly released company-specific comment letters (see the Current SEC Guidance and Activities Related to Climate Change section below for more information), we observed that information related to such expenditures was not readily available to some registrants.

Financial Estimates and Assumptions

Under the proposed rule, registrants would need to provide disclosures about whether risks, uncertainties, or known factors associated with climate-related events and transition activities (including the registrant’s own climate-related targets or goals) affected the estimates and assumptions reflected in its financial statements. If applicable, a registrant would be required to qualitatively disclose how the estimates and assumptions were affected. For example, a registrant that establishes a specific climate target may plan to retire certain assets early to reduce GHG emissions. Any change in the useful life associated with these assets would represent a financial estimate affected by transition activities.

Additional Financial Statement Disclosure Considerations

A registrant would perform these financial impact metric and expenditure metric calculations in a manner consistent with the consolidation principles reflected in its financial statements and, if applicable, would consider the same accounting principles. The disclosures would be required for all periods presented in the financial statements (i.e., two years or three years, depending on the registrant’s requirements). Appropriate context would need to be provided, including a description of how the metrics were derived, the significant inputs or assumptions used, and any policy choices related to the calculation of the metrics. The disclosures would also be subject to audit in accordance with PCAOB standards.

Connecting the Dots

The proposed rule states that if a registrant has not previously presented the metrics in historical periods and the “historical information necessary to calculate or estimate such metric is not reasonably available to the registrant without unreasonable effort or expense, the registrant may be able to rely on Rule 409 or Rule 12b-21 [of the Securities Exchange Act of 1934] to exclude a corresponding historical metric.” While those rules allow a registrant to disclose, in its required SEC filings, information that is available and include a statement that omitted information could not be obtained without unreasonable effort or expense, we have observed historically that registrants rarely avail themselves of this accomodation.

The proposed rule would allow, but not require, a registrant to disclose the impact of any opportunities associated with climate-related events, transition activities, or any other climate-related opportunities. See further discussion below in the Climate-Related Risks section below.

GHG Emissions

Under the proposed rule, GHG emissions are categorized and defined as follows:

Scope 1 GHG emissions	“[D]irect GHG emissions from operations that are owned or controlled by a registrant.”
Scope 2 GHG emissions	“[I]ndirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a registrant.”
Scope 3 GHG emissions	“[A]ll indirect GHG emissions not otherwise included in a registrant’s Scope 2 emissions, which occur in the upstream and downstream activities of a registrant’s value chain.”

The proposed rule also identifies certain upstream and downstream activities (Scope 3):

Upstream Activities	Downstream Activities
Purchased goods and services Capital goods Fuel and energy related activities not included within Scope 1 or Scope 2 Transportation and distribution of purchased goods, raw materials, or other inputs Waste generated Business travel by employees Commuting by employees Leased assets related to purchased or acquired goods or services	Transportation and distribution of a sold product, good, or other output Third party activities related to: Processing products sold Using products sold End-of-life treatment of products sold Leased assets related to sale or disposition of goods or services Franchises Investments

Measures

Registrants would be required to disclose Scope 1 and Scope 2 GHG emissions; Scope 3 GHG emission disclosures would be required if material or a registrant has established a reduction target or goal (see the Climate Targets and Goals section below) that includes such emissions. For each emission scope, a registrant would be required to disclose gross emissions (before consideration of any purchased or generated offsets) (1) disaggregated by each GHG (carbon dioxide, methane, nitrous oxide, nitrogen trifluoride, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride) and (2) on an aggregated basis by using carbon dioxide equivalents (“CO2e”). A registrant would also be required to disclose GHG intensity in terms of tons of CO2e per unit of revenue and per unit produced for the total of Scope 1 and Scope 2 GHG emissions and separately for Scope 3 GHG emissions. If a registrant does not have revenue or production, the registrant would be required to disclose another measure of GHG intensity. Further, a registrant may disclose additional measures of GHG intensity if it discloses that such metric was used and why it is useful to investors.

Boundaries

The proposed rule states that organizational boundaries used “must be consistent with the scope of entities, operations, assets, and other holdings within its business organization as those included in, and based upon the same set of accounting principles applicable to, the registrant’s consolidated financial statements.” That is, GHG emissions disclosed under the proposed rule would reflect all emissions for consolidated subsidiaries and the registrant’s share of GHG emissions for investments for which the registrant applies either proportional consolidation or the equity method of accounting. Any entities not consolidated, proportionally consolidated, or accounted for under the equity method would be reflected in the Scope 3 GHG emission disclosures.

