Proposed Rule2022-06342
The Enhancement and Standardization of Climate-Related Disclosures for Investors
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Published
April 11, 2022
Issuing agencies
Securities and Exchange Commission
Abstract
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.
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[Federal Register Volume 87, Number 69 (Monday, April 11, 2022)]
[Proposed Rules]
[Pages 21334-21473]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-06342]
[[Page 21333]]
Vol. 87
Monday,
No. 69
April 11, 2022
Part III
Securities and Exchange Commission
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17 CFR Part 210, 229, 232, et al.
The Enhancement and Standardization of Climate-Related Disclosures for
Investors; Proposed Rule
Federal Register / Vol. 87 , No. 69 / Monday, April 11, 2022 /
Proposed Rules
[[Page 21334]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 210, 229, 232, 239, and 249
[Release Nos. 33-11042; 34-94478; File No. S7-10-22]
RIN 3235-AM87
The Enhancement and Standardization of Climate-Related
Disclosures for Investors
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: 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.
DATES: Comments should be received on or before May 20, 2022.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/submitcomments.htm">https://www.sec.gov/rules/submitcomments.htm</a>).
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#3b494e575e16585456565e554f487b485e58155c544d"><span class="__cf_email__" data-cfemail="3b494e575e16585456565e554f487b485e58155c544d">[email protected]</span></a>. Please include
File Number S7-xx-xx on the subject line.
Paper Comments
<bullet> Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-10-22. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method of submission. The Commission will post all
comments on the Commission's website (<a href="https://www.sec.gov/rules/proposed.shtml">https://www.sec.gov/rules/proposed.shtml</a>). Comments are also available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549 on official business days between the hours of 10
a.m. and 3 p.m. Operating conditions may limit access to the
Commission's Public Reference Room. All comments received will be
posted without change. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on our website. To ensure direct electronic
receipt of such notifications, sign up through the ``Stay Connected''
option at <a href="http://www.sec.gov">www.sec.gov</a> to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Elliot Staffin, Special Counsel,
Office of Rulemaking, at (202) 551-3430, in the Division of Corporation
Finance; or Anita H. Chan, Professional Accounting Fellow or Shehzad K.
Niazi, Acting Deputy Chief Counsel, in the Office of the Chief
Accountant, at (202) 551-5300, U.S. Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are proposing to add 17 CFR 210.14-01 and
14-02 (Article 14 of Regulation S-X) and 17 CFR 17 CFR 229.1500 through
1506 (subpart 1500 of Regulation S-K) under the Securities Act \1\ and
the Exchange Act,\2\ and amend 17 CFR 239.11 (Form S-1), 17 CFR 239.18
(Form S-11), 17 CFR 239.25 (Form S-4), and 17 CFR 239.34 (Form F-4)
under the Securities Act, and 17 CFR 249.210 (Form 10), 17 CFR 249.220f
(Form 20-F), 17 CFR 249.306 (Form 6-K), 17 CFR 249.308a (Form 10-Q),
and 17 CFR 249.310 (Form 10-K) under the Exchange Act.
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\1\ 15 U.S.C. 77a et seq.
\2\ 15 U.S.C. 78a et seq.
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Table of Contents
I. Introduction
A. Background
B. The March 2021 Request for Public Input
C. The Growing Investor Demand for Climate-Related Risk
Disclosure and Related Information
1. Major Investor Climate-Related Initiatives
2. Third-Party Data, Voluntary Disclosure Frameworks, and
International Disclosure Initiatives
D. Development of a Climate-Related Reporting Framework
1. The Task Force on Climate-Related Financial Disclosure
2. The Greenhouse Gas Protocol
E. Summary of the Proposed Rules
1. Content of the Proposed Disclosures
2. Presentation of the Proposed Disclosures
3. Attestation for Scope 1 and Scope 2 Emissions Disclosure
4. Phase-In Periods and Accommodations for the Proposed
Disclosures
II. Discussion
A. Overview of the Climate-Related Disclosure Framework
1. Proposed TCFD-Based Disclosure Framework
2. Location of the Climate-Related Disclosure
B. Disclosure of Climate-Related Risks
1. Definitions of Climate-Related Risks and Climate-Related
Opportunities
2. Proposed Time Horizons and the Materiality Determination
C. Disclosure Regarding Climate-Related Impacts on Strategy,
Business Model, and Outlook
1. Disclosure of Material Impacts
2. Disclosure of Carbon Offsets or Renewable Energy Credits if
Used
3. Disclosure of a Maintained Internal Carbon Price
4. Disclosure of Scenario Analysis, if Used
D. Governance Disclosure
1. Board Oversight
2. Management Oversight
E. Risk Management Disclosure
1. Disclosure of Processes for Identifying, Assessing, and
Managing Climate-Related Risks
2. Transition Plan Disclosure
F. Financial Statement Metrics
1. Overview
2. Financial Impact Metrics
3. Expenditure Metrics
4. Financial Estimates and Assumptions
5. Inclusion of Climate-Related Metrics in the Financial
Statements
G. GHG Emissions Metrics Disclosure
1. GHG Emissions Disclosure Requirement
2. GHG Emissions Methodology and Related Instructions
3. The Scope 3 Emissions Disclosure Safe Harbor and Other
Accommodations
H. Attestation of Scope 1 and Scope 2 Emissions Disclosure
1. Overview
2. GHG Emissions Attestation Provider Requirements
3. GHG Emissions Attestation Engagement and Report Requirements
4. Additional Disclosure by the Registrant
5. Disclosure of Voluntary Attestation
I. Targets and Goals Disclosure
J. Registrants Subject to the Climate-Related Disclosure Rules
and Affected Forms
K. Structured Data Requirement
L. Treatment for Purposes of Securities Act and Exchange Act
M. Compliance Date
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III. General Request for Comments
IV. Economic Analysis
A. Baseline and Affected Parties
1. Affected Parties
2. Current Regulatory Framework
3. Existing State and Federal Laws
4. International Disclosure Requirements
5. Current Market Practices
B. Broad Economic Considerations
1. Investors' Demand for Climate Information
2. Impediments to Voluntary Climate-Related Disclosures
C. Benefits and Costs
1. Benefits
2. Costs
D. Anticipated Effects on Efficiency, Competition, and Capital
Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Other Economic Effects
F. Reasonable Alternatives
1. Requirements Limited to Only Certain Classes of Filers
2. Require Scenario Analysis
3. Require Specific External Protocol for GHG Emissions
Disclosure
4. Permit GHG Emissions Disclosures To Be ``Furnished'' Instead
of ``Filed''
5. Do Not Require Scope 3 Emissions for Registrants With a
Target or Goal Related to Scope 3
6. Exempt EGCs From Scope 3 Emissions Disclosure Requirements
7. Eliminate Exemption for SRCs From Scope 3 Reporting
8. Remove Safe Harbor for Scope 3 Emissions Disclosures
9. Require Large Accelerated Filers and Accelerated Filers To
Provide a Management Assessment and To Obtain an Attestation Report
Covering the Effectiveness of Controls Over GHG Emissions
Disclosures
10. Require Reasonable Assurance for Scopes 1 and 2 Emissions
Disclosures From All Registrants
11. Require Limited, Not Reasonable, Assurance for Large
Accelerated Filers and/or Accelerated Filers and/or Other Filers
12. In Lieu of Requiring Assurance, Require Disclosure About Any
Assurance Obtained Over GHG Emissions Disclosures
13. Permit Host Country Disclosure Frameworks
14. Alternative Tagging Requirements
G. Request for Comment
V. Paperwork Reduction Act
A. Summary of the Collections of Information
B. Summary of the Proposed Amendments' Effects on the
Collections of Information
C. Incremental and Aggregate Burden and Cost Estimates for the
Proposed Amendments
D. Request for Comment
VI. Initial Regulatory Flexibility Act Analysis
A. Reasons for, and Objectives of, the Proposed Action
B. Legal Basis
C. Small Entities Subject to the Proposed Rules
D. Reporting, Recordkeeping, and Other Compliance Requirements
E. Duplicative, Overlapping, or Conflicting Federal Rules
F. Significant Alternatives
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Statutory Authority
I. Introduction
We are proposing to require registrants to provide certain climate-
related information in their registration statements and annual
reports, including certain information about climate-related financial
risks and climate-related financial metrics in their financial
statements. The disclosure of this information would provide
consistent, comparable, and reliable--and therefore decision-useful--
information to investors to enable them to make informed judgments
about the impact of climate-related risks on current and potential
investments.
The Commission has broad authority to promulgate disclosure
requirements that are ``necessary or appropriate in the public interest
or for the protection of investors.'' \3\ We have considered this
statutory standard and determined that disclosure of information about
climate-related risks and metrics would be in the public interest and
would protect investors. In making this determination, we have also
considered whether the proposed disclosures ``will promote efficiency,
competition, and capital formation.'' \4\
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\3\ See, e.g., Section 7 of the Securities Act [15 U.S.C. 77g]
and Sections 12, 13, and 15 of the Exchange Act [15 U.S.C. 78l, 78m,
and 78o].
\4\ See, e.g., Section 2(b) of the Securities Act [15 U.S.C.
77b(b)] and Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)].
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We are proposing to require disclosures about climate-related risks
and metrics reflecting those risks because this information can have an
impact on public companies' financial performance or position and may
be material to investors in making investment or voting decisions. For
this reason, many investors--including shareholders, investment
advisers, and investment management companies--currently seek
information about climate-related risks from companies to inform their
investment decision-making. Furthermore, many companies have begun to
provide some of this information in response to investor demand and in
recognition of the potential financial effects of climate-related risks
on their businesses.
We are concerned that the existing disclosures of climate-related
risks do not adequately protect investors. For this reason, we believe
that additional disclosure requirements may be necessary or appropriate
to elicit climate-related disclosures and to improve the consistency,
comparability, and reliability of climate-related disclosures. With
respect to their existing climate-related disclosures (to the extent
registrants are already disclosing such information), registrants often
provide information outside of Commission filings and provide different
information, in varying degrees of completeness, and in different
documents and formats--meaning that the same information may not be
available to investors across different companies. This could result in
increased costs to investors in obtaining useful climate-related
information and impair the ability to make investment or voting
decisions in line with investors' risk preferences. Also, companies may
not disclose certain information needed to understand their existing
climate-related disclosures, such as the methodologies, data sources,
assumptions, and other key parameters used to assess climate-related
risks. To the extent companies primarily provide this information
separate from their financial reporting, it may be difficult for
investors to determine whether a company's financial disclosures are
consistent with its climate-related disclosures.\5\ In addition, the
information provided outside of Commission filings is not subject to
the full range of liability and other investor protections that help
elicit complete and accurate disclosure by public companies.
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\5\ S&P Global, Seven ESG Trends to Watch in 2021 (Feb. 7,
2021), available at <a href="https://www.spglobal.com/en/research-insights/featured/seven-esg-trends-to-watch-in-2021">https://www.spglobal.com/en/research-insights/featured/seven-esg-trends-to-watch-in-2021</a>. This study found that
approximately 90% of S&P 500 companies publish sustainability
reports but only 16% include any reference to ESG factors in their
Commission filings.
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Investors need information about climate-related risks--and it is
squarely within the Commission's authority to require such disclosure
in the public interest and for the protection of investors--because
climate-related risks have present financial consequences that
investors in public
[[Page 21336]]
companies consider in making investment and voting decisions.\6\
Investors have noted that climate-related inputs have many uses in the
capital allocation decision-making process including, but not limited
to, insight into governance and risks management practices,\7\
integration into various valuation models, and credit research and
assessments.\8\ Further, we understand investors often employ
diversified strategies, and therefore do not necessarily consider risk
and return of a particular security in isolation but also in terms of
the security's effect on the portfolio as a whole, which requires
comparable data across registrants.\9\
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\6\ See Financial Stability Oversight Council (``FSOC''), Report
on Climate-Related Financial Risk 2021 (Oct. 2021) (``2021 FSOC
Report''), available at <a href="https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf">https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf</a> (detailing the myriad ways that climate-
related risks pose financial threats both at the firm level and
financial system level). See also Managing Climate Risk in the U.S.
Financial System, Report of the Climate-Related Market Risk
Subcommittee, Market Risk Advisory Committee of the U.S. Commodity
Futures Trading Commission (2020), available at <a href="https://www.cftc.gov/sites/default/files/2020-09/9-9-20%20Report%20of%20the%20Subcommittee%20on%20Climate-Related%20Market%20Risk%20-%20Managing%20Climate%20Risk%20in%20the%20U.S.%20Financial%20System%20for%20posting.pdf">https://www.cftc.gov/sites/default/files/2020-09/9-9-20%20Report%20of%20the%20Subcommittee%20on%20Climate-Related%20Market%20Risk%20-%20Managing%20Climate%20Risk%20in%20the%20U.S.%20Financial%20System%20for%20posting.pdf</a> (``CFTC Advisory Subcommittee Report'') (stating
that climate-related risks pose a major risk to the stability of the
U.S. financial system and to its ability to sustain the American
economy).
\7\ See, e.g., letters from Amalgamated Bank (June 14, 2021);
and Norges Bank Investment Management (June 13, 2021).
\8\ See, e.g., letter from Principles for Responsible Investment
(PRI) (Consultation Response) (June 11, 2021).
\9\ See, e.g., id. (stating that broadly diversified investors
evaluating any individual asset for addition to a portfolio need to
consider its risk and return characteristics not in isolation, but
in terms of the asset's effect on the portfolio as a whole, and
providing CalPERS as an example of an asset owner holding a
diversified growth-oriented portfolio that has integrated climate
risk assessment into its investment process); see also letter from
Amalgamated Bank (stating that the principal mitigant of investment
risk is diversity of exposure and indicating that comprehensive
climate disclosures help investors assess systemic risk); and Norges
Bank Investment Management (stating that for sustainability
information to support investment decisions, risk management
processes, and ownership activities across a diversified portfolio,
it must be consistent and comparable across companies and over
time).
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While climate-related risks implicate broader concerns--and are
subject to various other regulatory schemes--our objective is to
advance the Commission's mission to protect investors, maintain fair,
orderly and efficient markets, and promote capital formation, not to
address climate-related issues more generally. In particular, the
impact of climate-related risks on both individual businesses and the
financial system as a whole are well documented.\10\ For example, the
Financial Stability Oversight Council's (``FSOC's'') Report on Climate-
Related Financial Risk 2021 found that businesses, financial
institutions, investors, and households may experience direct financial
effects from climate-related risks, and observed that the costs would
likely be broadly felt as they are passed through supply chains and to
customers and as they reduce firms' ability to service debt or produce
returns for investors.\11\ As a result, these climate-related risks and
their financial impact could negatively affect the economy as a whole
and create systemic risk for the financial system.\12\ SEC-reporting
companies and their investors are an essential component of this
system.\13\
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\10\ In 2020 alone, a record 22 separate climate-related
disasters with at least $1 billion in damages struck across the
United States, surpassing the previous annual highs of 16 such
events set in 2011 and 2017. See NOAA, National Center for
Environmental Information, Billion Dollar Weather and Climate
Disasters: Summary Stats (3rd Quarter release 2021), available at
<a href="https://www.ncdc.noaa.gov/billions/summary-stats/US/2020">https://www.ncdc.noaa.gov/billions/summary-stats/US/2020</a>. In 2021,
the United States experienced 20 separate billion-dollar climate-
related disasters. See NOAA, U.S. saw its 4th-warmest year on
record, fueled by a record-warm December (Jan. 10, 2022), available
at <a href="https://www.noaa.gov/news/us-saw-its-4th-warmest-year-on-record-fueled-by-record-warm-december">https://www.noaa.gov/news/us-saw-its-4th-warmest-year-on-record-fueled-by-record-warm-december</a>.
\11\ See 2021 FSOC Report, Chapter 1: From Climate-Related
Physical Risks to Financial Risks; From Climate-related Transition
Risks to Financial Risks. We discuss climate-related physical risks
and climate-related transition risks in greater detail in Section
II.B.1.
\12\ See 2021 FSOC Report, Chapter 1: An Emerging Consensus
Framework for Climate-related Financial Risks (stating that these
effects would likely propagate through the financial sector, which
may experience credit and market risks associated with loss of
income, defaults and changes in the values of assets, liquidity
risks associated with changing demand for liquidity, and operational
risks associated with disruptions to infrastructure). See also
Financial Stability Board (``FSB''), The Implications of Climate
Change for Financial Stability (Nov. 2020) (stating that climate-
related effects may be far-reaching in their breadth and magnitude,
and could affect a wide variety of firms, sectors and geographies in
a highly correlated manner, indicating that the value of financial
assets/liabilities could be affected either by the actual or
expected economic effects of a continuation of climate-related
physical risks, which could lead to a sharp fall in asset prices and
increase in uncertainty, or by risks associated with a transition
towards a low-carbon economy, particularly if the transition is
disorderly, which could have a destabilizing effect on the global
financial system). See also Basel Committee on Banking Supervision,
Climate-related Risk Drivers and Their Transmission Channels (Apr.
2021), at <a href="https://www.bis.org/bcbs/publ/d517.pdf">https://www.bis.org/bcbs/publ/d517.pdf</a>.
\13\ See, e.g., The Editors, Don't Drag Banks Into the Culture
Wars, The Washington Post (Mar. 7, 2022) (``No doubt, all
companies--including those in the financial sector--must do more to
manage social and environmental risks, in particular those related
to climate change. To that end, the Securities and Exchange
Commission is rightly working on climate-risk disclosure rules, so
investors will have the information they need to make the best
possible decisions and to hold public companies accountable.'').
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Climate-related risks can affect a company's business and its
financial performance and position in a number of ways. Severe and
frequent natural disasters can damage assets, disrupt operations, and
increase costs.\14\ Transitions to lower carbon products, practices,
and services, triggered by changes in regulations, consumer
preferences,\15\ availability of financing, technology and other market
forces,\16\
[[Page 21337]]
can lead to changes in a company's business model.\17\ Governments
around the world have made public commitments to transition to a lower
carbon economy, and efforts towards meeting those greenhouse gas
(``GHG'') reduction goals have financial effects that may materially
impact registrants.\18\ In addition, banking regulators have recently
launched initiatives to incorporate climate risk in their supervision
of financial institutions.\19\ How a company assesses and plans for
climate-related risks may have a significant impact on its future
financial performance and investors' return on their investment in the
company.
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\14\ See, e.g., 2021 FSOC Report, Chapter 1: From Climate-
related Physical Risks to Financial Risks.
