SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures

A Joint Release From BDO’s ESG Center of Excellence and SEC Practice

SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures 
As of December 2023, the SEC has not released its final rule, granted insight into potential modifications from its proposed form, or provided a definite timeline for the rule’s release. The public comment period on the SEC’s proposed rule closed in June 2022, and the regulator has since been reviewing more than 16,000 stakeholder comments received. As of the Commission’s updated rulemaking agenda, made public in early December 2023, the agency will consider finalizing the rule in April 2024. Meanwhile, lawmakers have challenged its authority to implement the rule, and industry groups and public companies have pushed back on several of its core proposed requirements, including the proposed Scope 3 GHG emissions disclosure mandate, attestation requirements, and one-percent materiality threshold for financial disclosures.

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As investor demand for environmental, social, and governance (ESG) information has increased, the SEC’s focus on such matters, including climate-related risks, has also increased. In 2021, the SEC laid much of the groundwork for the proposal by seeking public input on how it could best regulate or monitor climate change disclosures to provide more consistent and decision useful information for investors. The staff of the Division of Corporation Finance also enhanced its focus and review of climate-related disclosures in filings to better understand how registrants applied the Commission’s 2010 interpretive release on climate change disclosures. The proposal aims to meet investor demands for such information and provide registrants with a standardized framework for disclosures.

Summary of Proposed Requirements

The proposed rules, applicable to both domestic and foreign registrants, would require significantly enhanced climate-related disclosures in registration statements and annual reports (e.g., on Form 10-K).  The proposed financial statement disclosures would be presented in a footnote to the consolidated financial statements, while the other disclosures enumerated below would be presented in a separately captioned section of the filing prior to management’s discussion and analysis (MD&A).  Registrants would be required to electronically tag both the qualitative and quantitative disclosures in Inline XBRL.  The proposed requirements include:

Quantitative Disclosures Within the Financial Statements

  • The impact of climate-related events and transition activities on the line items of a registrant’s consolidated financial statements and related expenditures, and disclosure of financial estimates and assumptions impacted by such climate-related events and transition activities.

    • In a note to the audited financials, the proposed rules would require certain disaggregated climate-related financial metrics that are derived from financial statement line items, including the following:

  1. Financial impact metrics – the impact of severe weather and other natural conditions (including physical risks) and transition activities (including transition risks) on each financial statement line item unless the aggregate impact is less than one percent of the total line item for the relevant fiscal year.  

  2. Expenditure metrics – amounts expensed and capitalized during the fiscal years presented that are associated with climate-related events and transition activities subject to the same disclosure threshold above.

  3. Financial estimates and assumptions – whether estimates and assumptions used in the financial statements were impacted by exposure to risks and uncertainties associated with, or known impacts from, climate-related events.



Quantitative Disclosures Outside of the Financial Statements

  • Direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2), separately disclosed.

    •  Large accelerated and accelerated filers would be required to obtain a third-party attestation report over their Scope 1 and Scope 2 GHG emissions disclosures to include in their registration statements and annual reports. While the attestation provider would need to meet certain minimum standards (and incremental disclosures would be required about the provider), as proposed, the provider would not be required to be a registered public accounting firm. 

  • Indirect GHG emissions from upstream and downstream activities in a registrant’s value chain (Scope 3), if material, or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions.

    • Significant inputs and assumptions used in computing the Scope 3 emissions would also be disclosed.When included, such disclosures would be subject to a safe harbor from liability under the federal securities laws.Smaller reporting companies (SRCs) would be exempt from the Scope 3 GHG emissions disclosure requirements.

Overview of GHG Protocol scopes and emissions across the value chain



Qualitative Disclosures

  • How any climate-related risks have had or are reasonably likely to have a material impact on the business and consolidated financial statements, which may manifest over the short-, medium-, and long-term.

    • The proposal did not define “short-, medium-, or long-term” so registrants would have the flexibility to decide and disclose their definition for each category.  The materiality threshold would be applied in a consistent manner with other MD&A disclosure. 

  • How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook.

    • Such disclosures would include the short-, medium-, and long-term material impacts on the business operations, products or services, suppliers and other parties in the value chain, activities to mitigate or adapt to climate-related risks, and expenditures for research and development related to climate-related risks, as well as disclosure of the registrant’s scenario analysis, internal carbon price, and carbon offsets or renewable energy credits (if applicable or used). 

  • The registrant’s process 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.

Disclosure of processes for identifying, assessing, and managing climate-related risks would include how the registrant:

  • Determines the relative significance of climate-related risks compared to other risks;

  • Considers existing or likely regulatory requirements or policies, such as GHG emissions limits, when identifying climate-related risks;

  • Considers shifts in customer preferences, technological changes, or changes in market prices in assessing potential transition risks;

  • Determines the materiality of climate-related risks, including how it assesses the potential size and scope of any identified climate-related risk;

  • Decides whether to mitigate, accept, or adapt to a particular risk;

  • Prioritizes addressing climate-related risks;

  • Determines how to mitigate high-priority risks; and

  • Integrates climate-related risks into the registrant’s overall risk management system or processes.

Disclosure of the registrant’s transition plan, if any, adopted as part of the registrant’s overall risk management strategy. Elements to disclose would include:

  • Details of the plan, including relevant metrics and targets used to identify and manage physical and transitional risks;

  • How the registrant plans to mitigate or adapt to any physical risks identified in the filing, such as seal revel rise, extreme weather events, wildfires, and droughts;

  • How the registrant plans to mitigate or adapt to any identified transition risks, including laws, regulations, and policies, imposition of carbon prices, and changing demands or preferences of consumers, investors, employees, and business counterparties.

  • Information about a registrant’s publicly set climate-related targets and goals (if applicable).

    • Disclosures related to publicly available climate-related targets and goals would include:

      • The scope of activities in the target, the time horizon over which the target is intended to be met, and any interim targets;

      • How the registrant intends to meet the target and any relevant data about a registrant’s progress (with updates each fiscal year); and

      • Certain information about the carbon offsets or renewable energy certificates (“RECs”) that have been used as part of the registrant’s plan to achieve the target (if applicable). 

  • The oversight and governance of climate-related risks by the registrant’s board and management.

    • Board-related disclosures would include which board members are responsible for the oversight of climate-related risks; which board members, if any, have expertise in climate-related risks and the nature of their expertise; the process and frequency by which the board discusses climate-related risks; whether and how the board or committee considers climate-related risks as part of its business strategy, risk management, and financial oversight; and how the board sets and monitors climate-related goals.

    • Management-related disclosures would include management’s role in assessing and managing climate-related risks; management’s process for being informed about and monitoring climate-related risks; and management’s process and frequency for reporting to the board.



Phase-In Period of Proposed Rules

The proposed rules offer phased-in compliance dates dependent on a registrant’s filer status.  The level of assurance required for GHG emission disclosures would also be phased in over time.  The following tables from the SEC’s Fact Sheet illustrate the compliance deadlines for a calendar year-end registrant if the rules were adopted and effective in December 2022:

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