Connecting the Dots

While many aspects of the proposed rule are consistent with the GHG Protocol, the treatment of subsidiaries and affiliates is not. The GHG Protocol permits a company to apply either an equity share approach (reflecting its economic interest in each subsidiary) or a control approach (reflecting the emissions for any controlled subsidiary). A company can choose to define “control” either in financial or operational terms. Under the proposed rule, registrants already reporting under the GHG Protocol would need to revise their reporting boundary and inventory management plan to align with the consolidated financial statements.

Methods and Assumptions

Regardless of the scope of GHG emissions it discloses, a registrant would need to include its significant inputs and assumptions as well as the method it used to perform the corresponding calculations. While the proposed rule does not prescribe a specific method for GHG emission calculations, a registrant would have to disclose the approach it used (including the use of any material, third-party data), calculation tools, and organizational and operational boundaries. It would also need to disclose any data gaps and whether proxy data or another method has been used to address them. If a registrant changed the method or assumptions it used to measure GHG emissions between the current and prior year, it would be required to disclose such change.

Connecting the Dots

The proposed rule does not outline the specific disclosures that a registrant must provide when a change occurs. However, ASC 250,4 which requires a company to disclose, among other information, the nature and reason for a change as well as a description of the impacts on the affected financial statement line items, may be applied analogously.

Estimates

The proposed rule would permit a “reasonable estimate” for fourth quarter GHG emission disclosures in the absence of current available data as long as the registrant discloses any material differences between the actual versus estimated GHG emission data in its next filing. Within its annual report, a registrant would be required to disclose any material changes between the method or significant assumptions used in the calculations in the current period and those used in historical periods. Information about GHG emissions would be required for the most recently completed fiscal year and, if reasonably available, would need to be provided for the historical periods presented within a registrant’s financial statements.

Connecting the Dots

As noted in the Financial Statement Disclosures section above, the proposed rule indicates that registrants may be able to omit certain required information under Rule 409 or Rule 12b-21 of the Securities Exchange Act of 1934; however, we have rarely observed instances in which registrants have done so for other required disclosures.

Additional Scope 3 Disclosures

If a registrant discloses Scope 3 GHG emissions, it would be required to describe the categories of upstream and downstream activities included in the calculation and provide separate Scope 3 GHG emission disclosures for each significant category. Further, the proposed rule explicitly states that a registrant would be required to consider “outsourced activities that it previously conducted as part of its own operations” when measuring Scope 3 GHG emissions. A registrant can also provide a range for its Scope 3 GHG emissions “as long as it discloses its reasons for using the range and the underlying assumptions.”

In addition, a registrant would be required to disclose the data it used to calculate its Scope 3 GHG emissions, including any of the following:

“Emissions reported by parties in the registrant’s value chain, and whether such reports were verified by the registrant or a third party, or unverified.”
“Data concerning specific activities, as reported by parties in the registrant’s value chain.”
“Data derived from economic studies, published databases, government statistics, industry associations, or other third-party sources outside of a registrant’s value chain, including industry averages of emissions, activities, or economic data.”

Scope 3 GHG emission disclosures would be subject to securities law safe harbor provisions, and they would not be considered fraudulent under such law unless there was no reasonable basis to make or reaffirm them or they were provided other than in good faith.

Governance

The proposed rule would require a registrant to disclose the following information about how its board of directors oversees climate-related risks:

The specific board member(s) or board committee(s) responsible for overseeing climate-related risks.
Whether any board member has expertise in climate-related risks and, if so, the nature of such expertise.
The processes undertaken by the board of directors or board committee(s) to discuss climate-related risks, how those groups are informed of such risks, and how frequently such discussions occur.
How climate-related risks are considered by the board of directors or board committee(s) “as part of its business strategy, risk management, and financial oversight.”
How the board of directors establishes climate-related targets or goals or oversees the registrant’s progress toward such targets or goals.

Connecting the Dots

The proposed rule’s requirements related to identifying a climate-related risk expert may be viewed similarly to those associated with identifying an audit committee financial expert under the Sarbanes-Oxley Act5 since both require the expert to be named. However, the proposed rule would require a registrant to describe the individual’s expertise in “detail as necessary to fully describe the nature of the expertise.” Such disclosure is generally not required for an audit committee financial expert.