\15\ See, e.g., Why the automotive future is electric, McKinsey
& Company (Sept. 7, 2021), at <a href="https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/why-the-automotive-future-is-electric">https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/why-the-automotive-future-is-electric</a> (attributing the shift toward lower emissions forms of
transportation, such as electric vehicles, to a combination of
regulation, consumer behavior and technology); A Fifth Of World's
Largest Companies Committed To Net Zero Target, Forbes (Mar. 24,
2021), at <a href="https://www.forbes.com/sites/dishashetty/2021/03/24/a-fifth-of-worlds-largest-companies-committed-to-net-zero-target/?sh=2a72640f662f">https://www.forbes.com/sites/dishashetty/2021/03/24/a-fifth-of-worlds-largest-companies-committed-to-net-zero-target/?sh=2a72640f662f</a>; See also, More than 1,000 companies commit to
science-based emissions reductions in line with 1.5 [deg]C climate
ambition, Joint Press Release by the United Nations Global Compact
and the Science Based Targets Initiative (Nov. 9, 2021), at <a href="https://finance.yahoo.com/news/more-1-000-companies-commit-000800027.html">https://finance.yahoo.com/news/more-1-000-companies-commit-000800027.html</a>
(1,045 companies with more than $23 trillion in market
capitalization are setting 1.5 [deg]C aligned science based
targets). See also, Why Engage Suppliers on GHG Emissions?, EPA
Center for Corporate Climate Leadership, at <a href="https://www.epa.gov/climateleadership/why-engage-suppliers-ghg-emissions">https://www.epa.gov/climateleadership/why-engage-suppliers-ghg-emissions</a> (``As
organizations commit to reduce the carbon footprints of the products
and services they provide, they look to their suppliers to align
their efforts with the organization's sustainability goals'').
\16\ See, e.g., World Economic Forum, First Movers Coalition is
tackling the climate crisis, at https://www.weforum.org/our-impact/
first-movers-coalition-is-tackling-the-climate-crisis/
#:~:text=The%20First%20Movers%20Coalition%2C%20which%20was%20launched
%20at,companies%20that%20use%20steel%20to%20build%20wind%20turbines
(``The World Economic Forum is partnering with the US Special
Presidential Envoy for Climate John Kerry and over 30 global
businesses to invest in innovative green technologies so they are
available for massive scale-up by 2030 to enable net-zero emissions
by 2050 at the latest.''); COP26 made net zero a core principle for
business. Here's how leaders can act, McKinsey & Company (Nov. 12,
2021), at What COP26 means for business [verbar] McKinsey, at
<a href="https://www.mckinsey.com/business-functions/sustainability/our-insights/cop26-made-net-zero-a-core-principle-for-business-heres-how-leaders-can-act">https://www.mckinsey.com/business-functions/sustainability/our-insights/cop26-made-net-zero-a-core-principle-for-business-heres-how-leaders-can-act</a> (``The net-zero imperative is no longer in
question--it has become an organizing principle for business . . .
leaders who put convincing net-zero plans in place can distinguish
their companies from peers. To put that another way: the basis of
competition has changed, and there is now a premium on sound net-
zero planning and execution.''); see also S&P Dow Jones Indices
Launches Net Zero 2050 Climate Transition and Paris-Aligned Select
Indices (Nov. 22, 2021), at <a href="https://finance.yahoo.com/news/p-dow-jones-indices-launches-090000812.html">https://finance.yahoo.com/news/p-dow-jones-indices-launches-090000812.html</a> (The index is designed to
``bring greater transparency in measuring climate-related risks''
and help market participants ``achieve their goals in the path to
net zero by 2050'').
\17\ See, e.g., Juan C.Reboredo and Luis A. Otero, Are investors
aware of climate-related transition risks? Evidence from mutual fund
flows, 189 Ecological Economics (Nov. 2021), available at <a href="https://www.sciencedirect.com/science/article/abs/pii/S0921800921002068#">https://www.sciencedirect.com/science/article/abs/pii/S0921800921002068#</a>!;
and BlackRock, Climate risk and the transition to a low-carbon
economy, available at <a href="https://www.blackrock.com/corporate/literature/publication/blk-commentary-climate-risk-and-energy-transition.pdf">https://www.blackrock.com/corporate/literature/publication/blk-commentary-climate-risk-and-energy-transition.pdf</a>.
\18\ See Antony J. Blinken, Secretary of State, The United
States Officially Rejoins the Paris Agreement, Press Statement,
(Feb. 19, 2021). 191 countries plus the European Union have now
signed the Paris Climate Agreement. The central aim of the Paris
Climate Agreement is to strengthen the global response to the threat
of climate change by keeping a global temperature rise this century
to well below 2 [deg]Celsius above pre-industrial levels and to
pursue efforts to limit the temperature increase even further to 1.5
[deg] degrees Celsius. See Paris Agreement (Paris, Dec. 12, 2015)
(entered into force Nov. 4, 2016). Moreover, at the UN Climate
Change Conference (COP 26), the United States committed to become
net zero by 2050, China by 2060, and India by 2070. Further, over
100 countries formed a coalition to reduce methane emissions by 30
percent by 2030. See Environment+Energy Leader, COP26 Net Zero
Commitments will Speed Energy Transition, Increase Pressure on
Industries, According to Moody's Report (Nov. 17, 2021).
\19\ See, e.g., OCC announcement: Risk Management: Principles
for Climate-Related Financial Risk Management for Large Banks;
Request for Feedback [verbar] OCC (<a href="http://treas.gov">treas.gov</a>), available at <a href="https://www.occ.treas.gov/news-issuances/bulletins/2021/bulletin-2021-62.html">https://www.occ.treas.gov/news-issuances/bulletins/2021/bulletin-2021-62.html</a>; and Principles for Climate-Related Financial Risk
Management for Large Banks (<a href="http://treas.gov">treas.gov</a>) (Dec. 16, 2021), available at
<a href="https://www.occ.treas.gov/news-issuances/bulletins/2021/bulletin-2021-62a.pdf">https://www.occ.treas.gov/news-issuances/bulletins/2021/bulletin-2021-62a.pdf</a>.
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Consistent, comparable, and reliable disclosures on the material
climate-related risks public companies face would serve both investors
and capital markets. Investors would be able to use this information to
make investment or voting decisions in line with their risk
preferences. Capital allocation would become more efficient as
investors are better able to price climate-related risks. In addition,
more transparency and comparability in climate-related disclosures
would foster competition. Many other jurisdictions and financial
regulators around the globe have taken action or reached similar
conclusions regarding the importance of climate-related disclosures and
are also moving towards the adoption of climate-related disclosure
standards.\20\
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\20\ See infra Section I.C.2.
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This proposal builds on the Commission's previous rules and
guidance on climate-related disclosures, which date back to the 1970s.
In 2010, in response to increasing calls by the public and shareholders
for public companies to disclose information regarding how climate
change may affect their business and operations, the Commission
published guidance (``2010 Guidance'') for registrants on how the
Commission's existing disclosure rules may require disclosure of the
impacts of climate change on a registrant's business or financial
condition.\21\ Since that time, as climate-related impacts have
increasingly been well-documented and awareness of climate-related
risks to businesses and the economy has grown,\22\ investors have
increased their demand for more detailed information about the effects
of the climate on a registrant's business and for more information
about how a registrant has addressed climate-related risks and
opportunities when conducting its operations and developing its
business strategy and financial plans.\23\ It is appropriate for us to
consider such investor demand in exercising our authority and
responsibility to design an effective and efficient disclosure regime
under the federal securities laws.
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\21\ See Commission Guidance Regarding Disclosure Related to
Climate Change, Release No. 33-9106 (Feb. 2, 2010) [75 FR 6290 (Feb.
8, 2010)]. We discuss the 2010 Guidance in greater detail in Section
I.A. below.
\22\ See, e.g., supra notes 6, 10, and 12.
\23\ See, e.g., Larry Fink, A Fundamental Reshaping of Finance,
2020 Letter to CEOs, at <a href="https://www.blackrock.com/corporate/investor-relations/2020-larry-fink-ceo-letter">https://www.blackrock.com/corporate/investor-relations/2020-larry-fink-ceo-letter</a>, available at <a href="https://www.blackrock.com/corporate/investor-relations/2020-larry-fink-ceo-letter">https://www.blackrock.com/corporate/investor-relations/2020-larry-fink-ceo-letter</a> (stating that climate risk is investment risk and asking the
companies that BlackRock invests in to, among other matters,
disclose climate-related risks in line with the recommendations of
the Task Force on Climate-related Financial Disclosures); see also
Climate Action 100+, at <a href="https://www.climateaction100.org/">https://www.climateaction100.org/</a>. Climate
Action 100+ is an investor-led initiative composed of 615 investors
who manage $60 trillion in assets (as of Nov. 2021), who aim ``to
mitigate investment exposure to climate risk and secure ongoing
sustainable returns for their beneficiaries.'' See also Glasgow
Financial Alliance for Net Zero (GFANZ), at <a href="https://www.gfanzero.com/">https://www.gfanzero.com/</a>, a global coalition of leading financial
institutions focused on promoting the transition to a net zero
global economy. Formed in Apr. 2021, its membership as of Nov. 2021
included over 450 financial firms controlling assets of over $130
trillion. Further, more than 500 investor signatories with assets
under management of nearly $100 trillion are signatories to the CDP
climate risk disclosure program, <a href="https://cdn.cdp.net/cdp-production/comfy/cms/files/files/000/004/697/original/2021_CDP_Capital_Markets_Brochure_General.pdf">https://cdn.cdp.net/cdp-production/comfy/cms/files/files/000/004/697/original/2021_CDP_Capital_Markets_Brochure_General.pdf</a>. We discuss the
growing investor demand for climate-related information in greater
detail in Section I.C below.
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In developing these proposals, we have considered the feedback we
have received to date from a wide range of commenters, including
comments from investors as to the information they need to make
informed investment or voting decisions, as well as concerns expressed
by registrants with regard to compliance burdens and liability
risk.\24\ While our proposals include disclosure requirements designed
to foster greater consistency, comparability, and reliability of
available information, they also include a number of features designed
to mitigate the burdens on registrants, such as phase-in periods for
the proposed climate-related disclosure requirements,\25\ a safe harbor
for certain emissions disclosures,\26\ and an exemption from certain
emissions reporting requirements for smaller reporting companies.\27\
In addition, the existing safe harbors for forward-looking statements
under the Securities Act and Exchange Act would be available for
aspects of the proposed disclosures.\28\
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\24\ See Acting Chair Allison Herren Lee Public Statement,
Public Input Welcomed on Climate Change Disclosures (Mar. 15, 2021),
available at <a href="https://www.sec.gov/news/public-statement/lee-climate-change-disclosures">https://www.sec.gov/news/public-statement/lee-climate-change-disclosures</a>. See also, e.g., Concept Release: Business and
Financial Disclosure Required by Regulation S-K, Release No. 33-
10064 (Apr. 16, 2016), [83 FR 23915 (Apr. 22, 2016)] and related
comments, available at <a href="https://www.sec.gov/rules/concept/conceptarchive/conceptarch2016.shtml">https://www.sec.gov/rules/concept/conceptarchive/conceptarch2016.shtml</a>.
\25\ See infra Section II.M.
\26\ See Section II.G.3.
\27\ See id.
\28\ See Securities Act Section 27A [15 U.S.C. 77z-2] and
Exchange Act Section 21E [15 U.S.C. 78u-5]. We discuss the
application of the existing forward-looking statement safe harbors
to the proposed climate-related disclosures primarily in Sections
II.C.3-4, II.E, II.G.1, and II.I.
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Although the various requirements we are proposing are supported by
overlapping rationales, we emphasize that the different aspects of the
proposal serve independent, albeit complementary, objectives. In
addition, we have carefully considered how to craft this proposal to
best advance investor protection and the public interest, consistent
with the Commission's disclosure authority and regulatory mission, and
we welcome comments on how we can further achieve that goal.
A. Background
The Commission first addressed the disclosure of material
environmental issues in the early 1970s when it issued an interpretive
release stating that registrants should consider disclosing in their
SEC filings the financial impact of
[[Page 21338]]
compliance with environmental laws.\29\ Throughout the 1970s, the
Commission continued to explore the need for specific rules mandating
disclosure of information relating to litigation and other business
costs arising out of compliance with federal, state, and local laws
that regulate the discharge of materials into the environment or
otherwise relate to the protection of the environment. These topics
were the subject of several rulemaking efforts, extensive litigation,
and public hearings, all of which resulted in the rules that now
specifically address disclosure of environmental issues.\30\
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\29\ See Release No. 33-5170 (July 19, 1971) [36 FR 13989]. The
Commission codified this interpretive position in its disclosure
forms two years later. See Release 33-5386 (Apr. 20, 1973) [38 FR
12100] (``1972 Amendments'').
\30\ See Interpretive Release No. 33-6130 (Sept. 27, 1979) [44
FR 56924], which includes a brief summary of the National
Environmental Policy Act of 1969 and the legal and administrative
actions taken with regard to the Commission's environmental
disclosure during the 1970s. See also NRDC v. SEC, 606 F.2d 1031,
1036-42 (DC Cir. 1979) (discussing this history). More information
relating to the Commission's efforts in this area is chronicled in
Release No. 33-6315 (May 4, 1981) [46 FR 25638].
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After almost a decade of consideration, the Commission adopted
rules in 1982 mandating disclosure of information relating to
litigation and other business costs arising out of compliance with
federal, state, and local laws that regulate the discharge of materials
into the environment or otherwise relate to the protection of the
environment.\31\ In addition to these specific disclosure requirements,
the Commission's other disclosure rules requiring, for example,
information about material risks and a description of the registrant's
business, could give rise to an obligation to provide disclosure
related to the effects of climate change.\32\
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\31\ See Release No. 33-6383 (Mar. 3, 1982) [47 FR 11380]
(``1982 Release'') (adopting 17 CFR 229.103, which requires a
registrant to describe its material pending legal proceedings, other
than ordinary routine litigation incidental to the business, and
indicating that administrative or judicial proceedings arising under
federal, state, or local law regulating the discharge of materials
into the environment or primarily for the purpose of protecting the
environment, shall not be deemed ``ordinary routine litigation
incidental to the business'' and must be described if meeting
certain conditions). The 1982 Release also moved the information
called for by the 1973 Amendments to 17 CFR 229.101(c)(1)(xii),
which, as part of a registrant's business description, required the
disclosure of the material effects that compliance with Federal,
State and local provisions regulating the discharge of materials
into the environment, or otherwise relating to the protection of the
environment, have had upon the registrant's capital expenditures,
earnings and competitive position, as well as the disclosure of its
material estimated capital expenditures for environmental control
facilities. In 2020, the Commission amended 17 CFR 229.101(c)(1) to
require, to the extent material to an understanding of the business
taken as a whole, disclosure of the material effects that compliance
with government regulations, including environmental regulations,
may have upon the capital expenditures, earnings, and competitive
position of the registrant and its subsidiaries. See Modernization
of Regulation S-K Items 101, 103, and 105, Release No. 33-10825
(Aug. 26, 2020) [85 FR 63726 (Oct. 8, 2020)] (``2020 Release'').
\32\ See Release No. 33-9106, Section III.
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In its 2010 Guidance, the Commission observed that, in response to
investor demand for climate-related information, many companies were
voluntarily reporting climate-related information outside their filings
with the Commission. The Commission emphasized that ``registrants
should be aware that some of the information they may be reporting
pursuant to these mechanisms also may be required to be disclosed in
filings made with the Commission pursuant to existing disclosure
requirements.'' \33\ Specifically, the 2010 Guidance emphasized that
climate change disclosure might, depending on the circumstances, be
required in a company's Description of Business, Risk Factors, Legal
Proceedings, and Management's Discussion and Analysis of Financial
Condition and Results of Operations (``MD&A'').\34\ The 2010 Guidance
further 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.
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\33\ See Release No. 33-9106, Section I.
\34\ The 2010 Guidance also applies to corresponding disclosure
requirements in Form 20-F by foreign private issuers.
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The proposals set forth in this release would augment and
supplement the disclosures already required in SEC filings.
Accordingly, registrants should continue to evaluate the climate-
related risks they face and assess whether disclosures related to those
climate-related risks must be disclosed in their Description of
Business, Risk Factors, Legal Proceedings, and MD&A as described in the
2010 Guidance. These disclosures should be based on the registrant's
specific facts and circumstances. While climate risks impact many
issuers across industries, the impacts of those risks on a particular
registrant and how the registrant addresses those risks are fact-
specific and may vary significantly by registrant.\35\ The disclosures
required by our existing rules should reflect these company-specific
risks.
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\35\ Our recent amendments to Item 105 of Regulation S-K
discourage the presentation of generic risks that could apply
generally to any registrant or offering. The fact that climate risks
are broad-based does not, in our view, cause them to be generic. For
example, thousands of companies in Houston were impacted by
Hurricane Harvey. However, (1) their flood risk varied and some
companies may have been far more impacted than others (and would be
more vulnerable to future catastrophic storms); (2) their operations
were different and some may have been more disrupted as a result
than others--e.g., a services business on the 10th floor of a
building may have experienced just a few days of disruption while an
oil refinery may have been shut down for weeks; and (3) their risk
management processes may have been different--two similarly situated
companies may have different continuity of operations plans or may
have taken steps to mitigate those types of risks. In sum, while the
source of the risk may be common to many companies, the impact is
not.
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B. The March 2021 Request for Public Input
On March 15, 2021, Acting Chair Allison Herren Lee requested public
input on climate disclosure from investors, registrants, and other
market participants.\36\ The Acting Chair solicited input on several
issues, including how the Commission could best regulate disclosure
concerning climate change in order to provide more consistent,
comparable, and reliable information for investors, whether the
Commission should require the disclosure of certain metrics and other
climate-related information, the role that existing third-party
climate-related disclosure frameworks should play in the Commission's
regulation of such disclosure, and whether and how such disclosure
should be subject to assurance.
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\36\ See Acting Chair Allison Herren Lee Public Statement,
Public Input Welcomed on Climate Change Disclosures.
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The Commission received approximately 600 unique letters and over
5800 form letters in response to the Acting Chair's request for public
input.\37\ We received letters from academics, accounting and audit
firms, individuals, industry groups, investor groups, registrants, non-
governmental organizations, professional climate advisors, law firms,
professional investment advisors and investment management companies,
standard-setters, state government officials, and US Senators and
Members of the House of Representatives.
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\37\ The comment letters are available at <a href="https://www.sec.gov/comments/climate-disclosure/cll12.htm">https://www.sec.gov/comments/climate-disclosure/cll12.htm</a>. Except as otherwise noted,
references to comments in this release pertain to these comments.
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Many of these commenters, including investors with trillions of
dollars of assets under management collectively,\38\
[[Page 21339]]
supported implementation of climate-related disclosure rules. A number
of commenters \39\ stated that mandated disclosures are necessary
because climate change poses significant financial risks to registrants
and their investors.\40\ According to one of the commenters, 68 out of
77 industries are likely to be significantly affected by climate
risk.\41\ Many commenters criticized the current disclosure practice,
in which some issuers voluntarily provide climate disclosures based on
a variety of different third-party frameworks, because it has not
produced consistent, comparable, reliable information for investors and
their advisors, who otherwise have difficulty obtaining that
information.\42\
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\38\ See, e.g., letters from BlackRock (June 11, 2021) ($9T);
Ceres (June 10, 2021) (representing Investor Network on Climate Risk
and Sustainability) ($37T); Council of Institutional Investors (June
11, 2021) ($4T); Investment Adviser Association (June 11, 2021)
($25T); Investment Company Institute (June 4, 2021) ($30.8T); PIMCO
(June 9, 2021) ($2T); SIFMA (June 10, 2021) ($45T); State Street
Global Advisors (June 14, 2021) (3.9T); and Vanguard Group, Inc.
