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Enhancement and Standardization of Climate-Related Disclosures for Investors proposed rules (2022)

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Note: This page contains information about the proposed climate disclosure rules issued in 2022. To learn about the final rules issued in 2024, click here.

The Enhancement and Standardization of Climate-Related Disclosures for Investors proposed rules were a set of proposed rules issued by the Securities and Exchange Commission (SEC) on April 11, 2022, that proposed amending regulations to require climate-related information disclosures in registration statements and annual reports pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934. The rules proposed requiring public companies to disclose direct (Scope 1), indirect (Scope 2), and supply chain (Scope 3) greenhouse gas emissions.

The Scope 3 requirement was removed from the 2024 final rules.[1]

HIGHLIGHTS
  • Name: The Enhancement and Standardization of Climate-Related Disclosures for Investors
  • Code of Federal Regulations: 17 CFR Parts 210, 229, 232, 239, and 249
  • Agency: Securities and Exchange Commission
  • Action: Proposed rule

    • Timeline

    The following timeline details key rulemaking activity:

    Background

    Environmental, social, and corporate governance
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    The Securities and Exchange Commission (SEC) issued a statement in the 1970s "stating that registrants should consider disclosing in their SEC filings the financial impact of compliance with environmental laws," according to a publication in the Federal Register. The SEC in 1982 first adopted a rule to mandate information disclosure regarding compliance with environmental laws.[1]

    The agency in 2010 issued guidance further directing companies on climate-related information disclosure. The guidance emphasized the climate-related information that required disclosure to the SEC and "identified certain climate-related issues that companies may need to consider in making their disclosures, including the direct and indirect impact of climate-related legislation or regulations, international agreements, indirect consequences of business trends including changing demand for goods, and the physical impacts of climate change," according to the Federal Register.[1]

    Allison Herren Lee, the acting chair of the SEC, issued on March 15, 2021, a request for public input on climate disclosure requirements in an effort to determine how to regulate disclosures related to what the agency referred to as climate change. The agency received several responses to the request, many of which "supported implementation of climate-related disclosure rules," while others "questioned whether climate change posed a risk to companies or their investors," according to the SEC.

    Following review of public feedback, the SEC issued a proposed rule on April 11, 2022, to supplement the disclosure requirements in effect.

    Summary of the rule

    The following is a summary of the rule from the rule's entry in the Federal Register:

    “ The Securities and Exchange Commission (“Commission”) is proposing for public comment amendments to its rules under the Securities Act of 1933 (“Securities Act”) and Securities Exchange Act of 1934 (“Exchange Act”) that would require registrants to provide certain climate-related information in their registration statements and annual reports. The proposed rules would require information about a registrant's climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition. The required information about climate-related risks would also include disclosure of a registrant's greenhouse gas emissions, which have become a commonly used metric to assess a registrant's exposure to such risks. In addition, under the proposed rules, certain climate-related financial metrics would be required in a registrant's audited financial statements.[1][3] ”

    Summary of provisions

    The following is a summary of the provisions from the rule's entry in the Federal Register:[1]

    “

    We are proposing to add a new subpart to Regulation S–K, 17 CFR 229.1500–1507 (“Subpart 1500 of Regulation S–K”) that would require a registrant to disclose certain climate-related information, including information about its climate-related risks that are reasonably likely to have material impacts on its business or consolidated financial statements, and GHG emissions metrics that could help investors assess those risks. A registrant may also include disclosure about its climate-related opportunities. The proposed new subpart to Regulation S–K would include an attestation requirement for accelerated filers and large accelerated filers regarding certain proposed GHG emissions metrics disclosures.

    We are also proposing to add a new article to Regulation S–X, 17 CFR 210.14–01 and 02 (“Article 14 of Regulation S–X”) that would require certain climate-related financial statement metrics and related disclosure to be included in a note to a registrant's audited financial statements. The proposed financial statement metrics would consist of disaggregated climate-related impacts on existing financial statement line items. As part of the registrant's financial statements, the financial statement metrics would be subject to audit by an independent registered public accounting firm, and come within the scope of the registrant's internal control over financial reporting (“ICFR”).[3]

    		”

    Text of the rule

    The full text of the rule is available below:[1]

    Responses

    The following section provides a selection of responses to the proposed rule issued by the SEC aimed at amending rules to require climate-related information disclosures in registration statements and annual reports.

    SEC Chair Gary Gensler released a statement on June 13, 2023, arguing that the proposed rule follows the actions of previous presidents to update rules to align with new challenges:[4]

    “ In every generation since President Franklin Roosevelt’s, our Commission has updated its ruleset to meet the challenges of a new hour. Consistent with our legal mandate, guided by economic analysis, and informed by public comment, this agenda reflects the latest step in that long tradition. Thus, I am pleased to support it.[3] ”


    The Institute for Agriculture and Trade Policy sent a letter of support to the SEC on March 15, 2023, regarding the proposed rule and suggested clarifications aimed at preventing what they referred to as the spread of misinformation about the rule:[5]

    “ Enhanced disclosure from SEC registrants regarding risks and opportunities associated with their Scope 3 emissions will help producers who are adopting best practices for emissions reductions. With Scope 3 reporting by registrants in the food and agricultural sectors, these forward-looking registrants will be better positioned to attract new investment in the capital markets from investors who understand that emissions reporting per the requirements of the proposed rule provides a key indicator of the climate related financial risks to be managed in the registrant’s transition management planning.[3] ”


    Attorneys Jonathan S. Sack and Daniel P. Gordon published an article in August 2022 in Bloomsberg Law arguing that the SEC does not have authority to issue the proposed rule:[6]

    “ [C]ritics of the proposed rule argue that the SEC lacks authority to adopt disclosure rules simply because it regards a matter as conducive to the public interest. Rather, the SEC's authority to adopt disclosure rules is limited to rules that address core business and financial information and enable investors to value securities and capital resources—that is, rules consistent with the purposes of the Securities Act and Exchange Act. As the D.C. Circuit has noted, SEC rules generally strive to achieve benefits that are 'economic' in nature.[3] ”


    Law professor Bernard Sharfman published an article in 2023 The Federalist Society arguing that, in his view, the rule exceeds the SEC's authority under the Securities Act and the Securities Exchange Act:[7]

    “ When these ascertainable standards are applied to the Proposed Rule, a court is likely to find that the SEC has exceeded its authority. For example, none of the required disclosures involving Scope emissions meet the requirements for investor protection or are material to reasonable investors. Thus, the Proposed Rule is at risk of being set aside in whole or in part.[3] ”

    See also

    External links

    Footnotes

    1. ↑ 1.0 1.1 1.2 1.3 1.4 1.5 1.6 Federal Register, "The Enhancement and Standardization of Climate-Related Disclosures for Investors" April 11, 2022
    2. ↑ 2.0 2.1 Federal Register, "The Enhancement and Standardization of Climate-Related Disclosures for Investors," May 12, 2022
    3. ↑ 3.0 3.1 3.2 3.3 3.4 3.5 Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
    4. ↑ U.S. Securities and Exchange Commission, "Statement on the Spring 2023 Regulatory Agenda," June 13, 2023
    5. ↑ Institute for Agriculture & Trade Policy, "Letter to the SEC on the Enhancement and Standardization of Climate-Related Disclosures for Investors," March 15, 2023
    6. ↑ Bloomsberg Law, "SEC Authority Over Climate-Related Disclosures for Investors," August 2022
    7. ↑ The Federalist Society, "The Ascertainable Standards that Define the Boundaries of the SEC's Rulemaking Authority," November 30, 2023
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