In addition, the proposed rule would require a registrant to provide the following disclosures regarding how its management assesses and manages climate-related risks:

The specific executives or management committee(s) responsible for assessing and managing climate-related risks.
The relevant expertise of management.
The processes that management undertakes to obtain information about and monitor climate-related risks.

A registrant may also elect to disclose management’s role in assessing climate-related opportunities and the board of director’s oversight of such opportunities.

Connecting the Dots

The disclosures described above, particularly with respect to risk management and governance, are consistent with those in the SEC’s recent proposed rule 6 on cybersecurity risk. Historically, matters related to governance have been described primarily in a registrant’s proxy statement. Under the proposed rule, expanded governance disclosures would be required in annual reports, and the timeline for providing such governance information would be accelerated.

Climate-Related Risks

A registrant would be required to disclose how climate-related risks have (1) had or are likely to have a material impact on its business or financial statements and (2) affected or are likely to affect the registrant’s “strategy, business model, and outlook.” The proposed rule defines climate-related risks as “the actual or potential negative impacts of climate-related conditions and events on a registrant’s consolidated financial statements, business operations, or value chains, as a whole.” These risks may include physical risks that are acute (e.g., hurricanes, floods) or chronic (e.g., longer-term weather patterns such as sustained higher temperatures) as well as transition risks. The table below outlines the disclosure requirements.

Required Disclosures by Type of Climate Risk
Nature of the risk (e.g., acute, chronic) The location (including zip code or similar unique identifier) and nature of the “properties, processes, or operations” subject to such risk For flooding risks: The assets in the flood hazard area (e.g., 25% of total acreage) The location of those assets For high-water stress risks: The amount of assets in such an area (e.g., book value of $1 million and 10% of total assets) The location of those assets The total water usage from those areas (e.g., 30% of the registrant’s total water usage)	Nature of the risk and whether it is related to regulatory, technological, market, liability, reputational, or other transition risks.

Required Disclosures by Type of Climate Risk

Physical Risks

Transition Risks

Nature of the risk (e.g., acute, chronic)
The location (including zip code or similar unique identifier) and nature of the “properties, processes, or operations” subject to such risk
For flooding risks:
- The assets in the flood hazard area (e.g., 25% of total acreage)
- The location of those assets
For high-water stress risks:
- The amount of assets in such an area (e.g., book value of $1 million and 10% of total assets)
- The location of those assets
- The total water usage from those areas (e.g., 30% of the registrant’s total water usage)

Nature of the risk and whether it is related to regulatory, technological, market, liability, reputational, or other transition risks.

For all climate-related risks, a registrant would be required to disclose the actual or potential impacts of the risk, including on its operations, products, services, suppliers, transition activities (e.g., new technologies or processes), research and development expenditures, or “any other significant changes or impacts.” The disclosures would also address how the risks affect or are reasonably likely to affect the financial statements, including those related to the metrics associated with financial impacts and expenditures described in the Financial Statement Disclosures section above. A registrant would also have to disclose how the risks affect business strategy, financial planning, and capital allocation and whether the impacts are expected to occur in the short, medium, or long term. The proposed rule does not prescribe such time frames but would require registrants to develop their own definitions and disclose them.

Connecting the Dots

Many public companies currently address climate-related risks as part of their risk factor disclosures in their annual reports. For example, more than three-quarters of companies in the S&P 500 index disclosed matters related to climate change or emissions in the risk factor section of their most recent annual report. However, the proposed rule would require significantly more granular disclosure than the information companies currently provide.

If a registrant uses an internal carbon price (e.g., a monetary cost assigned to carbon emissions for budgeting, forecasting, or performance management), it would be required to disclose (1) the current price per metric ton of CO2e, (2) the registrant’s total price, (3) whether and, if so, how the total price is expected to change over time, (4) how such price is determined and the rationale for selecting it, and (5) how the price is used to assess and manage climate-related risks.

If a registrant uses a scenario analysis or another analytical tool to assess the resilience of its business, it would need to describe the scenario (e.g., 2 degree increase), the assumptions made, and the scenario’s projected financial impacts.

The proposed rule would permit (but not require) disclosure of climate-related opportunities, which are defined as “actual or potential positive impacts of climate-related conditions and events on a registrant’s consolidated financial statements, business operations, or value chains, as a whole.”