(June 11, 2021) ($7T).
\39\ See, e.g., letters from AllianceBernstein; Amalgamated
Bank; Boston Common Asset Management (June 14, 2021); Calvert
Research and Management (June 1, 2021); Ceres; the Committee on
Mission Responsibility through Investment by Presbyterian Church
(June 10, 2021); Katherine DiMatteo (June 1, 2021); Domini Impact
Investments (June 14, 2021); Felician Sisters of North America (June
8, 2021); Friends Fiduciary (June 11, 2021); Melanie Bender (May 26,
2021); Miller/Howard Investments (June 11, 2021); Mercy Investment
Services, Inc. (June 4, 2021); Parametric Portfolio Associates, LLC
(June 4, 2021); San Francisco City and County Employees' Retirement
System (June 12, 2021); Seventh Generation Interfaith, Inc. (May 20,
2021); State Street Global Advisors; Sustainability Accounting
Standards Board (SASB) (May 19, 2021); the Sustainability Group
(June 4, 2021); and Trillium Asset Management (June 9, 2021).
\40\ Several commenters referred to various reports by the
Intergovernmental Panel on Climate Change (``IPCC'') to demonstrate
that there is scientific consensus that climate change is the result
of global warming caused by human-induced emissions of greenhouse
gases and poses significant global risks. See, e.g., letters from
Better Markets (June 14, 2021); Center for Human Rights and
Environment (June 9, 2021); Commonwealth Climate and Law Initiative
(June 13, 2021); Charles E. Frye (Apr. 3, 2021); Interfaith Center
on Corporate Responsibility (June 14, 2021); and Mike Levin and 23
other Members of Congress (June 15, 2021). IPCC's latest report is
IPCC, AR6 Climate Change 2021: The Physical Science Basis (Aug. 7,
2021), available at <a href="https://www.ipcc.ch/report/ar6/wg1/">https://www.ipcc.ch/report/ar6/wg1/</a>.
\41\ See letter from SASB.
\42\ See, e.g., letters from Amalgamated Bank; Bank of Finland
(June 1, 2021); Blueprint Financial (June 11, 2021); Canadian
Coalition of Good Governance (June 9, 2021); Center for Climate and
Energy Solutions (June 12, 2021); Clean Yield Asset Management (June
11, 2021); Coalition for Inclusive Capitalism (June 14, 2021);
Felician Sisters of North America; First Affirmative Financial
Network (June 2, 2021); William and Flora Hewitt Foundation (June 9,
2021); Impact Investors, Inc. (June 2, 2021); Impax Asset Management
(June 9, 2021); Institute of International Bankers (June 8, 2021);
Investment Company Institute; Investment Consultants Sustainability
Working Group (June 11, 2021); Miller/Howard Investments; Norge Bank
Investment Management (June 13, 2021); Parametric Portfolio
Associates; Praxis Mutual Funds and Everence Financial (June 10,
2021); PRI (Consultation Response); <a href="http://Salesforce.com">Salesforce.com</a> Inc. (June 11,
2021); San Francisco City and County Employees' Retirement System;
SASB; Seventh Generation Interfaith, Inc.; S&P Global (June 11,
2021); Trillium Asset Management; World Business Council for
Development (WBCSD) (June 11, 2021); Vanguard Group, Inc.; and US
Impact Investing Alliance (June 14, 2021).
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Other commenters, however, questioned whether climate change posed
a risk to companies or their investors. These commenters stated their
belief that the assumptions underlying the assessment of the impact of
climate change were too uncertain to permit companies to ascertain the
real risks to their operations and financial condition caused by
climate change.\43\ These commenters stated that they opposed
implementation of climate-related disclosure rules, and argued that
such rules would exceed the Commission's statutory authority. Some of
these commenters also argued that such rules are not necessary because
registrants are already required to disclose material climate risks, or
that such rules would be more costly than the current ``private
ordering'' of climate disclosures.\44\ Some commenters also argued that
mandated climate disclosure rules could violate First Amendment
rights.\45\
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\43\ See, e.g., letters from American Enterprise Institute (June
10, 2021); CO<INF>2</INF> Coalition (June 1, 2021); the Heritage
Foundation (June 13, 2021); Steve Milloy (June 1, 2021); Berkeley T.
Rulon-Miller (Apr. 9, 2021); and the Texas Public Policy Foundation
(June 11, 2021).
\44\ See, e.g., letters from American Enterprise Institute; the
Cato Institute; the Heritage Foundation; and Texas Public Policy
Foundation.
\45\ See, e.g., letters from the Institute for Free Speech (June
10, 2021); Patrick Morrisey, West Virginia Attorney General (Mar.
25, 2021); and Texas Public Policy Foundation.
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As noted above, we have considered these comments and other
feedback received from the public in formulating the current proposal.
As part of its filing review process, the Commission staff also
assessed the extent to which registrants currently disclose climate-
related risks in their Commission filings. Since 2010, disclosures
related to climate change have generally increased, but there is
considerable variation in the content, detail, and location (i.e., in
reports filed with the Commission, in sustainability reports posted on
registrant websites, or elsewhere) of climate-related disclosures. The
staff has observed significant inconsistency in the depth and
specificity of disclosures by registrants across industries and within
the same industry. The staff has found significantly more extensive
information in registrants' sustainability reports and other locations
such as their websites as compared with their reports filed with the
Commission. In addition, the disclosures in registrants' Forms 10-K
frequently contain general, boilerplate discussions that provide
limited information as to the registrants' assessment of their climate-
related risks or their impact on the companies' business.\46\
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\46\ The staff of the Division of Corporation Finance has
developed a sample comment letter for registrants to elicit improved
disclosure on some of the deficient areas noted in their review of
filings. See Climate Change Disclosure-Sample Letter, available at
<a href="https://www.sec.gov/corpfin/sample-letter-climate-change-disclosures">https://www.sec.gov/corpfin/sample-letter-climate-change-disclosures</a>.
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We are also mindful of the benefits to investors of requiring
climate-related information in SEC filings. Providing more extensive
climate-related disclosure in sustainability reports, while excluding
such relevant information from Forms 10-K, may make it difficult for
investors to analyze and compare how climate-related risks and impacts
affect registrants' businesses and consolidated financial statements.
The inclusion of climate-related disclosures in SEC filings should
increase the consistency, comparability, and reliability of climate-
related information for investors. The placement of climate-related
information in different locations can make it difficult for investors
to find comparable climate-related disclosures, whereas inclusion in a
registrant's Form 10-K or registration statement should make it easier
for investors to find and compare this information.\47\ Further,
information that is filed with the Commission in Exchange Act periodic
reports is subject to disclosure controls and procedures (``DCP''),
which help to ensure that a registrant maintains appropriate processes
for collecting and communicating the necessary information by which to
formulate the climate-related disclosures.\48\ Moreover, information
filed as part of a registrant's Form 10-K carries certain additional
potential liability, which itself can cause registrants to prepare and
review information filed in the Form 10-K more carefully than
information presented outside SEC filings.\49\
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\47\ See, e.g., letter from Pricewaterhouse Coopers.
\48\ See 17 CFR 240.13a-15 and 17 CFR 240.15d-15.
\49\ We note that the liability provisions of Section 10(b) and
Rule 10b-5 of the Exchange Act can apply to statements made in
filings with the SEC or elsewhere, such as in sustainability reports
or on company websites. See, e.g., SEC v. Stinson, No. 10-3130, 2011
U.S. Dist. LEXIS 65723, 2011 WL 2462038, at 12 (E.D. Pa. June 20,
2011) (finding defendants liable under Section 10(b) when they
communicated material misstatements and omissions in direct
solicitations via email, a webinar, and various websites). As such,
registrants should scrutinize and ensure the accuracy of such
statements whether or not filed with the Commission. In addition,
information filed in a Form 10-K is subject to Section 18 of the
Exchange Act. Further, information filed in an annual report on Form
10-K (and other current and periodic reports) can be incorporated by
reference in certain Securities Act registration statements, such as
those filed on Form S-3, and thereby become subject to the liability
provisions of the Securities Act. See Securities Act Section 11 (15
U.S.C. 77k) and Section 12 (15 U.S.C. 77l). See infra Section
II.C.3-4, II.E, II.G.1, and II.I regarding the application to
forward-looking climate disclosures of the safe harbor for forward-
looking statements that was added to the Securities Act and Exchange
Act pursuant to the Private Securities Litigation Reform Act of
1995.
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[[Page 21340]]
Having considered the public feedback and the staff's experience
with climate-related disclosures, we believe that the current
disclosure system is not eliciting consistent, comparable, and reliable
information that enables investors both to assess accurately the
potential impacts of climate-related risks on the nature of a
registrant's business and to gauge how a registrant's board and
management are assessing and addressing those impacts.\50\ The
Commission has broad authority to promulgate disclosure rules that are
in the public interest or for the protection of investors and that
promote efficiency, competition, and capital formation.\51\ In light of
the present and growing significance of climate-related risks to
registrants and the inadequacies of current climate disclosures, we are
proposing to revise our rules to include climate-related disclosure
items and metrics to elicit investment decision-useful information that
is necessary or appropriate to protect investors.
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\50\ See supra note 42 and accompanying text.
\51\ See letters from Jill E. Fisch and 18 other law professor
signatories (June 11, 2021) (referencing Sections 7, 10, and 19(a)
of the Securities Act; and Sections 3(b), 12, 13, 14, 15(d), and
23(a) of the Exchange Act); and Natural Resources Defense Council
(June 11, 2021).
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We also believe that enhanced climate disclosure requirements could
increase confidence in the capital markets and help promote efficient
valuation of securities and capital formation by requiring more
consistent, comparable, and reliable disclosure about climate-related
risks, including how those risks are likely to impact a registrant's
business operations and financial performance.\52\ The proposed
requirements may also result in benefits to registrants, given existing
costs to registrants that have resulted from the inconsistent market
response to investor demand for climate-related information.\53\ In
this regard our proposal would provide registrants with a more
standardized framework to communicate their assessments of climate-
related risks as well as the measures they are taking to address those
risks.\54\ At the same time, we are open to exploring ways in which
registrants could be afforded flexibility in making the necessary
disclosures while still providing appropriate consistency and
comparability, and are seeking comment in that regard.
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\52\ See letters from Eni SpA (June 12, 2021); Jill. E. Fisch et
al; Natural Resources Defense Council; SASB; and Value Balancing
Alliance (June 28, 2021); see also infra Section IV.
\53\ See, e.g., letter from SASB (stating that through the
``multiple voluntary disclosure frameworks (i.e., the ``alphabet
soup'' decried by companies) . . . and numerous direct requests to
companies for information through surveys, the current private
ordering-led system has increased the burden on companies--and
investors--while still leaving many companies uncertain as to
whether they are, in practice, providing the decision-useful
information required by investors.''); see also letters from
Americans for Financial Reform Education Fund and Public Citizen
(June 14, 2021) (stating that ``the proliferation of differing
frameworks has increased compliance complexities and costs for
companies''); Eni SpA (stating that the fragmentation of data
fostered by the proliferation of reporting frameworks has multiplied
the efforts of companies in satisfying all their requirements); and
BSR (June 11, 2021) (providing that ``a fragmented environment is
limiting the impact of reporting and creating undue confusion and
cost on the part of reporters.'').
\54\ Providing a more standardized framework for climate-related
disclosures would be consistent with the Recommendation from the
Investor-as-Owner Subcommittee of the SEC Investor Advisory
Committee Relating to ESG Disclosure (May 14, 2020) (``IAC
Recommendation''), available at <a href="https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-of-the-investor-as-owner-subcommittee-on-esg-disclosure.pdf">https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-of-the-investor-as-owner-subcommittee-on-esg-disclosure.pdf</a>. The term ``ESG'' refers to
environmental, social, and governance matters, of which climate-
related disclosures is a part. The IAC Recommendation focused on the
inadequacies of ESG disclosures broadly, and not just on those
involving climate. The IAC Recommendation stated that, to the extent
that SEC reporting obligations would require a single standard of
material, decision-useful ESG information, as relevant to each
issuer, and based upon data that issuers already use to make their
business decisions, such an approach would level the playing field
between well-financed large issuers and capital constrained small
issuers.
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C. The Growing Investor Demand for Climate-Related Risk Disclosure and
Related Information
1. Major Investor Climate-Related Initiatives
As the Commission recognized in 2010 and earlier, there has been
significant investor demand for information about how climate
conditions may impact their investments. That demand has been
increasing in recent years. Several major institutional investors,
which collectively have trillions of dollars in investments under
management, have demanded climate-related information from the
companies in which they invest because of their assessment of climate
change as a risk to their portfolios, and to investments generally, and
also to satisfy investor interest in investments that are considered
``sustainable.'' As a result, these investors have sought to include
and consider climate risk as part of their investment selection
process.\55\ These institutional investors have formed investor
initiatives to collectively urge companies to provide better
information about the impact that climate change has had or is likely
to have on their businesses, and to urge governments and companies to
take steps to reduce investors' exposure to climate risks. Among these
initiatives:\56\
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\55\ See supra note 23.
\56\ There is some overlap in the signatories to the listed
initiatives.
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<bullet> In 2019, more than 630 investors collectively managing
more than $37 trillion signed the Global Investor Statement to
Governments on Climate Change urging governments to require climate-
related financial reporting; \57\
---------------------------------------------------------------------------
\57\ See United Nations Climate Change, 631 Institutional
Investors Managing More than USD 37 Trillion in Assets Urge
Governments to Step up Climate Ambition (Dec. 9, 2019), available at
<a href="https://unfccc.int/news/631-institutional-investors-managing-more-than-usd-37-trillion-in-assets-urge-governments-to-step-up">https://unfccc.int/news/631-institutional-investors-managing-more-than-usd-37-trillion-in-assets-urge-governments-to-step-up</a>.
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<bullet> This investor initiative continued as the Investor
Agenda's 2021 Global Investor Statement to Governments on the Climate
Crisis, which was signed by 733 global institutional investors,
including some of the largest investors, with more than US $52 trillion
in assets under management in the aggregate. This Statement called for
governments to implement a number of measures, including mandating
climate risk disclosure.\58\
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\58\ See The Investor Agenda, 2021 Global Investor Statement to
Governments on the Climate Crisis (Oct. 27, 2021), available at
<a href="https://theinvestoragenda.org/wp-content/uploads/2021/09/2021-Global-Investor-Statement-to-Governments-on-the-Climate-Crisis.pdf">https://theinvestoragenda.org/wp-content/uploads/2021/09/2021-Global-Investor-Statement-to-Governments-on-the-Climate-Crisis.pdf</a>.
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<bullet> The UN Principles for Responsible Investment (``PRI'')
\59\ has acquired over 4,000 signatories who, as of July 13, 2021,
have, in the aggregate, assets under management exceeding $120 trillion
as of July 13, 2021; \60\
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\59\ PRI was created by a UN-sponsored small group of large
global investors in 2006. A stated core goal of the PRI is to help
investors protect their portfolios from climate-related risks and to
take advantage of climate-related opportunities associated with a
shift to a low-carbon global economy. See PRI, Climate Change,
available at <a href="https://www.unpri.org/climate-change">https://www.unpri.org/climate-change</a>.
\60\ See PRI, CEO quarterly update: Celebrating 4000 signatories
and supporting the evolution of PRI (July 13, 2021), available at
<a href="https://www.unpri.org/pri-blog/ceo-quarterly-update-celebrating-4000-signatories-and-supporting-the-evolution-of-ri/8033.article">https://www.unpri.org/pri-blog/ceo-quarterly-update-celebrating-4000-signatories-and-supporting-the-evolution-of-ri/8033.article</a>.
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<bullet> The Net Zero Asset Managers Initiative, which was formed
by an international group of asset managers, has 128 signatories that
collectively
[[Page 21341]]
manage $43 trillion in assets as of July 2021; \61\
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\61\ See Net Zero Asset Managers Initiative, Net Zero Asset
Managers initiative announces 41 new signatories, with sector seeing
`net zero tipping point' (July 6, 2021), available at <a href="https://www.netzeroassetmanagers.org/net-zero-asset-managers-initiative-announces-41-new-signatories-with-sector-seeing-net-zero-tipping-point">https://www.netzeroassetmanagers.org/net-zero-asset-managers-initiative-announces-41-new-signatories-with-sector-seeing-net-zero-tipping-point</a>.
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<bullet> The Climate Action 100+, an investor-led initiative, now
comprises 617 global investors that together have more than $60
trillion in assets under management; \62\ and
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\62\ See Climate Action 100+, About Climate Action 100+,
available at <a href="https://www.climateaction100.org/about/">https://www.climateaction100.org/about/</a> (indicating
that the initiative is engaging companies on strengthening climate-
related financial disclosures).
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<bullet> The Glasgow Financial Alliance for Net Zero (``GFANZ''), a
coalition of over 450 financial firms from 45 countries, responsible
for assets of over $130 trillion, that are committed to achieving net-
zero emissions by 2050, reaching 2030 interim targets, covering all
emission scopes and providing transparent climate-related
reporting.\63\
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\63\ See GFANZ, About Us, available at <a href="https://www.gfanzero.com/about/">https://www.gfanzero.com/about/</a>. Another organization, the CDP, provides a means for
investors to request that companies provide climate-related
disclosures through the CDP. In 2021, over 590 investors with $110
trillion in assets under management requested that thousands of
companies disclose climate related information to them through the
CDP. See CDP, Request Environmental Information, available at
<a href="https://www.cdp.net/en/investor/request-environmental-information#d52d69887a88f63e15931b5db2cbe80d">https://www.cdp.net/en/investor/request-environmental-information#d52d69887a88f63e15931b5db2cbe80d</a>.
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Each of these investor initiatives has emphasized the need for
improved disclosure by companies regarding climate-related impacts.
Each of these initiatives has advocated for mandatory climate risk
disclosure requirements aligned with the recommendations of the Task
Force on Climate-Related Financial Disclosures (``TCFD'') \64\ so that
disclosures are consistent, comparable, and reliable. The investor
signatories of Climate Action 100+ emphasized that obtaining better
disclosure of climate-related risks and companies' strategies to
address their exposure to those risks is consistent with the exercise
of their fiduciary duties to their respective clients.\65\
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\64\ We discuss the TCFD in greater detail in Section I.D.1
below.
\65\ See Climate Action 100+, About Climate Action 100+.
Further, commenters noted their fiduciary obligations to consider
climate-related risks. See, e.g., letters from PRI (Consultation
Response); and California Public Employee Retirement System
(CalPERS) (June 12, 2021).
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At the same time, many companies have made commitments with respect
to climate change, such as commitments to reduce greenhouse gas
emissions or become ``net zero'' by a particular date.\66\ Companies
may make these commitments to attract investors, to appeal to customers
that prioritize sustainability, or to reduce their exposure to risks
posed by an expected transition to a lower carbon economy.\67\ In
response to these commitments, investors have demanded more detailed
information about climate-related targets and companies' plans to
achieve them in order to assess the credibility of those commitments
and compare companies based on those commitments.\68\
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\66\ According to one publication, two-thirds of S&P 500
companies had set a carbon reduction target by the end of 2020. See
Jean Eaglesham, Climate Promises by Businesses Face New Scrutiny,
The Wall Street Journal (Nov. 5, 2021).
\67\ See Global Survey Shows Race to Decarbonization is on:
Johnson Controls finds Delivering Growth and Competitive Advantage
are Main Drivers for Companies to Commit to Net Zero (Dec. 1, 2021),
available at https://ih.advfn.com/stock-market/NYSE/johnson-
controls-JCI/stock-news/86696470/global-survey-shows-race-to-
decarbonization-is-
on#:~:text=Global%20Survey%20Shows%20Race%20to%20Decarbonization%20is
%20on%3A,December%2001%202021%20-
%2007%3A01AM%20PR%20Newswire%20%28US%29; and COP26 made net zero a
core principle for business. Here's how leaders can act, McKinsey
(Nov. 12, 2021), available at <a href="https://www.mckinsey.com/business-functions/sustainability/our-insights/cop26-made-net-zero-a-core-principle-for-business-heres-how-leaders-can-act">https://www.mckinsey.com/business-functions/sustainability/our-insights/cop26-made-net-zero-a-core-principle-for-business-heres-how-leaders-can-act</a>.
\68\ See, e.g., letters from Ceres; Investor Adviser Association
(June 11, 2021); SIFMA Asset Management Group (June 10, 2021);
Trillium Asset Management; and T. Rowe Price (June 11, 2021); see
also letters from Boston University Impact Measurement and
Allocation Program (June 7, 2021); CDP (June 11, 2021); Christopher
Lish (June 12, 2021); and Pricewaterhouse Coopers (June 10, 2021).
---------------------------------------------------------------------------
These initiatives demonstrate that investors are using information
about climate risks now as part of their investment selection process
and are seeking more informative disclosures about those risks. As an
increasing number of investors incorporate this information, in
particular GHG emissions, into their investment selection or voting
decisions, this may in turn create transition risks for companies that
are seeking to raise capital.
2. Third-Party Data, Voluntary Disclosure Frameworks, and International
Disclosure Initiatives
Despite increasing investor demand for information about climate-
related risks and strategies, many investors maintain that they cannot
obtain the consistent, comparable, and material information that they
need to properly inform their investment or voting decisions.\69\ In
2020, the Commission's Investor Advisory Committee (``IAC'') noted the
fragmentation of information that has resulted from a rise in third-
party data providers that have emerged to try to meet the informational
demands of investors.\70\ The IAC recommended that the Commission take
action to ensure investors have the material, comparable, consistent
information about climate and other ESG matters that they need to make
investment and voting decisions.
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\69\ See supra note 42.
\70\ See IAC Recommendation. The IAC Recommendation noted that
more than 125 third-party ESG data providers, including ESG ratings
firms, have emerged to try to meet the informational demands of
investors. According to the IAC Recommendation, these data providers
are limited in their ability collectively to provide investors with
comparable and consistent information as they use different
information sources and different--frequently opaque--methodologies
to conduct their analyses, which compromises the usefulness and
reliability of the information. This current heterogeneity in
practices and disparate demands from investors and ratings firms
places a significant burden on companies asked to provide this
information in a variety of formats. The IAC Recommendation further
observed that many companies feel compelled to respond to the
multiple surveys of ESG rating firms because ignoring them or
refusing to respond can lead to a low rating, which can adversely
affect stock price and access to capital. While the proposed rules
would not necessarily eliminate third-party questionnaires, they
would help to provide standardized information to all investors and
might reduce the need to obtain the information obtained through
questionnaires.
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In addition, a diverse group of third parties has developed
climate-related reporting frameworks seeking to meet investors'
informational demands. These include the Global Reporting Initiative
(``GRI''),\71\ CDP (formerly the Carbon Disclosure Project),\72\
Climate Disclosure Standards Board (``CDSB''),\73\ Value Reporting
Foundation (formed through a merger of the Sustainability Accounting
Standards Board (``SASB'') and the International Integrated Reporting
Council (``IIRC'')),\74\ and the TCFD.\75\
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\71\ See GRI, About GRI, available at <a href="https://www.globalreporting.org/about-gri/">https://www.globalreporting.org/about-gri/</a>.
\72\ See CDP, About Us, available at <a href="https://www.cdp.net/en/info/about-us">https://www.cdp.net/en/info/about-us</a>. In 2018, CDP revised its questionnaire to companies
so that it aligns with the TCFD recommended framework. See letter
from CDP.
\73\ See CDSB, About the Climate Disclosure Standards Board,
available at <a href="https://www.cdsb.net/our-story">https://www.cdsb.net/our-story</a>.
\74\ See Value Reporting Foundation, Understanding the Value
Reporting Foundation, available at <a href="https://www.valuereportingfoundation.org/">https://www.valuereportingfoundation.org/</a>.
\75\ See TCFD, About, available at <a href="https://www.fsb-tcfd.org/about/">https://www.fsb-tcfd.org/about/</a>.
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To some extent, the development of these disparate frameworks has
led to an increase in the number of companies that are providing some
climate-related disclosures.\76\ However, because they
[[Page 21342]]
are voluntary, companies that choose to disclose under these frameworks
may provide partial disclosures or they may choose not to participate
every year. In addition, the form and content of the disclosures may
vary significantly from company to company, or from period to period
for the same company. The situation resulting from these multiple
voluntary frameworks has failed to produce the consistent, comparable,
and reliable information that investors need.\77\ Instead, the
proliferation of third-party reporting frameworks has contributed to
reporting fragmentation, which can hinder investors' ability to
understand and compare registrants' climate-related disclosures. An
analysis conducted by the World Business Council for Sustainable
Development found that investors had difficulty using existing
sustainability disclosures because they lack consistency and
comparability.\78\ In addition, a 2020 study by the Yale Initiative on
Sustainable Finance found that the proliferation of reporting
frameworks may have made reporting more difficult for issuers.\79\
Moreover, given the voluntary nature of these third-party frameworks,
there may not be sufficient incentives or external disciplines to
ensure that companies are providing complete and robust disclosure
under those frameworks.\80\
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\76\ For example, according to the CDP, over 3,000 companies
have provided climate-related disclosures through the CDP's platform
by responding to the CDP's questionnaires that are aligned with the
TCFD's disclosure recommendations. See letter from CDP. The TCFD has
similarly reported growth in the number of companies and countries
supporting its climate-related disclosure recommendations. See TCFD,
2021 Status Report (Oct. 2021), available at <a href="<a href="https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Status_Report.pdf">https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Status_Report.pdf</a>"><a href="https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Status_Report.pdf">https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Status_Report.pdf</a></a>
(stating that, as of Oct. 6, 2021, the TCFD had over 2,600
supporters globally, including 1,069 financial institutions
responsible for assets of US $194 trillion).
\77\ See supra note 42.
\78\ Dr. Rodney Irwin, Alan McGill, Enhancing the Credibility of
Non-Financial Information, the Investor Perspective, WBCSD and PwC
(Oct. 2018).
\79\ Yale Initiative on Sustainable Finance, Toward Enhanced
Sustainability Disclosure: Identifying Obstacles to Broader and More
Actionable ESG Reporting (Sept. 2020), available at <a href="https://pages.fiscalnote.com/rs/109-ILL-989/images/YISF%20ESG%20Reporting%20White%20Paper.pdf">https://pages.fiscalnote.com/rs/109-ILL-989/images/YISF%20ESG%20Reporting%20White%20Paper.pdf</a>.
\80\ See, e.g., TCFD, 2021 Status Report (indicating that there
is a need to improve companies' climate-related disclosures,
particularly regarding governance and risk management, to better
align with the TCFD's recommendations).
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The staff has reviewed more than a dozen studies of climate-related
disclosures conducted by third parties, such as the CDP,\81\ KPMG,\82\
TCFD \83\, and Ernst & Young,\84\ which assessed the adherence of the
climate-related disclosures to various third-party frameworks, such as
the TCFD. These studies have reinforced the staff's observations from
their review of filings that there is significant variation across
companies and industries with regard to the content of current climate
disclosures.\85\ Further, much of this climate-related information,
particularly GHG emissions and targets, appears outside of Commission
filings, in sustainability reports, and on corporate websites. Other
analyses of current climate reporting have found a lack of transparency
and standardization with regard to the methodologies companies apply in
disclosing climate-related information.\86\
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\81\ See CDP, ANALYSIS OF CA100+ COMPANY DATA (2020), available
at <a href="https://cdn.cdp.net/cdp-production/cms/reports/documents/000/005/312/original/Analysis_of_CA100__Data_for_CDP_Investor_Signatories_v5.pdf?1596046258">https://cdn.cdp.net/cdp-production/cms/reports/documents/000/005/312/original/Analysis_of_CA100__Data_for_CDP_Investor_Signatories_v5.pdf?1596046258</a>.
\82\ See KPMG, The Time Has Come-The KPMG Survey of
Sustainability Reporting 2020 (Dec. 2020), available at <a href="https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/11/the-time-has-come.pdf">https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/11/the-time-has-come.pdf</a>.
\83\ See TCFD 2020 Status Report (Sept. 2020), available at
<a href="https://assets.bbhub.io/company/sites/60/2020/09/2020-TCFD_Status-Report.pdf">https://assets.bbhub.io/company/sites/60/2020/09/2020-TCFD_Status-Report.pdf</a>.
\84\ See Ernst & Young, How can climate change disclosures
protect reputation and value?-The 2019 EY Global Climate Risk
Disclosure Barometer (Apr. 2020), available at <a href="https://www.ey.com/en_us/climate-change-sustainability-services/how-can-climate-change-disclosures-protect-reputation-and-value">https://www.ey.com/en_us/climate-change-sustainability-services/how-can-climate-change-disclosures-protect-reputation-and-value</a>.
\85\ For example, the TCFD report found that the average level
of disclosure across the TCFD's 11 disclosure categories was 40% for
the energy sector, 30% for the materials and building sector, 18%
for the consumer goods sector and 13% for the technology sector. The
level of disclosure varied among categories with only 4% or
reporting companies disclosing the resilience of their strategies in
North America and 50% reporting their risks and opportunities (the
category with the highest level of disclosure). The Ernst & Young
report found many companies in industries considered to have high
exposure to climate-related risks lack high quality climate
disclosures. The Ernst & Young report graded the average quality of
the disclosures at 27 out of 100.
\86\ See, e.g., The SEC's Time to Act, Center for American
Progress (Feb. 19, 2021) (``[T]here is a lack of standardization of
the data, assumptions, and methodologies companies use to meet the
standards, with much of this information being opaque. Clearly, the
current path of climate disclosure will not provide the transparency
that an increasing number of investors are seeking and, indeed, a
properly functioning market requires--consistency of disclosures
across time, comparability of disclosures across companies, and
reliability of the information that is disclosed.'') See, also, Andy
Green and Andrew Schwartz, Corporate Long-Termism, Transparency, and
the Public Interest (Oct. 2, 2018) (``[C]orporate disclosure
available today is insufficient, not comparable, and unreliable'');
and Managing Climate Risk in the U.S. Financial System, Report of
the Climate-Related Market Risk Subcommittee, Market Risk Advisory
Committee of the U.S. Commodity Futures Trading Commission (2020)
(``Large companies are increasingly disclosing some climate-related
information, but significant variations remain in the information
disclosed by each company, making it difficult for investors and
others to understand exposure and manage climate risks.'').
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The increased fragmentation of climate reporting resulting from the
proliferation of third-party reporting frameworks has motivated a
number of recent international efforts to obtain more consistent,
comparable, and reliable climate-related information for investors. For
example:
<bullet> A consultation paper published by the IFRS Foundation \87\
Trustees in 2020 noted the broad range of voluntary sustainability
reporting frameworks that have increased complexity and cost to
preparers without improving the quality of the information available to
investors; \88\
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\87\ The IFRS Foundation refers to the International Financial
Reporting Standards Foundation, which was established to develop a
single set of ``high-quality,'' enforceable, and globally accepted
accounting standards. See IFRS--Who we are, available at <a href="https://www.ifrs.org/about-us/who-we-are/">https://www.ifrs.org/about-us/who-we-are/</a>. The IFRS Foundation was formed in
2010 and succeeded the International Accounting Standards
Foundation, which was formed in 2001.
\88\ IFRS Foundation, IFRS Foundation Trustees' Feedback
Statement on the Consultation Paper on Sustainability Reporting
(Apr. 2021), available at <a href="https://www.ifrs.org/content/dam/ifrs/project/sustainability-reporting/sustainability-consultation-paper-feedback-statement.pdf">https://www.ifrs.org/content/dam/ifrs/project/sustainability-reporting/sustainability-consultation-paper-feedback-statement.pdf</a>.
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<bullet> Based on the response to the IFRS Foundation consultation
paper, the IFRS Foundation took steps toward the establishment of an
International Sustainability Standards Board (``ISSB'') operating
within the existing governance structure of the IFRS Foundation;
<bullet> In 2021, following two roundtables hosted by its
Sustainable Finance Task Force, IOSCO \89\ issued a report that
concluded that companies' current sustainability disclosures do not
meet investors' needs, and the proliferation of voluntary disclosure
frameworks has led to inconsistency in application of the frameworks
and, in some cases ``cherry picking'' of information that might not
present an accurate picture of companies' risks.\90\
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\89\ IOSCO refers to the International Organization of
Securities Commissions, of which the Commission is a member.
\90\ IOSCO, Report on Sustainability-related Issuer Disclosures,
Final Report (June 2021) available at <a href="https://www.iosco.org/library/pubdocs/pdf/IOSCOPD678.pdf">https://www.iosco.org/library/pubdocs/pdf/IOSCOPD678.pdf</a>.
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<bullet> A Technical Experts' Group of IOSCO worked with a
Technical Readiness Working Group of the IFRS Foundation to assess and
fine-tune a prototype climate-related financial disclosure standard
(``Prototype'') drafted by an alliance of prominent sustainability
reporting organizations and designed as a potential model for
[[Page 21343]]
standards that an ISSB might eventually develop; \91\
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\91\ See CDP, CDSB, GRI, IIRC and SASB, Reporting on enterprise
value Illustrated with a prototype climate-related financial
disclosure standard (Dec. 2020), available at <a href="https://29kjwb3armds2g3gi4lq2sx1-wpengine.netdna-ssl.com/wp-content/uploads/Reporting-on-enterprise-value_climate-prototype_Dec20.pdf">https://29kjwb3armds2g3gi4lq2sx1-wpengine.netdna-ssl.com/wp-content/uploads/Reporting-on-enterprise-value_climate-prototype_Dec20.pdf</a>; and IFRS
Foundation, IFRS Foundation announces International Sustainability
Standards Board, consolidation with CDSB and VRF, and publication of
prototype disclosure requirements, available at <a href="https://www.ifrs.org/news-and-events/news/2021/11/ifrs-foundation-announces-issb-consolidation-with-cdsb-vrf-publication-of-prototypes/">https://www.ifrs.org/news-and-events/news/2021/11/ifrs-foundation-announces-issb-consolidation-with-cdsb-vrf-publication-of-prototypes/</a>.
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<bullet> In November 2021, the IFRS Foundation announced the
formation of the ISSB.\92\ The ISSB is expected to engage in standard
setting to build on the Prototype, including developing climate-
specific disclosure standards based on the recommendations of the
TCFD.\93\
---------------------------------------------------------------------------
\92\ See IFRS Foundation, IFRS Foundation announces
International Sustainability Standards Board, consolidation with
CDSB and VRF, and publication of prototype disclosure requirements
(Nov. 3, 2021), available at <a href="https://www.ifrs.org/news-and-events/news/2021/11/ifrs-foundation-announces-issb-consolidation-with-cdsb-vrf-publication-of-prototypes/">https://www.ifrs.org/news-and-events/news/2021/11/ifrs-foundation-announces-issb-consolidation-with-cdsb-vrf-publication-of-prototypes/</a>. At the same time, the IFRS
Foundation announced the planned consolidation of the Climate
Disclosure Standards Board and the Value Reporting Foundation into
the ISSB during 2022. The ISSB is expected to develop reporting
standards using the Prototype as a starting point and engaging in
rigorous due process under the oversight of the IFRS Foundation
Trustees' Due Process Oversight Committee.
\93\ Id.
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<bullet> Several jurisdictions, including the European Union,\94\
are developing or revising their mandatory climate-related disclosure
regimes to provide investors with more consistent, useful climate-
related financial information, including associated assurance
requirements and data tagging to facilitate the use of the
information.\95\
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\94\ Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF
THE COUNCIL amending Directive 2013/34/EU, Directive 2004/109/EC,
Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards
corporate sustainability reporting (Apr. 2021), available at <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0189">https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0189</a>. In
proposing revised corporate sustainability reporting requirements,
the EU explained that there exists a widening gap between the
sustainability information, including climate-related data,
companies report and the needs of the intended users of that
information, which may mean that investors are unable to take
sufficient account of climate-related risks in their investment
decisions.
\95\ See IOSCO, Report on Sustainability-related Issuer
Disclosures, Final Report (June 2021) (noting progress in several
jurisdictions, including Hong Kong, India, Japan, New Zealand and
the United Kingdom, to incorporate TCFD's disclosure recommendations
into their legal and regulatory frameworks).
---------------------------------------------------------------------------
These international developments show an increasing global
recognition of the need to improve companies' climate-related
disclosures, which the proposed rules would help address, as well as
the convergence of investors and issuers around the TCFD as a useful
framework for communicating information about climate-related risks
that companies may face.
D. Development of a Climate-Related Reporting Framework
In recent years, two significant developments have occurred that
support and inform the Commission's proposed climate-related reporting
rules. The first involves the TCFD, which has developed a climate-
related reporting framework that has become widely accepted by both
registrants and investors.\96\ The second involves the Greenhouse Gas
Protocol (``GHG Protocol''), which has become a leading accounting and
reporting standard for greenhouse gas emissions.\97\ Both the TCFD and
the GHG Protocol have developed concepts and a vocabulary that are
commonly used by companies when providing climate-related disclosures
in their sustainability or related reports. As discussed in greater
detail below, the Commission's proposed rules incorporate some of these
concepts and vocabulary, which by now are familiar to many registrants
and investors.
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\96\ A number of registrants recommended basing the Commission's
climate-related disclosure rules on the TCFD framework. See, e.g.,
letters from Adobe; Alphabet Inc. et al.; BNP Paribas (June 11,
2021); bp; Chevron (June 11, 2021; ConocoPhilips; and Walmart.
Similarly, numerous investors and investor groups recommended the
TCFD framework. See letters from Alberta Investment Management
Corporation; BlackRock; CalPERS; CALSTRS (June 4, 2021); Impact
Investors, Inc.; and San Francisco Employees Retirement System. See
also infra Section II.A.1 for further discussion of the many
commenters that recommended basing the Commission's climate-related
disclosure rules on the TCFD framework.