Climate Risk Management

A registrant would be required to disclose its processes for “identifying, assessing, and managing” climate-related risks. Such disclosure would include how the registrant (1) assesses the significance and materiality of climate-related risks; (2) considers actual or potential regulations (e.g., GHG emission limits) as well as shifts in customer demand, technology, or market prices in assessing transition risks; and (3) prioritizes and mitigates climate-related risks. Further, a registrant would disclose whether those processes are integrated into its broader risk management program.

If a registrant has adopted a climate transition plan, the proposed rule would require a description of such plan, including how the registrant intends to mitigate or adapt to climate-related risks as well as the relevant targets and metrics used in identifying and managing physical and transition risks. A registrant would be required to update its disclosure annually to specify its progress toward completing the transition plan.

The proposed rule would also permit, but not require, a registrant to disclose its process of identifying, assessing, and managing climate-related opportunities.

Climate Targets and Goals

If a registrant has set any climate-related targets or goals related to, for example, a reduction in GHG emissions, energy usage, or water usage, it would be required to disclose information such as:

The scope of activities encompassed in the target (e.g., Scope 1 and Scope 2 only, domestic operations only).
The time horizon envisioned for achieving the target (e.g., a 50 percent reduction in GHG emission by 2030).
Any interim targets established.
How the target is measured (e.g., reduction of CO2e emitted, reduction of CO2e emitted per unit of revenue).
How the registrant plans to achieve its targets or goals.
An update each year of the registrant’s progress relative to its targets or goals and how (or whether) such progress has been achieved.
If carbon offsets or renewable energy certificates (RECs) have been used as part of the plan to achieve climate-related targets or goals, information about the carbon offsets or RECs, including how much of the progress made is attributable to offsets or RECs.

Connecting the Dots

In recent comment letters from the DCF (see the Current SEC Guidance and Activities Related to Climate Change section below), registrants were asked to describe the impact of climate-related commitments on their costs and capital expenditures in the context of MD&A. The proposed rule would expand on these comments and add specific disclosure requirements related to climate targets and goals.

Attestation Requirements

A registrant’s financial statement footnote disclosures would be subject to existing audit requirements for financial statements and ICFR. The Scope 1 and Scope 2 GHG emission disclosures would be subject to limited assurance during a phase-in period, followed by reasonable assurance. Any voluntary assurance obtained (e.g., Scope 3) would be subject to the same requirements and the same attestation standards as Scope 1 and Scope 2 GHG emission disclosures. While the proposed rule does not prescribe specific attestation standards, it imposes certain minimum requirements for those standards, including that they be publicly available, established with appropriate due process, and subject to public comment.

Under the proposed rule, a GHG emissions attestation provider would have to be (1) an expert in GHG emissions that performs engagements in accordance with professional standards and (2) independent from the registrant. The GHG attestation report would include specific information such as the specific attestation standard used, management’s responsibility for the information, and the attestation provider’s responsibility. The registrant would also be required to provide additional disclosures, including those related to the attestation provider’s (1) licensing or accrediting information and (2) record-keeping obligations, as well as whether the attestation engagement is subject to an “oversight inspection program.”

Connecting the Dots

While the proposed rule does not establish specific attestation standards, its requirements are consistent with the standards issued by the AICPA, PCAOB, and IAASB. Further, the independence requirements required under the proposed rule are similar to those already established for independent registered public accounting firms.

Internal Controls and Disclosure Controls and Procedures

The disclosures outlined in the Financial Statement Disclosures section above would be subject to a registrant’s ICFR because they would be included in the audited financial statements. Accordingly, both management’s assessment and the auditor’s attestation regarding the effectiveness of ICFR, which must be provided by accelerated and large accelerated filers that are not EGCs, would need to address the proposed rule’s additional disclosure requirements.

Disclosure controls and procedures (DCPs) are a broad set of controls that largely encompass ICFR and are designed to ensure that information that must be disclosed by the registrant in its filings or submissions under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within specified periods. Management must disclose its evaluation of DCPs and provide certifications related to the information disclosed in quarterly and annual reports. The disclosures, including GHG emissions, that would be required outside of the financial statements would be subject to a registrant’s DCPs and management certifications.