\97\ See, e.g., letter from Natural Resources Defense Council
(stating that most companies providing climate-related information
do so using the three-part (scope) framework developed by the GHG
Protocol and noting other organizations, such as the CDP, that use
the GHG Protocol's framework and methodology); see also GHG
Protocol, Companies and Organizations, available at <a href="https://ghgprotocol.org/companies-and-organizations">https://ghgprotocol.org/companies-and-organizations</a> (stating that 92% of
companies responding to the CDP in 2016 used the GHG Protocol's
standards and guidance).
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1. The Task Force on Climate-Related Financial Disclosure
Our proposed climate-related disclosure framework is modeled in
part on the TCFD's recommendations. A goal of the proposed rules is to
elicit climate-related disclosures that are consistent, comparable, and
reliable while also attempting to limit the compliance burden
associated with these disclosures. The TCFD framework has been widely
accepted by issuers, investors, and other market participants, and,
accordingly, we believe that proposing rules based on the TCFD
framework may facilitate achieving this balance between eliciting
better disclosure and limiting compliance costs.\98\
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\98\ See infra Section II.A.1 and notes 145 through 149.
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In April 2015, the Group of 20 Finance Ministers directed the
Financial Stability Board (``FSB'') to evaluate ways in which the
financial sector could address climate-related concerns.\99\ The FSB
concluded that better information was needed to facilitate informed
investment decisions and to help investors and other market
participants to better understand and take into account climate-related
risks. The FSB established the TCFD, an industry-led task force charged
with promoting better-informed investment, credit, and insurance
underwriting decisions.\100\ Since then, the framework for climate-
related disclosures developed by the TCFD has been refined and garnered
global support as a reliable framework for climate-related financial
reporting.\101\
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\99\ See TCFD, 2020 Status Report (Oct. 2020). The Group of 20
(``G20'') is a group of finance ministers and central bank governors
from 19 countries, including the United States, plus the European
Union, which was formed in 1999 to promote global economic growth,
international trade, and regulation of financial markets. According
to the G20, its members represent more than 80% of world GDP, 75% of
international trade, and 60% of the world population. See G20, About
the G20, available at <a href="https://g20.org/about-the-g20/">https://g20.org/about-the-g20/</a>.
\100\ See TCFD, Recommendations of the Task Force on Climate-
related Financial Disclosures (June 2017), available at <a href="https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf">https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf</a>.
\101\ See, e.g., Climate Action 100+, The Three Asks, available
at <a href="https://www.climateaction100.org/approach/the-three-asks/">https://www.climateaction100.org/approach/the-three-asks/</a>
(requiring participating investors to ask the companies with which
they engage to provide enhanced corporate disclosure in line with
the TCFD's recommendations; and CDP, How CDP is aligned to the TCFD,
available at <a href="https://www.cdp.net/en/guidance/how-cdp-is-aligned-to-the-tcfd">https://www.cdp.net/en/guidance/how-cdp-is-aligned-to-the-tcfd</a> (explaining how the CDP has aligned its questionnaires to
elicit disclosures aligned with the TCFD's recommendations).
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In 2017, the TCFD published disclosure recommendations that provide
a framework by which to evaluate material climate-related risks and
opportunities through an assessment of their projected short-, medium-,
and long-term financial impacts on a registrant. The TCFD framework
establishes eleven disclosure topics related to four core themes that
provide a structure for the assessment, management, and disclosure of
climate-related financial risks: Governance, strategy, risk management,
and metrics and targets.\102\
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\102\ See TCFD, TCFD_Booklet_FNL_Digital_March-2020.pdf
(bbhub.io) (Mar. 2021), available at <a href="https://assets.bbhub.io/company/sites/60/2020/10/TCFD_Booklet_FNL_Digital_March-2020.pdf">https://assets.bbhub.io/company/sites/60/2020/10/TCFD_Booklet_FNL_Digital_March-2020.pdf</a>.
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[[Page 21344]]
Support for the TCFD's recommendations by companies and other
reporting frameworks has grown steadily since the TCFD's
formation.\103\ As of October 2021 more than 2,600 organizations
globally, with a total market capitalization of $25 trillion have
expressed support for the TCFD.\104\ Further, 1,069 financial
institutions, managing assets of $194 trillion, also support the
TCFD.\105\ In recognition of the widespread adoption by companies of
TCFD reporting, a number of countries, including the United Kingdom,
New Zealand, and Switzerland, and the European Union that have proposed
mandatory climate-risk disclosure requirements have indicated an
intention to base disclosure requirements on the TCFD framework.\106\
Further, the TCFD's recommendations have been adopted by, and
incorporated into, other voluntary climate disclosure frameworks such
as the CDP, GRI, CDSB, and SASB frameworks. The TCFD also forms the
framework for the Prototype that the IFRS Foundation provided to the
ISSB as a potential starting point for its standard setting
initiative.\107\ The G7 Finance Ministers and Central Bank Governors
have also endorsed the TCFD.\108\ As a result, although the reporting
landscape is crowded with voluntary standards that seek different
information in different formats, the TCFD framework has been widely
endorsed by U.S. companies and regulators and standard-setters around
the world.
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\103\ According to the TCFD, ``[for] companies, support is a
commitment to work toward their own implementation of the TCFD
recommendations.'' <a href="https://www.fsb-tcfd.org/support-tcfd/">https://www.fsb-tcfd.org/support-tcfd/</a>
\104\ See TCFD, 2021 Status Report. A recent survey by Moody's
of over 3,800 companies worldwide indicated that the global average
disclosure rate of companies that reported across all 11 TCFD's
recommendations increased to 22% in 2021 from 16% in 2020. See
Moody's State of TCFD Disclosures 2021, available at <a href="https://assets.website-files.com/5df9172583d7eec04960799a/616d36184f3e6431a424b9df_BX9303_MESG_State%20of%20TCFD%20Disclosures%202021.pdf">https://assets.website-files.com/5df9172583d7eec04960799a/616d36184f3e6431a424b9df_BX9303_MESG_State%20of%20TCFD%20Disclosures%202021.pdf</a>. In addition, according to a recent report by the
Governance & Accountability Institute, Inc., 70% of companies in the
Russell 1000 Index published sustainability reports in 2020, and of
those reporters, 30% mentioned or aligned their disclosures with the
TCFD framework, and 40% responded to the CDP questionnaires, which
are aligned with the TCFD. See Governance & Accountability
Institute, Sustainability Reporting in Focus, 2021, available at
<a href="https://www.ga-institute.com/fileadmin/ga_institute/images/FlashReports/2021/Russell-1000/G_A-Russell-Report-2021-Final.pdf?vgo_ee=NK5m02JiOOHgDiUUST7fBRwUnRnlmwiuCIJkd9A7F3A%3D">https://www.ga-institute.com/fileadmin/ga_institute/images/FlashReports/2021/Russell-1000/G_A-Russell-Report-2021-Final.pdf?vgo_ee=NK5m02JiOOHgDiUUST7fBRwUnRnlmwiuCIJkd9A7F3A%3D</a>. We
discuss the findings of this report, and other similar findings, in
greater detail in Section IV.A.5.c below.
\105\ See TCFD, 2021 Status Report.
\106\ See id.
\107\ See Climate-related Disclosures Prototype, Developed by
the Technical Readiness Working Group, chaired by the IFRS
Foundation, to provide recommendations to the International
Sustainability Standards Board for consideration (Nov. 2021).
\108\ HM Treasury, G7 Finance Ministers and Central Bank
Governors Communique--Policy Paper (June 2021), available at <a href="https://www.gov.uk/government/publications/g7-finance-ministers-meeting-june-2021-communique/g7-finance-ministers-and-central-bank-governors-communique">https://www.gov.uk/government/publications/g7-finance-ministers-meeting-june-2021-communique/g7-finance-ministers-and-central-bank-governors-communique</a> (stating their support of mandatory climate-
related financial disclosures based on the TCFD framework because of
investors' need for high quality, reliable, comparable climate-risk
data).
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2. The Greenhouse Gas Protocol
Quantitative greenhouse gas (``GHG'') emissions data can enable
investors to assess a registrant's exposure to climate-related risks,
including regulatory, technological, and market risks driven by a
transition to a lower-GHG intensive economy.\109\ This data also could
help investors to assess the progress of registrants with public
commitments to reduce GHG emissions, which would be important in
assessing potential future capital outlays that might be required to
meet such commitments. For these reasons, many investors and other
commenters recommended that we require disclosure of a registrant's GHG
emissions.\110\ Many commenters also recommended that we base any GHG
emissions disclosure requirement on the GHG Protocol.\111\ These
commenters indicated that the GHG Protocol has become the most widely-
used global greenhouse gas accounting standard.\112\ For example, the
Environmental Protection Agency (``EPA'') Center for Corporate Climate
Leadership references the GHG Protocol's standards and guidance as
resources for companies that seek to calculate their GHG
emissions.\113\
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\109\ See, e.g., letters from Calvert Research and Management
(June 1, 2021); Ceres et al (June 10, 2021); NY State Comptroller
(June 8, 2021); and SASB (May 19, 2021).
\110\ See infra Section II.G.1 and note 412.
\111\ See, e.g., letters from Apple, Inc. (June 11, 2021); bp
(June 11, 2021); Carbon Tracker Initiative (June 14, 2021); Consumer
Federation of America (June 14, 2021); ERM CVS (June 11, 2021);
Ethic Inc. (June 11, 2021); First Affirmative Financial Network;
Regenerative Crisis Response Committee; MSCI, Inc. (June 12, 2021);
Natural Resources Defense Council; New York State Society of
Certified Public Accountants(June 11, 2021); Paradice Investment
Management (June 11, 2021); Stray Dog Capital (June 15, 2021); and
Huw Thomas (June 16, 2021).
\112\ See, e.g., letters from ERM CVS; and Natural Resources
Defense Council; see also Greenhouse Gas Protocol, About Us [verbar]
Greenhouse Gas Protocol, available at <a href="https://ghgprotocol.org/about-us">https://ghgprotocol.org/about-us</a>.
\113\ See, e.g., EPA Center for Corporate Climate Leadership,
Scope 1 and Scope 2 Inventory Guidance, at <a href="https://www.epa.gov/climateleadership/scope-1-and-scope-2-inventory-guidance">https://www.epa.gov/climateleadership/scope-1-and-scope-2-inventory-guidance</a>.
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The GHG Protocol was created through a partnership between the
World Resources Institute and the World Business Council for
Sustainable Development, which agreed in 1997 to collaborate with
businesses and NGOs to create a standardized GHG accounting
methodology.\114\ The GHG Protocol has been updated periodically since
its original publication and has been broadly incorporated into
sustainability reporting frameworks, including the TCFD, Value
Reporting Foundation, GRI, CDP, CDSB, and the IFRS Foundation's
Prototype.
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\114\ See Greenhouse Gas Protocol, About Us [verbar] Greenhouse
Gas Protocol (<a href="http://ghgprotocol.org">ghgprotocol.org</a>), available at <a href="https://ghgprotocol.org/about-us">https://ghgprotocol.org/about-us</a>.
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The GHG Protocol's Corporate Accounting and Reporting Standard
provides uniform methods to measure and report the seven greenhouse
gasses covered by the Kyoto Protocol--carbon dioxide, methane, nitrous
oxide, hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride, and
nitrogen trifluoride.\115\ The GHG Protocol introduced the concept of
``scopes'' of emissions to help delineate those emissions that are
directly attributable to the reporting entity and those that are
indirectly attributable to the company's activities.\116\ Under the GHG
Protocol, Scope 1 emissions are direct GHG emissions that occur from
sources owned or controlled by the company. These might include
emissions from company-owned or controlled machinery or vehicles, or
methane emissions from petroleum operations. Scope 2 emissions are
those emissions primarily resulting from the generation of electricity
purchased and consumed by the company.\117\ Because these emissions
derive from the activities of another party (the power provider), they
are considered indirect emissions. Scope 3 emissions are all other
indirect emissions not accounted for in Scope 2 emissions. These
emissions are a consequence of the company's activities but are
generated from sources that are neither owned nor controlled by the
[[Page 21345]]
company.\118\ These might include emissions associated with the
production and transportation of goods a registrant purchases from
third parties, employee commuting or business travel, and the
processing or use of the registrant's products by third parties.\119\
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\115\ See id. The Kyoto Protocol, adopted in 1997, implemented
the United Nations Framework Convention on Climate Change by
obtaining commitments from industrialized countries to reduce
emissions of the seven identified gasses according to agreed
targets. See United Nations Climate Change, What is the Kyoto
Protocol?, available at <a href="https://unfccc.int/kyoto_protocol">https://unfccc.int/kyoto_protocol</a>. The EPA
includes these seven greenhouse gases in its greenhouse gas
reporting program. See, e.g., EPA, GHGRP Emissions by GHG, available
at <a href="https://www.epa.gov/ghgreporting/ghgrp-emissions-ghg">https://www.epa.gov/ghgreporting/ghgrp-emissions-ghg</a>.
\116\ See World Business Council for Sustainable Development and
World Resources Institute, The Greenhouse Gas Protocol, A Corporate
Accounting and Reporting Standard REVISED EDITION, available at
<a href="https://ghgprotocol.org/corporate-standard">https://ghgprotocol.org/corporate-standard</a>.
\117\ Id.
\118\ The Scope 3 emissions standard was developed over a three-
year period with participation by businesses, government agencies,
academics, and NGOs to help companies understand and manage their
climate-related risks and opportunities in their upstream and
downstream value chains. See Greenhouse Gas Protocol, Corporate
Value Chain (Scope 3) Accounting and Reporting Standard, Supplement
to the GHG Protocol Corporate Accounting and Reporting Standard
(Sept. 2011), available at <a href="https://ghgprotocol.org/sites/default/files/standards/Corporate-Value-Chain-Accounting-Reporing-Standard_041613_2.pdf">https://ghgprotocol.org/sites/default/files/standards/Corporate-Value-Chain-Accounting-Reporing-Standard_041613_2.pdf</a>. This standard identified eight upstream and
seven downstream emission categories that can give rise to Scope 3
emissions. The GHG Protocol is developing additional guidance that
may impact Scope 3 emissions related to land use and land sector
activities. See Greenhouse Gas Protocol, Update on Greenhouse Gas
Protocol Carbon Removals and Land Sector Initiative (July 8, 2021),
available at <a href="https://ghgprotocol.org/blog/update-greenhouse-gas-protocol-carbon-removals-and-land-sector-initiative">https://ghgprotocol.org/blog/update-greenhouse-gas-protocol-carbon-removals-and-land-sector-initiative</a>.
\119\ See Section II.G.1, below, for a more extensive discussion
of Scope 3 categories and emissions.
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We have based our proposed GHG emissions disclosure requirement
primarily on the GHG Protocol's concept of scopes and related
methodology.\120\ By basing this requirement on an established GHG
emissions reporting framework, we believe the compliance burden would
be mitigated, especially for those registrants that are already
disclosing or estimating their GHG emissions pursuant to the GHG
Protocol.
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\120\ See id.
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E. Summary of the Proposed Rules
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.\121\ 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
\122\ and large accelerated filers \123\ regarding certain proposed GHG
emissions metrics disclosures.\124\
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\121\ See infra Sections II.B through E and II.G through I.
\122\ See 17 CFR 240.12b-2 (defining ``accelerated filer'' as an
issuer after it first meets 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).
\123\ See 17 CFR 240.12b-2 (defining ``large accelerated filer''
as an issuer after it first meets 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).
\124\ See infra Section II.H.
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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.\125\ 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'').\126\
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\125\ See infra Section II.F.
\126\ See infra Sections II.F.2 and 3.
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1. Content of the Proposed Disclosures
The proposed climate-related disclosure framework is modeled in
part on the TCFD's recommendations, and also draws upon the GHG
Protocol. In particular, the proposed rules would require a registrant
to disclose information about:
<bullet> The oversight and governance of climate-related risks by
the registrant's board and management; \127\
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\127\ See infra Section II.D.
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<bullet> How any climate-related risks identified by the registrant
have had or are likely to have a material impact on its business and
consolidated financial statements, which may manifest over the short-,
medium-, or long-term; \128\
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\128\ See infra Sections II.B and C.
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<bullet> How any identified climate-related risks have affected or
are likely to affect the registrant's strategy, business model, and
outlook; \129\
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\129\ See infra Section II.C.
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<bullet> 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; \130\
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\130\ See infra Section II.E.
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<bullet> The impact of climate-related events (severe weather
events and other natural conditions as well as physical risks
identified by the registrant) and transition activities (including
transition risks identified by the registrant) on the line items of a
registrant's consolidated financial statements and related
expenditures,\131\ and disclosure of financial estimates and
assumptions impacted by such climate-related events and transition
activities.\132\
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\131\ See infra Sections II.F.2 and 3.
\132\ See infra Sections II.F.4.
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<bullet> Scopes 1 and 2 GHG emissions metrics, separately
disclosed, expressed:
[cir] Both by disaggregated constituent greenhouse gases and in the
aggregate, and
[cir] In absolute and intensity terms; \133\
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\133\ See infra Section II.G.1.
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<bullet> Scope 3 GHG emissions and intensity, if material, or if
the registrant has set a GHG emissions reduction target or goal that
includes its Scope 3 emissions; and
<bullet> The registrant's climate-related targets or goals, and
transition plan, if any.\134\
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\134\ See infra Section II.I.
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When responding to any of the proposed rules' provisions concerning
governance, strategy, and risk management, a registrant may also
disclose information concerning any identified climate-related
opportunities.
2. Presentation of the Proposed Disclosures
The proposed rules would require a registrant (both domestic and
foreign private issuers): \135\
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\135\ As defined by Commission rules, a foreign private issuer
is any foreign issuer other than a foreign government except an
issuer meeting the following conditions as of the last business day
of its most recently completed second fiscal quarter: More than 50%
of the outstanding voting securities of such issuer are directly or
indirectly owned of record by residents of the United States; and
either the majority of its executive officers or directors are
United States citizens or residents, more than 50% of the assets of
the issuer are located in the United States, or the business of the
issuer is administered principally in the United States. See 17 CFR
230.405 and 17 CFR 240.3b-4.
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<bullet> To provide the climate-related disclosure in its
registration statements and Exchange Act annual reports; \136\
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\136\ See infra Section II.A.2.
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[[Page 21346]]
<bullet> To provide the Regulation S-K mandated climate-related
disclosure in a separate, appropriately captioned section of its
registration statement or annual report, or alternatively to
incorporate that information in the separate, appropriately captioned
section by reference from another section, such as Risk Factors,
Description of Business, or Management's Discussion and Analysis
(``MD&A''); \137\
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\137\ See id.
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<bullet> To provide the Regulation S-X mandated climate-related
financial statement metrics and related disclosure in a note to the
registrant's audited financial statements; \138\
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\138\ See infra Section II.F.
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<bullet> To electronically tag both narrative and quantitative
climate-related disclosures in Inline XBRL; \139\ and
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\139\ See infra Section II.K.
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<bullet> To file rather than furnish the climate-related
disclosure.\140\
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\140\ See infra Section II.L.
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3. Attestation for Scope 1 and Scope 2 Emissions Disclosure
The proposed rules would require an accelerated filer or a large
accelerated filer to include, in the relevant filing, an attestation
report covering, at a minimum, the disclosure of its Scope 1 and Scope
2 emissions and to provide certain related disclosures about the
service provider.\141\ As proposed, both accelerated filers and large
accelerated filers would have time to transition to the minimum
attestation requirements. The proposed transition periods would provide
existing accelerated filers and large accelerated filers one fiscal
year to transition to providing limited assurance and two additional
fiscal years to transition to providing reasonable assurance, starting
with the respective compliance dates for Scopes 1 and 2 disclosure
described below.\142\ The proposed rules would provide minimum
attestation report requirements, minimum standards for acceptable
attestation frameworks, and would require an attestation service
provider to meet certain minimum qualifications. The proposed rules
would not require an attestation service provider to be a registered
public accounting firm.
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\141\ See infra Section II.H.
\142\ See infra Section II.H.1 (providing further details on the
proposed timing of the minimum attestation requirements).
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4. Phase-In Periods and Accommodations for the Proposed Disclosures
The proposed rules would include:
<bullet> A phase-in for all registrants, with the compliance date
dependent on the registrant's filer status;
<bullet> An additional phase-in period for Scope 3 emissions
disclosure;
<bullet> A safe harbor for Scope 3 emissions disclosure;
<bullet> An exemption from the Scope 3 emissions disclosure
requirement for a registrant meeting the definition of a smaller
reporting company (``SRC''); \143\ and
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\143\ See infra Section II.G.3. The Commission's rules define a
smaller reporting company to mean an issuer that 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
that: (1) Had a public float of less than $250 million; or (2) had
annual revenues of less than $100 million and either: (i) No public
float; or (ii) a public float of less than $700 million. See 17 CFR
229.10(f)(1), 230.405, and 17 CFR 240.12b-2.
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<bullet> A provision permitting a registrant, if actual reported
data is not reasonably available, to use a reasonable estimate of its
GHG emissions for its fourth fiscal quarter, together with actual,
determined GHG emissions data for the first three fiscal quarters, as
long as the registrant promptly discloses in a subsequent filing any
material difference between the estimate used and the actual,
determined GHG emissions data for the fourth fiscal quarter.
The proposed rules would be phased in for all registrants, with the
compliance date dependent upon the status of the registrant as a large
accelerated filer, accelerated or non-accelerated filer, or SRC, and
the content of the item of disclosure. For example, assuming that the
effective date of the proposed rules occurs in December 2022 and that
the registrant has a December 31st fiscal year-end, the compliance date
for the proposed disclosures in annual reports, other than the Scope 3
disclosure, would be:
<bullet> For large accelerated filers, fiscal year 2023 (filed in
2024);
<bullet> For accelerated and non-accelerated filers, fiscal year
2024 (filed in 2025); and
<bullet> For SRCs, fiscal year 2025 (filed in 2026).\144\
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\144\ See infra Section II.M.
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Registrants subject to the proposed Scope 3 disclosure requirements
would have one additional year to comply with those disclosure
requirements.
We welcome feedback and encourage interested parties to submit
comments on any or all aspects of the proposed rules. When commenting,
it would be most helpful if you include the reasoning behind your
position or recommendation.
II. Discussion
A. Overview of the Climate-Related Disclosure Framework
1. Proposed TCFD-Based Disclosure Framework
We have modeled the proposed disclosure rules in part on the TCFD
disclosure framework. Building on the TCFD framework should enable
companies to leverage the framework with which many investors and
issuers are already familiar, which should help to mitigate both the
compliance burden for issuers and any burdens faced by investors in
analyzing and comparing the new proposed disclosures.
Many commenters that supported climate disclosure rules recommended
that we consider the TCFD framework in developing those rules. Numerous
commenters stated that the Commission should base its climate-related
disclosure rules on the TCFD framework either as a standalone
framework,\145\ or in conjunction with industry-specific metrics drawn
from the SASB \146\ or
[[Page 21347]]
other third-party frameworks.\147\ A broad range of commenters,
including both issuers \148\ and investors,\149\ supported basing new
climate-related disclosure rules on the TCFD framework.
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\145\ See, e.g., letters from Alphabet Inc., <a href="http://Amazon.com">Amazon.com</a> Inc.,
Autodesk, Inc., eBay Inc., Facebook, Inc., Intel Corporation, and
<a href="http://Salesforce.com">Salesforce.com</a>, Inc. (June 11, 2021) (``Alphabet Inc. et al.); the
Aluminum Association (June 11, 2021); Amalgamated Bank; Apple, Inc.;
Bank of Finland; BNP Paribas; Boston Common Asset Management; Ceres
and other signatories representing NGOs, academics, and investors
(Ceres et al.) (June 11, 2021); Certified B Corporations (June 11,
2021); Chevron; Clean Yield Asset Management; Climate Advisers (June
13, 2021); Climate Governance Initiative (June 12, 2021); Committee
on Financial and Capital Markets (Keidenren) (June 13, 2021);
Commonwealth Climate and Law Initiative; Crowe LLP (June 11, 2021);
E2 (June 14, 2021); ERM CVS; Eumedion (June 11, 2021); Fossil Fuel
Divest Harvard (June 14, 2021); Impact Investors, Inc.; Impax Asset
Management; Information Technology Industry Council (June 11, 2021);
Institutional Limited Partners Association (June 11, 2021); Japanese
Bankers Association (June 11, 2021); Keramida (June 11, 2021);
Carolyn Kohoot (June 11, 2021); Legal and General Investment
Management America (June 11, 2021); Christopher Lish (June 12,
2021); Manifest Climate (June 13, 2021); Mercy Investment Services,
Inc.; Miller/Howard Investments; Mirova US LLC (June 14, 2021); M.J.
Bradley & Associates, on behalf of Energy Strategy Coalition (June
13, 2021); Morningstar, Inc. (June 9, 2021); MSCI, Inc.; Natural
Resources Defense Council (June 11, 2021); Persefoni (June 14,
2021); PRI; S&P Global; Maria Stoica (June 11, 2021); Trillium Asset
Management; United Nations Environment Programme (UNEP) (June 9,
2021); Walmart, Inc. (June 11, 2021); and World Business Council for
Development (June 11, 2021) (WBCSD).
\146\ See, e.g., letters from Adobe Inc. (June 11, 2021);
Alberta Investment Management Corporation (June 11, 2021);
AllianceBernstein; American Chemistry Council (June 11, 2021);
American Society of Adaptation Professionals (June 11, 2021);
Baillie Gifford (June 11, 2021); Bank Policy Institute (June 9,
2021); BlackRock; Bloomberg, LP (June 3, 2021); bp; BSR (June 11,
2021); Canadian Bankers Association (June 11, 2021); Canadian
Coalition of Good Governance; Capital Group (June 11, 2021);
Catavento Consultancy (Apr. 30, 2021); Center for Climate and Energy
Solutions; Confluence Philanthropy (June 14, 2021); ConocoPhilips,
Inc. (June 11, 2021); CPP Investments (June 11, 2021); Enbridge,
Inc. (June 11, 2021); Energy Workforce and Technology Council (June
11, 2021); Entelligent, Inc. (June 14, 2021); Ethic Inc.; Emmanuelle
Haack (Apr. 27, 2021); Harvard Management Company (June 11, 2021);
Hermes Equity Ownership Services Limited (June 14, 2021); Douglas
Hileman Consulting (June 7, 2021); HP, Inc. (June 14, 2021);
Virginia Harper Ho (June 12, 2021); IHS Markit (June 13, 2021);
Institute of International Bankers; Institute of International
Finance (June 13, 2021); Institute of Management Accountants (June
12, 2021); Invesco (June 10, 2021); Investment Company Institute;
Investment Consultants Sustainability Working Group (June 11, 2021);
Richard Love (May 20, 2021); Manulife Investment Management (June
11, 2021); NEI Investments (June 11, 2021); Neuberger Berman (June
11, 2021); New York State Society of Certified Public Accountants;
Nordea Asset Management (June 11, 2021); Norges Bank Investment
Management (June 13, 2021); NY State Comptroller; Paradice
Investment Management (June 11, 2021); Parametric Portfolio
Associates; PayPal Holdings, Inc. (June 12, 2021); PGIM (June 13,
2021); Reinsurance Association of America (June 9, 2021);
<a href="http://Salesforce.com">Salesforce.com</a> (June 11, 2021); San Francisco Employees Retirement
System (June 12, 2021); State Street Global Advisors; Summit
Strategy Group (June 11, 2021); Teachers Insurance and Annuity
Association of America (June 11, 2021); T Rowe Price (June 11,
2021); Value Reporting Foundation (June 11, 2021); Wellington
Management Co. (June 11, 2021); and Westpath Benefits and
Assessments (June 11, 2021).
\147\ See, e.g., letters from Gabrielle F. Preiser (Mar. 31,
2021) and Worldbenchmarking Alliance (June 11, 2021) (recommending
the Global Reporting Initiative (GRI) standards); letter from Mathew
Roling and Samantha Tirakian (June 11, 2021) (recommending the CDSB
standards); and Pricewaterhouse Coopers and Grant Thornton (June 11,
2021) (recommending the Sustainability Standards Board (SSB)
standards once the SSB is established by the IFRS Foundation and
others as a global standard-setter and once it promulgates
standards).
\148\ See, e.g., letters from Adobe; Alphabet Inc. et al.; BNP
Paribas; bp; Chevron; ConocoPhilips; and Walmart.
\149\ See, e.g., letters from Alberta Investment Management
Corporation; BlackRock; CalPERS; CALSTRS; Impact Investors, Inc.;
and San Francisco Employees Retirement System.
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Commenters provided several reasons for their support of the TCFD
framework. First, commenters indicated that, because of the widespread
adoption of the framework, issuers and investors have experience making
and using TCFD disclosures. As a result, according to commenters,
aligning SEC rules with the TCFD could reduce the burden on issuers and
increase the consistency and comparability of climate disclosures.\150\
Second, commenters stated that the information that the TCFD
disclosures elicit is useful for investors to understand companies'
exposure to and management of climate-related risks.\151\ Third,
various jurisdictions around the world have announced their intention
to align their domestic disclosure rules with the TCFD.\152\ Commenters
stated that by aligning with the TCFD framework, the Commission could
potentially facilitate higher levels of consistency and comparability
of disclosures globally.\153\
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\150\ See, e.g., letters from BNP Paribas; Deutsche Bank (June
11, 2021); and Institute of International Bankers.
\151\ See, e.g., letters from AllianceBernstein; CALSTRS;
Investment Company Institute; and NY State Comptroller.
\152\ See supra note 95 and accompanying text.
\153\ See, e.g., letters from BNP Paribas; bp; and Chevron.
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The consistency and breadth of these comments comport with our
understanding that the TCFD framework has been widely accepted by
issuers, investors, and other market participants and reinforce our
view that the framework would provide an appropriate foundation for the
proposed amendments.\154\ Basing the Commission's climate-related
disclosure rules on a globally recognized framework should help elicit
climate-related disclosures that are consistent, comparable, and
reliable while also limiting the compliance burden for registrants that
are already providing climate-related disclosures based on this
framework.
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\154\ Proponents of the TCFD framework include academics (see,
e.g., letters from Jill Fisch et al., J. Robert Gibson (May 26,
2021), and Gina-Gail S Fletcher (June 14, 2021)); accounting and
audit firms (see, e.g., letters from AICPA (June 11, 2021), Center
for Audit Quality (``CAQ'') (June 11, 2021), and KPMG LLP (June 12,
2021)); foreign firms (see, e.g., letters from Bank of Finland, BNP
Paribas, bp, and Deutsche Bank); industry groups (see, e.g., letters
from American Chemistry Council, Association of American Railroads
(June 11, 2021), and Information Technology Industry Council (June
11, 2021)); investor groups (see, e.g., letters from CalPERS;
CALSTRS; and San Francisco Employees Retirement System); individuals
(see, e.g., letters from Emmanuelle Haack, Christopher Lish, and
Maria Stoica); issuers (see, e.g., letters from Adobe, Alphabet Inc.
et al., Apple, and Chevron); NGOs (see, e.g., letters from Ceres et
al., Climate Governance Initiative, Natural Resources Defense
Council, and UNEP); professional climate advisors (see, e.g.,
letters from Catavento Consultancy, Douglas Hileman Consulting, ERM
CVS, and Ethic Inc.); and professional investment advisors/
investment management companies (see, e.g., letters from
AllianceBernstein, Impact Investors, Miller/Howard Investments, and
Neuberger Berman).
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Similar to the TCFD framework, the proposed climate-related
provisions under Regulation S-K would require disclosure of a
registrant's: Governance of climate-related risks; \155\ any material
climate-related impacts on its strategy, business model, and outlook;
\156\ climate-related risk management; \157\ GHG emissions metrics;
\158\ and climate-related targets and goals, if any.\159\
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\155\ See proposed 17 CFR 229.1501.
\156\ See proposed 17 CFR 229.1502.
\157\ See proposed 17 CFR 229.1503.
\158\ See proposed 17 CFR 229.1504.
\159\ See proposed 17 CFR 229.1506.
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The proposed climate-related provisions under Regulation S-X would
require a registrant to disclose in a note to its financial statements
certain disaggregated climate-related financial statement metrics that
are mainly derived from existing financial statement line items.\160\
The proposed rules would require disclosure falling under the following
three categories of information: Financial impact metrics; \161\
expenditure metrics; \162\ and financial estimates and
assumptions.\163\ Similar to the TCFD's recommendation regarding
financial impacts, the proposed financial statement metrics have the
objective of increasing transparency about how climate-related risks
impact a registrant's financial statements.\164\ The TCFD framework
identifies two broad categories of actual and potential financial
impacts driven by climate-related risks and opportunities: Financial
performance (income statement focused) and financial position (balance
sheet focused), and includes suggested metrics such as the amount of
capital expenditure deployed toward climate-related risks and
opportunities, which is similar to our proposed financial statement
metrics.\165\
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\160\ See proposed 17 CFR 210.14-01 and 14-02.
\161\ See proposed 17 CFR 210.14-02(c) and (d).
\162\ See proposed 17 CFR 210.14-02(e) and (f).
\163\ See proposed 17 CFR 210.14-02(g) and (h).
\164\ See TCFD, Recommendations of the Task Force on Climate-
related Financial Disclosures (June 2017), Section B.3 (Financial
Impacts).
\165\ See TCFD, Guidance on Metrics, Targets, and Transition
Plans (Oct. 2021), Section F (Financial Impacts), available at
<a href="https://assets.bbhub.io/company/sites/60/2021/07/2021-Metrics_Targets_Guidance-1.pdf">https://assets.bbhub.io/company/sites/60/2021/07/2021-Metrics_Targets_Guidance-1.pdf</a>. For avoidance of doubt, disclosure
of climate-related opportunities is optional, not required, under
our proposal.
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2. Location of the Climate-Related Disclosure
Many commenters stated that the Commission should amend Regulation
S-K or Regulation S-X to include climate-related disclosure
requirements.\166\ Other commenters
[[Page 21348]]
recommended that the Commission adopt a new stand-alone regulation for
climate-related disclosure.\167\ We are proposing to include the
climate-related disclosure rules in Regulation S-K and Regulation S-X
because the required disclosure is fundamental to investors'
understanding the nature of a registrant's business and its operating
prospects and financial performance, and therefore, should be presented
together with other disclosure about the registrant's business and its
financial condition.
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\166\ See, e.g., letters from AllianceBernstein; American
Society of Adaptation Professionals; Seema Arora (June 22, 2021);
Associated General Contractors of America (June 11, 2021); Baillie
Gifford; CalPERS; Cardano Risk Management Ltd. (Apr. 19, 2021);
Center for American Progress; Ceres et al.; Eni SpA; Jill Fisch
(June 3, 2021); George S. Georgiev (June 22, 2021); Hannon Armstrong
(June 15, 2021); Henry Schein, Inc.; Hermes Equity Ownership
Services Limited; Virginia Harper Ho; Institute for Governance and
Sustainable Development (June 9, 2021); Institute for Market
Transformation (June 12, 2021); Interfaith Center on Corporate
Responsibility; International Corporate Governance Network (June 11,
2021); Japanese Bankers Association; Morrison & Foerster LLP;
National Investor Relations Institute (June 11, 2021); Natural
Resources Defense Council; Newmont Corporation (June 13, 2021); New
York State Society of Certified Public Accountants; NY State
Comptroller; PayPal Holdings, Inc.; PRI (Consultation Response);
PricewaterhouseCoopers LLP; Maria Stoica; Sunrise Bay Area (June 14,
2021); Teachers Insurance and Annuity Association of America; Vert
Asset Management LLC (June 14, 2021); WBCSD; and Wespath Benefits
and Investments (June 11, 2021).
\167\ See letters from Bank Policy Institute; Andrew Behar (As
You Sow) (June 14, 2021); Entelligent Inc. (June 14, 2021); Impax
Asset Management; Information Technology Industry Council; Majedie
Asset Management (May 25, 2021); David Marriage (June 15, 2021); and
XBRL US (June 15, 2021).
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Specifically, we are proposing to require a registrant to include
climate-related disclosure in Securities Act or Exchange Act
registration statements and Exchange Act annual reports in a separately
captioned ``Climate-Related Disclosure'' section and in the financial
statements.\168\ Requiring climate-related disclosure to be presented
in this manner would facilitate review of the climate-related
disclosure by investors alongside other relevant company financial and
non-financial information.
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\168\ See infra Section II.J for a discussion of the registrants
and forms to which the proposed rules would apply.
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A registrant would be able to incorporate by reference disclosure
from other parts of the registration statement or annual report (e.g.,
Risk Factors, MD&A, or the financial statements) or, in most cases,
from other filed or submitted reports into the Climate-Related
Disclosure item if it is responsive to the topics specified in Items
1500-1506 of Regulation S-K and if the registrant satisfies the
incorporation by reference requirements under the Commission's rules
and forms.\169\ Allowing incorporation by reference for the Regulation
S-K climate-related disclosure would be consistent with the treatment
of other types of business disclosure under our rules and would provide
some flexibility for registrants while reducing redundancy in
disclosure.\170\
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\169\ See 17 CFR 230.411; 17 CFR 240.12b-23; and the applicable
forms.
\170\ A registrant that elects to incorporate by reference any
of the metrics or narrative disclosure that is subject to XBRL
tagging must comply with the electronic tagging requirement in the
section of the registration statement or report where the metrics or
narrative disclosure appears in full. We discuss the XBRL tagging
requirement in Section II.K.
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Many commenters stated that the Commission should require
registrants to discuss and analyze their quantitative climate data in a
manner similar to that required for MD&A.\171\ These commenters
stressed the importance of placing climate-related metrics in the
context of other company financial and non-financial information to
enable investors to see how those metrics intersect with business
operations and industrial processes.\172\ Other commenters supported a
requirement to discuss and analyze the climate-related metrics, but
stated that such discussion should be part of the existing MD&A
disclosures.\173\ We agree with the commenters supporting a narrative
discussion and analysis of the climate-related metrics as means to
present these disclosures in context and explain how they relate to the
registrant's strategy and management of its climate-related risks. In
this way, such a discussion will serve a similar function to the MD&A
but will focus on climate-related risk specifically. Our proposed
approach, which requires the climate-related disclosure to be included
in a specific section but allows registrants to incorporate from
disclosure elsewhere (consistent with applicable incorporation by
reference requirements), provides some flexibility to the proposed
climate-related disclosure scheme while ensuring the disclosure is
consistent and comparable across registrants.