Location and Timing of Required Disclosures

Under the proposed rule, a registrant would provide the disclosures in its registration statements (e.g., Forms S-1, S-3, S-4, F-1, F-3, F-4) as well as its annual reports (e.g., Forms 10-K and 20-F). The disclosures outlined in the Financial Statement Disclosures section above would be required in the financial statements, whereas the remaining disclosures, including GHG emissions and related attestation report, would be required in a newly created “Climate-Related Disclosure” section that would be presented immediately before MD&A. If disclosure requirements outlined in the proposed rule are addressed in other sections of the document (e.g., MD&A, risk factors), a registrant would be permitted to incorporate them by reference in the Climate-Related Disclosure section. The disclosures in the financial statements and the Climate-Related Disclosure section would be due at the same time as a registrant’s registration statement or annual report. The proposed rule would require a registrant to electronically tag the required narrative and quantitative disclosures by using Inline XBRL.

The financial statement disclosures discussed above would only be required in audited financial statements and thus would not be included in interim financial statements filed on Form 10-Q. However, the proposed rule would require a registrant to disclose, in its quarterly reports on Form 10-Q (for domestic registrants) or Form 6-K (for foreign registrants), any material changes to the information disclosed in its last annual report. This may include, for example, material changes in fourth quarter emissions if a registrant used estimates for disclosures in its annual report.

Affected Companies

The proposed rule’s disclosures would be required for all domestic and foreign registrants, except for asset-backed issuers. Further, the disclosures would be required for companies completing an initial public offering (IPO) and private operating companies (target) merging with a registrant (including special-purpose acquisition companies). The information for target companies would be required in the proxy statement or Form S-4 filed in advance of the transaction.

Connecting the Dots

An EGC is a category of issuer that was established in 2012 under the Jumpstart Our Business Startups Act to encourage certain companies to undertake IPOs by permitting them to apply less stringent reporting and regulatory requirements for a certain period. Notably, the proposed rule does not provide any exemption for EGCs undertaking an IPO; therefore, such entities would be subject to the same disclosure requirements as non-EGCs.

Materiality

The proposed rule states that the definition of materiality used by a registrant should be consistent with the Supreme Court’s definition; that is, “a matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote.” The proposed rule emphasizes that materiality is based on facts and circumstances and takes into account qualitative and quantitative factors as well as the probability and magnitude of future events.

Questions to Consider

The proposed rule would significantly change the climate-related disclosure requirements for public companies. For most companies the effort needed to comply with the disclosure requirements will be substantial, and the time to begin preparing is now.

In a recent Deloitte survey of 300 finance, accounting, sustainability, and legal executives at public companies with over $500 million in revenue, more than half (57 percent) indicated that data availability (access) and data quality (accuracy or completeness) remain their greatest challenges with respect to environmental, social, and governance (ESG) data for disclosure. Less than a quarter (21 percent) of respondents currently have an ESG council or working group focused on ESG topics; however, more than half (57 percent) are actively working to establish one. A strong majority (82 percent) also believe that they will need additional resources to generate ESG disclosures that meet the information needs of critical stakeholders.

Given the challenges expressed by survey respondents and in anticipation of the final rule, companies may wish to begin preparing ahead of time by using the proposed rule as a guide and by considering the following questions:

With whom does the oversight responsibility for climate-related or other ESG risks and opportunities reside? What involvement does finance, internal audit, the audit committee, or the board of directors have? What policies and procedures are in place to govern such involvement?
What climate-related information is currently gathered and available? What level of assurance is currently obtained over this information? What additional information (if any) would need to be developed or gathered (including for disclosure in the audited financial statements)?
How does the company evaluate the materiality of climate-related disclosures? Are there systems and processes in place for gathering the necessary information for determining whether such disclosures are material?
What DCPs are in place to address the proposed rule’s disclosure requirements, and what ICFR is in place to address the disclosure that would be required in the audited financial statements?
When is climate-related information currently prepared and reviewed? How does that timing compare with the reporting deadlines proposed by the SEC? What resources (e.g., people, processes, technologies) would the company need to meet the proposed reporting deadlines?

As noted above, the SEC has indicated that the proposed rule is consistent with existing frameworks or standards, such as those recommended by the TCFD and the GHG Protocol. Therefore, registrants that already provide such disclosures may be better positioned to implement the proposed rule’s requirements.

Current SEC Guidance and Activities Related to Climate Change

The proposed rule arrives approximately one year after then SEC Acting Chair Allison Herren Lee issued a request for input on climate-change disclosures as a prelude to rulemaking. Chair Gensler has similarly focused on climate risks and climate-related disclosures during his tenure. For example, in his testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, he noted that “[c]ompanies and investors alike would benefit from clear rules of the road” and that he had directed the SEC staff to consider economic analysis and public comment in developing the requirements related to such disclosures.

Currently, the SEC’s guidance on climate-related disclosures is primarily contained in its 2010 interpretive release,7 which provides considerations within the context of existing SEC requirements. Further, in September 2021, the DCF issued comment letters to more than 30 registrants about their climate-change disclosures on the basis of the themes in the 2010 interpretive release. On September 22, 2021, the DCF publicly released a “Dear Issuer” letter that included samples of the types of comments the DCF may issue to public companies about such disclosures. The sample comments, which the DCF published before publicly releasing any company-specific letters about climate disclosures, served as an early warning to registrants that had not received comments from the DCF about such disclosures. For more information about the “Dear Issuer” letter, see Deloitte’s September 27, 2021, Heads Up.

Beginning in February 2022, the DCF began to publicly release company-specific comment letters and responses related to climate disclosures. The DCF’s comments in those letters, which were largely consistent with its sample comments, demonstrated that the staff had considered public disclosures in corporate social responsibility (CSR) reports and other corporate disclosures. They also contained inquiries about whether registrants would need to make material capital or operating expenditures to honor climate-change mitigation commitments, such as reducing greenhouse gases. We observed that if registrants received a company-specific comment letter, such letter contained, on average, around six comments. In addition, substantially all registrants that received an initial letter received a follow-up comment letter that included, on average, about five comments. In certain cases, registrants received a third round of comments from the DCF.

In their responses to the comment letters, many registrants stated that (1) specific climate-related disclosures mentioned in the comments would not be material to their business; (2) climate-related disclosures and risk factors were already incorporated into their existing disclosures; or (3) the information in their CSR report was intended for a broader audience than users of the SEC filings. In other words, they generally believed that while employees, customers, suppliers, nongovernmental organizations, and governments may use CSR reports, not all the information contained within them is material for disclosure purposes in SEC filings. The DCF’s follow-up comment letters principally requested a more detailed materiality analysis as support for the initial responses, which registrants provided. In some cases, registrants agreed to modify or expand language in future filings, particularly that related to risk factors and, to a lesser extent, MD&A. We did not observe follow-up comments from the DCF regarding information that registrants included in the CSR reports but excluded from SEC filings.

In addition to the proposed rule, the SEC’s regulatory agenda includes potential amendments to SEC regulations related to investment fund names. Such amendments may address certain requirements associated with the characterization of investment funds as “sustainable” or “ESG” funds.

Providing Feedback to the SEC

The SEC is interested in feedback on the proposed rule from market participants and does not require a specific format for the submission of comments. Some commenters may choose to present their views in a narrative format without any reference to specific questions posed by the SEC, and others may choose to answer all, or only some, of the specific requests for comment. Any format is acceptable, and the SEC encourages all types of feedback. Comments on the proposed rule are due 30 days after its publication in the Federal Register or May 20, 2022, whichever is later.

Other Resources

In addition to the resources discussed above, Deloitte resources such as the following may help companies assess their approach to climate-related disclosures:

Footnotes

SEC Proposed Rule Release No. 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors.

The objective of a limited assurance engagement is for the service provider to express a conclusion about whether it is aware of any material modifications that a registrant should make to ensure that the subject matter (e.g., the Scope 1 and Scope 2 GHG emission disclosure) is fairly stated or in accordance with the relevant criteria. By contrast, the objective of a reasonable assurance engagement, which provides the same level of assurance as an audit of a registrant’s financial statements, is to express an opinion on whether the subject matter is, in all material respects, in accordance with the relevant criteria.

If a large accelerated filer or accelerated filer does not have a calendar year-end and its 2023 or 2024 fiscal year would begin before the mandatory compliance dates described above, the registrant would not have to comply with the GHG emissions disclosure requirements until the following fiscal year. That is, calendar-year-end companies would be the first to be required to adopt the proposed rule.

FASB Accounting Standards Codification (ASC) Topic No. 250, Accounting Changes and Error Corrections.

See SEC Final Rule Release No. 33-8177, Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002.

SEC Proposed Rule Release No. 33-11038, Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure.

SEC Interpretation Release No. 33-9106, Commission Guidance Regarding Disclosure Related to Climate Change.

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