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\171\ See, e.g., letters from Acadian Asset Management LLC (June
14, 2021); Actual Systems, Inc. (June 11, 2021); Baillie Gifford;
Biotechnology Innovation Organization; CDP; ClientEarth US (June 14,
2021); FAIRR Initiative (June 15, 2021); Jill Fisch (June 3, 2021);
Hermes Equity Ownership Services Limited; International Corporate
Governance Network; Japanese Bankers Association; Majedie Asset
Management; Morningstar, Inc.; NEI Investments; NY State
Comptroller; Paradice Investment Management; Pre-Distribution
Initiative (June 14, 2021); PricewaterhouseCoopers LLP; Matthew
Roling and Samantha Tirakian (June 11, 2021); Terra Alpha
Investments; Vert Asset Management; and WBCSD.
\172\ See, e.g., letters from Pricewaterhouse Coopers Ltd.; Vert
Asset Management; and WBCSD.
\173\ See, e.g., letters from Canadian Coalition for Good
Governance; Clean Production Action and Environmental Health Network
(June 11, 2021); Decatur Capital Management; Dimensional Fund
Advisors (June 11, 2021); Environmental Industry Group (June 9,
2021); Institute for Governance and Sustainable Development; PRI
(Consultation Response); Kenya Rothstein (May 3, 2021); and Maria
Stoica. But see letter from Sarah Ladin (June 14, 2021) (doubting
that a ``sustainability discussion and analysis'' requirement would
achieve the desired results and stating that it would be difficult
to enforce); and David Marriage (indicating that a discussion and
analysis requirement for climate-related data would make the data
difficult for the market to absorb).
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Request for Comment
1. Should we add a new subpart to Regulation S-K and a new article
to Regulation S-X that would require a registrant to disclose certain
climate-related information, as proposed? Would including the climate-
related disclosure in Regulation S-K and Regulation S-X facilitate the
presentation of climate information as part of a registrant's regular
business reporting? Should we instead place the climate-related
disclosure requirements in a new regulation or report? Are there
certain proposed provisions, such as GHG emissions disclosure
requirements, that would be more appropriate under Regulation S-X than
Regulation S-K?
2. If adopted, how will investors utilize the disclosures
contemplated in this release to assess climate-related risks? How will
investors use the information to assess the physical effects and
related financial impacts from climate-related events? How will
investors use the information to assess risks associated with a
transition to a lower carbon economy?
3. Should we model the Commission's climate-related disclosure
framework in part on the framework recommended by the TCFD, as
proposed? Would alignment with the TCFD help elicit climate-related
disclosures that are consistent, comparable, and reliable for
investors? Would alignment with the TCFD framework help mitigate the
reporting burden for issuers and facilitate understanding of climate-
related information by investors because the framework is widely used
by companies in the United States and around the world? Are there
aspects of the TCFD framework that we should not adopt? Should we
instead adopt rules that are based on a different third-party
framework? If so, which framework? Should we base the rules on
something other than an existing third-party framework?
4. Do our current reporting requirements yield adequate and
sufficient information regarding climate-related risks to allow
investors to make informed decisions? In lieu of, or in addition to the
proposed amendments, should we provide updated guidance on how our
existing rules may elicit better disclosure about climate-related
risks?
5. Should we require a registrant to present the climate-related
disclosure in an appropriately captioned, separate part of the
registration statement or annual report, as proposed? Should this
disclosure instead be presented as part of the registrant's MD&A?
6. Should we permit a registrant to incorporate by reference some
of the
[[Page 21349]]
climate-related disclosure from other parts of the registration
statement or annual report, as proposed? Should we permit a registrant
to incorporate by reference climate-related disclosure that appears in
a sustainability report if the registrant includes the incorporated by
referenced disclosure as an exhibit to the registration statement or
annual report? Are there some climate-related disclosure items, such as
GHG emissions data, that we should not permit a registrant to
incorporate by reference? Would requiring a registrant to include all
of the proposed climate-related disclosures in a separate,
appropriately captioned section, while precluding a registrant from
incorporating by reference some or all of the climate-related
disclosures, promote comparability and ease of use of the climate-
related information for investors?
7. Should we permit a registrant to provide certain of the proposed
climate-related disclosures in Commission filings other than the annual
report or registration statement? For example, should we permit a
registrant to provide information about board and management oversight
of climate-related risks in its proxy statement?
B. Disclosure of Climate-Related Risks
As many commenters have noted when seeking more detailed climate-
related disclosures,\174\ climate events and contingencies can pose
financial risks to issuers across industrial sectors.\175\ Physical
risks may include harm to businesses and their assets arising from
acute climate-related disasters such as wildfires, hurricanes,
tornadoes, floods, and heatwaves. Companies and their investors may
also face chronic risks and more gradual impacts from long-term
temperature increases, drought, and sea level rise.
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\174\ See supra note 40.
\175\ The 2020 CFTC Advisory Subcommittee Report found that
climate change currently impacts or is expected to affect every part
of the U.S. economy, including agriculture, real estate,
infrastructure, and the financial sectors. See infra note 361.
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In addition to the physical risks associated with the climate,
issuers and investors may also face risks associated with a potential
transition to a less carbon intensive economy. These risks may arise
from potential adoption of climate-related regulatory policies
including those that may be necessary to achieve the national climate
goals that may be or have been adopted in the United States and other
countries; \176\ climate-related litigation; changing consumer,
investor, and employee behavior and choices; changing demands of
business partners; long-term shifts in market prices; technological
challenges and opportunities, and other transitional impacts.
Disclosure about a registrant's exposure to transition risks, as well
as how the registrant is assessing and managing those risks, would help
investors assess and plan for how the registrant would be financially
impacted by a transition to a lower-carbon economy.
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\176\ A National Climate Taskforce created by the president
established commitments to reduce economy-wide net greenhouse gas
emissions by 50-52% by 2030 as compared to 2005 levels, and to reach
net zero emissions by 2050. See The White House, FACT SHEET:
President Biden Sets 2030 Greenhouse Gas Pollution Reduction Target
Aimed at Creating Good-Paying Union Jobs and Securing U.S.
Leadership on Clean Energy Technologies (Apr. 22, 2021). An
Executive Order also directs the Federal government to achieve net-
zero emissions from overall Federal operations by 2050, and a 65%
emissions reduction by 2030. See The White House, FACT SHEET:
President Biden Signs Executive Order Catalyzing America's Clean
Energy Economy Through Federal Sustainability (Dec. 8, 2021), at
<a href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/12/08/fact-sheet-president-biden-signs-executive-order-catalyzing-americas-clean-energy-economy-through-federal-sustainability/">https://www.whitehouse.gov/briefing-room/statements-releases/2021/12/08/fact-sheet-president-biden-signs-executive-order-catalyzing-americas-clean-energy-economy-through-federal-sustainability/</a>. A
growing number of governments and companies have made net zero
commitments or announced similar carbon-reduction goals or targets.
See United Nations Climate Change, Commitments to Net Zero Double in
Less Than a Year (Sept. 21, 2020), available at <a href="https://unfccc.int/news/commitments-to-net-zero-double-in-less-than-a-year">https://unfccc.int/news/commitments-to-net-zero-double-in-less-than-a-year</a>.
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1. Definitions of Climate-Related Risks and Climate-Related
Opportunities
A central focus of the Commission's proposed rules is the
identification and disclosure of a registrant's material climate-
related risks. The proposed rules would require a registrant to
disclose any climate-related risks reasonably likely to have a material
impact on the registrant's business or consolidated financial
statements.\177\ A registrant may also disclose, as applicable, the
actual and potential impacts of any climate-related opportunities it is
pursuing.\178\ The proposed definitions are substantially similar to
the TCFD's definitions of climate-related risks and climate-related
opportunities.\179\ We have based our definitions on the TCFD's
definitions because they provide a common terminology that allows
registrants to disclose climate-related risks and opportunities in a
consistent and comparable way. Grounding our definitions in a framework
that is already widely accepted also could help limit the burden on
issuers to identify and describe climate-related risks and improve the
comparability and usefulness of the disclosures for investors.
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\177\ See proposed 17 CFR 229.1502(a).
\178\ See id.
\179\ See TCFD, Recommendations of the Task Force on Climate-
related Financial Disclosures, Appendix 5.
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As proposed, ``climate-related risks'' means 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.\180\ ``Value chain'' would mean the
upstream and downstream activities related to a registrant's
operations.\181\ Under the proposed definition, upstream activities
include activities by a party other than the registrant that relate to
the initial stages of a registrant's production of a good or service
(e.g., materials sourcing, materials processing, and supplier
activities). Downstream activities would be defined to include
activities by a party other than the registrant that relate to
processing materials into a finished product and delivering it or
providing a service to the end user (e.g., transportation and
distribution, processing of sold products, use of sold products, end of
life treatment of sold products, and investments).\182\ We have
proposed including a registrant's value chain within the definition of
climate-related risks to capture the full extent of a registrant's
potential exposure to climate-related risks, which can extend beyond
its own operations to those of its suppliers, distributors, and others
engaged in upstream or downstream activities.\183\
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\180\ See proposed 17 CFR 229.1500(c). The reference to
`negative' impact is intended to refer to the actual or potential
impact on the registrant's consolidated financial statements,
business operations, or value chains as a whole, rather than the
mathematical impacts on a specific financial statement line item.
See infra Section II.F.2 (discussing the proposed financial impact
metrics, which focus on the line items in a registrant's
consolidated financial statements).
\181\ See proposed 17 CFR 229.1500(t).
\182\ See id.
\183\ See, e.g., infra Section II.G.1.
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Climate-related conditions and events can present risks related to
the physical impacts of the climate (``physical risks'') and risks
related to a potential transition to a lower carbon economy
(``transition risks''). As proposed, ``physical risks'' is defined to
include both acute and chronic risks to a registrant's business
operations or the operations of those with whom it does business.\184\
``Acute risks'' is defined as event-driven risks related to shorter-
term extreme weather events, such as hurricanes, floods, and
tornadoes.\185\ ``Chronic risks'' is defined as those risks that the
business may face as a result of longer term weather
[[Page 21350]]
patterns and related effects, such as sustained higher temperatures,
sea level rise, drought, and increased wildfires, as well as related
effects such as decreased arability of farmland, decreased habitability
of land, and decreased availability of fresh water.\186\ Many of these
physical risks have already impacted and may continue to impact
registrants across a wide range of economic sectors.\187\ The proposed
rules would define transition risks to mean the actual or potential
negative impacts on a registrant's consolidated financial statements,
business operations, or value chains attributable to regulatory,
technological, and market changes to address the mitigation of, or
adaptation to, climate-related risks.\188\ Transition risks would
include, but are not limited to, increased costs attributable to
climate-related changes in law or policy, reduced market demand for
carbon-intensive products leading to decreased sales, prices, or
profits for such products, the devaluation or abandonment of assets,
risk of legal liability and litigation defense costs, competitive
pressures associated with the adoption of new technologies,
reputational impacts (including those stemming from a registrant's
customers or business counterparties) that might trigger changes to
market behavior, changes in consumer preferences or behavior, or
changes in a registrant's behavior. A registrant that has significant
operations in a jurisdiction that has made a GHG emissions reduction
commitment would likely be exposed to transition risks related to the
implementation of the commitment.\189\
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\184\ See proposed 17 CFR 229.1500(c)(1).
\185\ See proposed 17 CFR 229.1500(c)(2).
\186\ See proposed 17 CFR 229.1500(c)(3). The physical risks
described are examples, but registrants may be exposed to many other
types of physical risks from climate change depending on their
specific facts and circumstances. As such, any reference to certain
types of risks should be considered as non-exhaustive examples.
\187\ The IPCC's Sixth Assessment Report noted drought,
heatwaves, hurricanes, and heavy precipitation. See IPCC, Climate
Change 2021, The Physical Science Basis Summary for Policymakers.
\188\ See proposed 17 CFR 229.1500(c)(4).
\189\ See proposed 17 CFR 229.1502(a)(1)(ii).
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The proposed rules would require a registrant to specify whether an
identified climate-related risk is a physical or transition risk so
that investors can better understand the nature of the risk \190\ and
the registrant's actions or plan to mitigate or adapt to the risk.\191\
If a physical risk, the proposed rules would require a registrant to
describe the nature of the risk, including whether it may be
categorized as an acute or chronic risk.\192\
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\190\ See proposed 17 CFR 229.1502(a)(1).
\191\ See, e.g., proposed 17 CFR 229.1502(b)(1) and
229.1503(c)(1) and (2).
\192\ See proposed 17 CFR 229.1502(a)(1)(i). In some instances,
chronic risks might give rise to acute risks. For example, drought
(a chronic risk) that increases acute risks, such as wildfires, or
increased temperatures (a chronic risk) that increases acute risks,
such as severe storms. In such instances, a registrant should
provide a clear and consistent description of the nature of the risk
and how it may affect a related risk.
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The proposed rules would require a registrant to include in its
description of an identified physical risk the location of the
properties, processes, or operations subject to the physical risk.\193\
The proposed location disclosure would only be required for a physical
risk that a registrant has determined has had or is likely to have a
material impact on its business or consolidated financial statements.
In such instances, a registrant would be required to provide the ZIP
code for the location or, if the location is in a jurisdiction that
does not use ZIP codes, a similar subnational postal zone or geographic
location.\194\ Because physical risks can be concentrated in particular
geographic areas, the proposed disclosure would allow investors to
better assess the risk exposure of one or more registrants with
properties or operations in a particular area. One commenter cited
location information as a key component of how it, as an investor,
assesses the climate risk facing a company, particularly for companies
with fixed assets that may be disproportionately exposed to climate-
related physical risks.\195\ Several other commenters recommended that
we require the disclosure of certain climate data to be disaggregated
by location using a point source's zip code for risk assessment.\196\
Disclosing the zip codes of its identified material climate-related
risks, rather than a broader location designation, could help investors
more accurately assess a registrant's specific risk exposure.
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\193\ See id.
\194\ See proposed 17 CFR 229.1500(k).
\195\ See letter from Wellington Management Co.
\196\ See letters from Action Center on Race and Economy (June
14, 2021); Americans for Financial Reform Education Fund; Confluence
Philanthropy; Domini Impact Investments; William and Flora Hewlett
Foundation; Public Citizen; and Revolving Door Project.
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Some registrants might be exposed to water-related acute physical
risks, such as flooding, which could impair a registrant's operations
or devalue its property. If flooding presents a material physical risk,
the proposed rules would require a registrant to disclose the
percentage of buildings, plants, or properties (square meters or acres)
that are located in flood hazard areas in addition to their
location.\197\ This information could help investors evaluate the
magnitude of a registrant's exposure to flooding, which, for example,
could cause a registrant in the real estate sector to lose revenues
from the rental or sale of coastal property or incur higher costs or a
diminished ability to obtain property insurance, or a manufacturing
registrant to incur increased expenses due to the need to replace
water-damaged equipment or move an entire plant.
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\197\ See proposed 17 CFR 229.1502(a)(1)(i)(A).
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Additional disclosure would be required if a material risk concerns
the location of assets in regions of high or extremely high water
stress.\198\ For example, some registrants might be impacted by water-
related chronic physical risks, such as increased temperatures and
changes in weather patterns that result in water scarcity. Registrants
that are heavily reliant on water for their operations, such as
registrants in the energy sector, materials and buildings sector, or
agriculture sector,\199\ could face regulatory restrictions on water
use, increased expenses related to the acquisition and purchase of
alternative sources of water, or curtailment of its operations due to a
reduced water supply that diminishes its earning capacity. If the
location of assets in regions of high or extremely high water stress
presents a material risk, the proposed rules would require a registrant
to disclose the amount of assets (e.g., book value and as a percentage
of total assets) located in such regions in addition to their location.
The registrant would also be required to disclose the percentage of its
total water usage from water withdrawn in those regions.\200\ These
disclosures could help investors understand the magnitude of a
registrant's material water-stress risks with a degree of specificity
that might not be elicited under our current risk factor disclosure
standards.
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\198\ See proposed 1502(a)(1)(i)(B).
\199\ Registrants in these industry sectors could be
particularly susceptible to water-stress risks because operations in
these sectors require large amounts of water. See TCFD, Implementing
the Recommendations of the Task Force on Climate-Related Financial
Disclosures, Section E (Oct. 2021), available at <a href="https://assets.bbhub.io/company/sites/60/2021/07/2021/TCFD/Implementing_Guidance.pdf">https://assets.bbhub.io/company/sites/60/2021/07/2021/TCFD/Implementing_Guidance.pdf</a> (discussing the listed events and other
risks).
\200\ See proposed 17 CFR 229.1502(a)(1)(i)(B).
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Any increased temperatures could also materially impact a
registrant in other ways. For example, a registrant in the construction
industry might be required to disclose the physical risk of increased
heat waves that affect the
[[Page 21351]]
ability of its personnel to safely work outdoors, which could result in
a cessation or delay of operations, and a reduction in its current or
future earnings.\201\ A registrant operating in wildfire-prone areas
could be exposed to potential disruption of operations, destruction of
property, and relocation of personnel in the event of heat-induced
wildfires.\202\ A registrant in the real estate sector might similarly
be required to disclose the likelihood that sea levels could rise
faster than expected and reduce the value of its coastal
properties.\203\
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\201\ See, e.g., How Seasonal Temperature Changes Affect the
Construction Industry (<a href="http://constructconnect.com">constructconnect.com</a>) (Aug. 15, 2018),
available at <a href="https://www.constructconnect.com/blog/seasonal-temperature-changes-affect-construction-industry">https://www.constructconnect.com/blog/seasonal-temperature-changes-affect-construction-industry</a>.
\202\ See, e.g., The Impact of Wildfires on Business is Enormous
[verbarlm] Are You Ready? (<a href="http://alertmedia.com">alertmedia.com</a>) (Aug. 27, 2020),
available at <a href="https://www.alertmedia.com/blog/the-impact-of-wildfires-on-business/">https://www.alertmedia.com/blog/the-impact-of-wildfires-on-business/</a>.
\203\ See, e.g., Climate change and the coming coastal real
estate crash--Curbed (Oct. 16, 2018), available at <a href="https://archive.curbed.com/2018/10/16/17981244/real-estate-climate-change-infrastructure">https://archive.curbed.com/2018/10/16/17981244/real-estate-climate-change-infrastructure</a>.
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The proposed rules would require a registrant to describe the
nature of transition risks, including whether they relate to
regulatory, technological, market (including changing consumer,
business counterparty, and investor preferences), liability,
reputational, or other transition-related factors, and how those
factors impact the registrant.\204\ For example, an automobile
manufacturer might describe how market factors, such as changing
consumer and investor preferences for low-emission vehicles, have
impacted or will likely impact its production choices, operational
capabilities, and future expenditures. An energy producer might
describe how regulatory and reputational factors have impacted or are
likely to impact its operational activities, reserve valuations, and
investments in renewable energy. An industrial manufacturer might
describe how investments in innovative technologies, such as carbon
capture and storage, have impacted or are likely to impact its
consolidated financial statements, such as by increasing its capital
expenditures.
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\204\ See proposed 17 CFR 229.1502(a)(1)(ii).
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Climate related conditions and any transition to a lower carbon
economy may also present opportunities for companies and investors. The
proposed rules would define ``climate-related opportunities'' to mean
the 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.\205\ Efforts to
mitigate or adapt to the effects of climate-related conditions and
events can produce opportunities, such as cost savings associated with
the increased use of renewable energy, increased resource efficiency,
the development of new products, services, and methods, access to new
markets caused by the transition to a lower carbon economy, and
increased resilience along a registrant's supply or distribution
network related to potential climate-related regulatory or market
constraints. A registrant, at its option, may disclose information
about any climate-related opportunities it may be pursuing when
responding to the proposed disclosure requirements concerning
governance, strategy, and risk management in connection with climate-
related risks. We are proposing to treat this disclosure as optional to
allay any anti-competitive concerns that might arise from a requirement
to disclose a particular business opportunity.\206\ By defining
``climate-related opportunities,'' the proposed rules would promote
consistency when such opportunities are disclosed, even if such
disclosure is not required.
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\205\ See proposed 17 CFR 229.1500(b). The reference to
`positive' impact is intended to refer to the actual or potential
impact on the registrant's consolidated financial statements,
business operations, or value chains as a whole, rather than the
mathematical impacts on a specific financial statement line item.
See infra Section II.F.2 (discussing the proposed financial impact
metrics, which focus on the line items in a registrant's
consolidated financial statements).
\206\ Some commenters expressed concern about potential anti-
competitive effects of the Commission's possible climate disclosure
rules. See, e.g., letters from Association of General Contractors of
America (June 11, 2021); and Healthy Markets Association (June 14,
2021).
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2. Proposed Time Horizons and the Materiality Determination
The proposed rules would require a registrant to disclose whether
any climate-related risk is reasonably likely to have a material impact
on a registrant, including its business or consolidated financial
statements, which may manifest over the short, medium, and long
term.\207\ Several commenters made a similar recommendation, stating
that disclosure of climate-related risks and impacts across short,
medium, and long-term time horizons is necessary to fully understand a
registrant's susceptibility to material climate-related risks.\208\
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\207\ See proposed Item 1502(a) of Regulation S-K.
\208\ See, e.g., letters from Boston Common Asset Management;
Christian Brothers Investment Services (June 11, 2021); Clean Yield
Asset Management; and Miller/Howard Investments; see also American
Institute of CPAs (AICPA) (June 11, 2021).
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As proposed, a registrant would be required to describe how it
defines short-, medium-, and long-term time horizons, including how it
takes into account or reassesses the expected useful life of the
registrant's assets and the time horizons for the registrant's planning
processes and goals. We have not proposed a specific range of years to
define short-, medium-, and long-term time horizons in order to allow
flexibility for a registrant to select the time horizons that are most
appropriate to its particular circumstances.
As defined by the Commission and consistent with Supreme Court
precedent, 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.\209\ As the
Commission has previously indicated, the materiality determination is
largely fact specific and one that requires both quantitative and
qualitative considerations.\210\ Moreover, as the Supreme Court has
articulated, the materiality determination with regard to potential
future events requires an assessment of both the probability of the
event occurring and its potential magnitude, or significance to the
registrant.\211\
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\209\ See 17 CFR 240.12b-2 (definition of ``material''). See
also Basic Inc. v. Levinson, 485 U.S. 224, 231, 232, and 240 (1988)
(holding that information is material if there is a substantial
likelihood that a reasonable investor would consider the information
important in deciding how to vote or make an investment decision;
and quoting TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438,
449 (1977) to further explain that an omitted fact is material if
there is ``a substantial likelihood that the disclosure of the
omitted fact would have been viewed by the reasonable investor as
having significantly altered the `total mix' of information made
available.'').
\210\ See Release No. 33-10064, Business and Financial
Disclosure Required by Regulation S-K (Apr. 13, 2016), [81 FR 23915
(Apr. 22, 2016)] (discussing materiality in the context of, among
other matters, restating financial statements). See also Staff
Accounting Bulletin No. 99 (Aug. 12, 1999), available at <a href="https://www.sec.gov/interps/account/sab99.htm">https://www.sec.gov/interps/account/sab99.htm</a> (emphasizing that a registrant
or an auditor may not substitute a percentage threshold for a
materiality determination that is required by applicable accounting
principles). Staff accounting bulletins are not rules or
interpretations of the Commission, nor are they published as bearing
the Commission's official approval. They represent interpretations
and practices followed by the Division of Corporation Finance and
the Office of the Chief Accountant in administering the disclosure
requirements of the Federal securities laws.
\211\ See Basic, Inc. v. Levinson, 485 U.S. 224, 238 (1988).
When considering the materiality of different climate-related risks,
a registrant might, for example, determine that certain transition
risks and chronic physical risks are material when balancing their
likelihood and impact. It also might determine that certain acute
physical risks are material even if they are less likely to occur if
the magnitude of their impact would be high.
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[[Page 21352]]
The materiality determination that a registrant would be required
to make regarding climate-related risks under the proposed rules is
similar to what is required when preparing the MD&A section in a
registration statement or annual report. The Commission's rules require
a registrant to disclose material events and uncertainties known to
management that are reasonably likely to cause reported financial
information not to be necessarily indicative of future operating
results or of future financial condition.\212\ As the Commission has
stated, MD&A should include descriptions and amounts of matters that
have had a material impact on reported operations as well as matters
that are reasonably likely to have a material impact on future
operations.\213\
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\212\ See 17 CFR 229.303(a).
\213\ See Release No. 33-10890, Management's Discussion and
Analysis, Selected Financial Data, and Supplementary Financial
Information (Nov. 19, 2020), [86 FR 2080, 2089 (Jan. 11, 2021)].
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The proposed rule serves to emphasize that, when assessing the
materiality of a particular risk, management should consider its
magnitude and probability over the short, medium, and long term. In the
context of climate, the magnitude and probability of such risks vary
and can be significant over such time periods. For example, wildfires
in California, which recently have become more frequent and more
intense, may be a material risk for wineries, farmers, and other
property owners.\214\ Some insurance companies have withdrawn from
certain wildfire prone areas after concluding the risk is no longer
insurable.\215\ For many investors, the availability of insurance and
the potential exposure to damage, loss, and legal liability from
wildfires may be a determining factor in their investment decision-
making. Moreover, registrants must bear in mind that the materiality
determination is made with regard to the information that a reasonable
investor considers important to an investment or voting decision.
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\214\ See, e.g., Daoping Wang, Dabo Guan, Shupeng Zhu, et al.,
Economic footprint of California wildfires in 2018, Nature
Sustainability (Dec. 2020) (stating that the frequency and size of
wildfires in the western United States has been increasing for
several decades, driven by decreases in precipitation and related
changes in the moisture in vegetation, which, together with land use
and fire management practices, has dramatically increased wildfire
risks, culminating in a series of enormously damaging fires in
California in 2017, 2018 and 2020); Andrew Freedman, California
wildfires prompt new warnings amid record heat, erratic winds, the
Washington Post (Oct. 1, 2020) (reporting that the ``Glass Fire''
forced about 80,000 to evacuate from Napa and Sonoma Counties and
took a heavy toll on the wine industry).
\215\ See Shelby Vittek, California Farmers Struggle to Secure
Wildfire Insurance Coverage, Modern Farmer (Aug. 2, 2021), available
at <a href="https://modernfarmer.com/2021/08/california-farmers-struggle-to-secure-wildfire-insurance-coverage/">https://modernfarmer.com/2021/08/california-farmers-struggle-to-secure-wildfire-insurance-coverage/</a>
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To help ensure that management considers the dynamic nature of
climate-related risks, we are proposing to require a registrant to
discuss its assessment of the materiality of climate-related risks over
the short, medium, and long term. We recognize that determining the
likely future impacts on a registrant's business may be difficult for
some registrants. Commenters have noted that the science of climate
modelling has progressed in recent years and enabled the development of
various software tools and that climate consulting firms are available
to assist registrants in making this determination.\216\ We also note
that, under our existing rules, registrants long have had to disclose
forward-looking information, including pursuant to MD&A requirements.
To the extent that the proposed climate-related disclosures constitute
forward-looking statements, as discussed below,\217\ the forward-
looking statement safe harbors pursuant to the Private Securities
Litigation Reform Act (``PSLRA'') \218\ would apply, assuming the
conditions specified in those safe harbor provisions are met.\219\ We
note, however, that there are important limitations to the PSLRA safe
harbor. For example, we are proposing that climate-related disclosures
would be required in registration statements, including those for
initial public offerings, and forward-looking statements made in
connection with an initial public offering are excluded from the
protections afforded by the PSLRA. In addition, the PSLRA does not
limit the Commission's ability to bring enforcement actions.
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\216\ See, e.g., letters from AIR Worldwide (June 11, 2021);
Coastal Risk Consulting (May 3, 2021); CoreLogic (June 12, 2021);
Datamaran (June 14, 2021); Dynamhex, Inc. (June 15, 2021); EC-Map
(June 12, 2021); FutureProof Technologies, Inc. (June 7, 2021); and
right.based on science GmbH (June 12, 2021).
\217\ See, e.g., infra Sections II.C.4 and II.I.
\218\ Pub. Law 104-67, 109 Stat. 737.
\219\ See Securities Act Section 27A and Exchange Act Section
21E. The statutory safe harbors by their terms do not apply to
forward-looking statements included in financial statements prepared
in accordance with generally accepted accounting principles
(``GAAP''). The statutory safe harbors also would not apply to
forward-looking statements made: (i) In connection with an initial
public offering; a tender offer; an offering by, or relating to the
operations of, a partnership, limited liability company, or a direct
participation investment program, an offering of securities by a
blank check company; a roll-up transaction; or a going private
transaction; or (ii) by an issuer of penny stock. See Section 27A(b)
of the Securities Act and Section 21E(b) of the Exchange Act. Also,
the statutory safe harbors do not, absent a rule, regulation, or
Commission order, apply to forward-looking statements by certain
``bad actor'' issuers under Section 27A(b)(1)(A) of the Securities
Act and Section 21E(b)(1)(A) of the Exchange Act.
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Request for Comment
8. Should we require a registrant to disclose any climate-related
risks that are reasonably likely to have a material impact on the
registrant, including on its business or consolidated financial
statements, which may manifest over the short, medium, and long term,
as proposed? If so, should we specify a particular time period, or
minimum or maximum range of years, for ``short,'' ``medium,'' and
``long term?'' For example, should we define short term as 1 year, 1-3
years, or 1-5 years? Should we define medium term as 5-10 years, 5-15
years, or 5-20 years? Should we define long-term as 10-20 years, 20-30
years, or 30-50 years? Are there other possible years or ranges of
years that we should consider as the definitions of short, medium, and
long term? What, if any, are the benefits to leaving those terms
undefined? What, if any, are the concerns to leaving those terms
undefined? Would the proposed provision requiring a registrant to
specify what it means by the short, medium, and long term mitigate any
such concerns?
9. Should we define ``climate-related risks'' to mean 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 proposed? Should we define climate-related risks to
include both physical and transition risks, as proposed? Should we
define physical risks to include both acute and chronic risks and
define each of those risks, as proposed? Should we define transition
risks, as proposed? Are there any aspects of the definitions of
climate-related risks, physical risks, acute risks, chronic risks, and
transition risks that we should revise? Are there other distinctions
among types of climate-related risks that we should use in our
definitions? Are there any risks that we should add to the definition
of transition risk? How should we address risks that may involve both
physical and transition risks?
10. We define transition risks to include legal liability,
litigation, or reputational risks. Should we provide more examples
about these types of risks? Should we require more specific disclosures
about how a registrant assesses and manages material legal liability,
litigation, or reputational risks that may arise from a registrant's
business operations, climate mitigation efforts, or transition
activities?
[[Page 21353]]
11. Some chronic risks might give rise to acute risks, e.g.,
drought (a chronic risk) that increases acute risks, such as wildfires,
or increased temperatures (a chronic risk) that increases acute risks,
such as severe storms. Should we require a registrant to discuss how
the acute and chronic risks they face may affect one another?
12. For the location of its business operations, properties or
processes subject to an identified material physical risk, should we
require a registrant to provide the ZIP code of the location or, if
located in a jurisdiction that does not use ZIP codes, a similar
subnational postal zone or geographic location, as proposed? Is there
another location identifier that we should use for all registrants,
such as the county, province, municipality or other subnational
jurisdiction? Would requiring granular location information, such as
ZIP codes, present concerns about competitive harm or the physical
security of assets? If so, how can we mitigate those concerns? Are
there exceptions or exemptions to a granular location disclosure
requirement that we should consider?
13. If a registrant determines that the flooding of its buildings,
plants, or properties is a material risk, should we require it to
disclose the percentage of those assets that are in flood hazard areas
in addition to their location, as proposed? Would such disclosure help
investors evaluate the registrant's exposure to physical risks related
to floods? Should we require this disclosure from all registrants,
including those that do not currently consider exposure to flooding to
be a material physical risk? Should we require this disclosure from all
registrants operating in certain industrial sectors and, if so, which
sectors? Should we define ``flood hazard area'' or provide examples of
such areas? If we should define the term, should we define it similar
to a related definition by the Federal Emergency Management Agency
(``FEMA'') as an area having flood, mudflow or flood-related erosion
hazards, as depicted on a flood hazard boundary map or a flood
insurance rate map? Should we require a registrant to disclose how it
has defined ``flood hazard area'' or whether it has used particular
maps or software tools when determining whether its buildings, plants,
or properties are located in flood hazard areas? Should we recommend
that certain maps be used to promote comparability? Should we require
disclosure of whether a registrant's assets are located in zones that
are subject to other physical risks, such as in locations subject to
wildfire risk?
14. If a material risk concerns the location of assets in regions
of high or extremely high water stress, should we require a registrant
to quantify the assets (e.g., book value and as a percentage of total
assets) in those regions in addition to their location, as proposed?
Should we also require such a registrant to disclose the percentage of
its total water usage from water withdrawn in high or extremely high
water stressed regions, as proposed? If so, should we include a
definition of a ``high water stressed region'' similar to the
definition provided by the World Resource Institute as a region where
40-80 percent of the water available to agricultural, domestic, and
industrial users is withdrawn annually? Should we similarly define an
``extremely high water stressed area'' as a region where more than 80
percent of the water available to agricultural, domestic, and
industrial users is withdrawn annually? Are there other definitions of
high or extremely high water stressed areas we should use for purposes
of this disclosure? Would these items of information help investors
assess a registrant's exposure to climate-related risks impacting water
availability? Should we require the disclosure of these items of
information from all registrants, including those that do not currently
consider having assets in high water-stressed areas a material physical
risk? Should we require these disclosures from all registrants
operating in certain industrial sectors and, if so, which sectors?
15. Are there other specific metrics that would provide investors
with a better understanding of the physical and transition risks facing
registrants? How would investors benefit from the disclosure of any
additional metrics that would not necessarily be disclosed or disclosed
in a consistent manner by the proposed climate risk disclosures? What,
if any, additional burdens would registrants face if they were required
to disclose additional climate risk metrics?
16. Are there other areas that should be included as examples in
the definitions of acute or chronic risks? If so, for each example,
please explain how the particular climate-related risk could materially
impact a registrant's operations or financial condition.
17. Should we include the negative impacts on a registrant's value
chain in the definition of climate-related risks, as proposed? Should
we define ``value chain'' to mean the upstream and downstream
activities related to a registrant's operations, as proposed? Are there
any upstream or downstream activities included in the proposed
definition of value chain that we should exclude or revise? Are there
any upstream or downstream activities that we should add to the
definition of value chain? Are there any upstream or downstream
activities currently proposed that should not be included?
18. Should we define climate-related opportunities as proposed?
Should we permit a registrant, at its option, to disclose information
about any climate-related opportunities that it is pursuing, such as
the actual or potential impacts of those opportunities on the
registrant, including its business or consolidated financial
statements, as proposed? Should we specifically require a registrant to
provide disclosure about any climate-related opportunities that have
materially impacted or are reasonably likely to impact materially the
registrant, including its business or consolidated financial
statements? Is there a risk that the disclosure of climate-related
opportunities could be misleading and lead to ``greenwashing''? If so,
how should this risk be addressed?
C. Disclosure Regarding Climate-Related Impacts on Strategy, Business
Model, and Outlook
1. Disclosure of Material Impacts
Once a registrant has described the climate-related risks
reasonably likely to have a material impact on the registrant's
business or consolidated financial statements as manifested over the
short, medium, and long term as required by proposed Item 1502(a),
proposed Item 1502(b) would require the registrant to describe the
actual and potential impacts of those risks on its strategy, business
model, and outlook.\220\ Several commenters stated that many
registrants have included largely boilerplate discussions about
climate-related risks and failed to provide a meaningful analysis of
the impacts of those risks on their businesses.\221\ The TCFD's most
recent assessment of public companies' voluntary climate reports also
noted that a minority of companies disclosed the impacts of climate-
related risks and opportunities on their businesses in alignment with
the TCFD framework.\222\ Because information about how climate-related
risks have impacted or are likely to impact a registrant's strategy,
[[Page 21354]]
business model, and outlook can be important for purposes of making an
investment or voting decision about the registrant, we are proposing
the provisions below to elicit robust and company-specific disclosure
on this topic.
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\220\ See proposed 17 CFR 229.1502(b).
\221\ See, e.g., letters from CALSTRS; Cardano Risk Management
Ltd.; Climate Risk Disclosure Lab (June 14, 2021); and Colorado PERA
(June 11, 2021).
\222\ See TCFD, 2021 Status Report, Section B (Oct. 2021)
(stating that, based on a review of reports of 1,651 public
companies from 2018-2020, while 38-52% of companies surveyed
described climate-related risks and opportunities during 2018-2020,
only 26-39% disclosed the impacts of those risks and opportunities
during this period).
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As proposed, a registrant would be required to disclose impacts on
its:
<bullet> Business operations, including the types and locations of
its operations;
<bullet> Products or services;
<bullet> Suppliers and other parties in its value chain;
<bullet> Activities to mitigate or adapt to climate-related risks,
including adoption of new technologies or processes;
<bullet> Expenditure for research and development; and
<bullet> Any other significant changes or impacts.\223\
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\223\ See proposed 17 CFR 229.1502(b)(1).
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A registrant would also be required to disclose the time horizon
for each described impact (i.e., as manifested in the short, medium, or
long term, as defined by the registrant when determining its material
climate-related risks).\224\
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\224\ See proposed 17 CFR 229.1502(b)(2).
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The proposed rules would require a registrant to discuss how it has
considered the identified impacts as part of its business strategy,
financial planning, and capital alloc
[…truncated; see source link]Indexed from Federal Register on April 11, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.