Rule2024-05137
The Enhancement and Standardization of Climate-Related Disclosures for Investors
Primary source
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Published
March 28, 2024
Effective
May 28, 2024
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission") is adopting amendments to its rules under the Securities Act of 1933 ("Securities Act") and Securities Exchange Act of 1934 ("Exchange Act") that will require registrants to provide certain climate-related information in their registration statements and annual reports. The final rules will require information about a registrant's climate- related risks that have materially impacted, or are reasonably likely to have a material impact on, its business strategy, results of operations, or financial condition. In addition, under the final rules, certain disclosures related to severe weather events and other natural conditions will be required in a registrant's audited financial statements.
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[Federal Register Volume 89, Number 61 (Thursday, March 28, 2024)]
[Rules and Regulations]
[Pages 21668-21921]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-05137]
[[Page 21667]]
Vol. 89
Thursday,
No. 61
March 28, 2024
Part II
Securities and Exchange Commission
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17 CFR Parts 210, 229, et al.
The Enhancement and Standardization of Climate-Related Disclosures for
Investors; Final Rule
Federal Register / Vol. 89 , No. 61 / Thursday, March 28, 2024 /
Rules and Regulations
[[Page 21668]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR 210, 229, 230, 232, 239, and 249
[Release Nos. 33-11275; 34-99678; File No. S7-10-22]
RIN 3235-AM87
The Enhancement and Standardization of Climate-Related
Disclosures for Investors
AGENCY: Securities and Exchange Commission.
ACTION: Final rules.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting amendments to its rules under the Securities Act of 1933
(``Securities Act'') and Securities Exchange Act of 1934 (``Exchange
Act'') that will require registrants to provide certain climate-related
information in their registration statements and annual reports. The
final rules will require information about a registrant's climate-
related risks that have materially impacted, or are reasonably likely
to have a material impact on, its business strategy, results of
operations, or financial condition. In addition, under the final rules,
certain disclosures related to severe weather events and other natural
conditions will be required in a registrant's audited financial
statements.
DATES:
Effective date: These final rules are effective on May 28, 2024.
Compliance date: See section II.O. for further information on
transitioning to the final rules.
FOR FURTHER INFORMATION CONTACT: Elliot Staffin, Senior Special
Counsel, and Kristin Baldwin, Special Counsel, Office of Rulemaking, at
(202) 551-3430, in the Division of Corporation Finance; or Erin Nelson,
Senior Special Counsel, and Meagan Van Orden, Professional Accounting
Fellow, in the Office of the Chief Accountant, at (202) 551-5300,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549.
SUPPLEMENTARY INFORMATION: We are adopting amendments to or adding the
following rules and forms:
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Commission CFR citation (17
reference CFR)
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Regulation S-X.................. Article 8-01...... Sec. 210.8-01
Article 14-01..... Sec. 210.14-01
Article 14-02..... Sec. 210.14-02
Regulation S-K.................. Items 1500 through Sec. Sec.
1508. 229.1500 \through
Item 601.......... 229.1508
Sec. 229.601
Regulation S-T.................. Item 405.......... Sec. 232.405
Securities Act \1\.............. Rule 436.......... Sec. 230.436
Form S-1.......... Sec. 239.11
Form S-3.......... Sec. 239.13
Form S-11......... Sec. 239.18
Form S-4.......... Sec. 239.25
Form F-3.......... Sec. 239.33
Form F-4.......... Sec. 239.34
Exchange Act \2\................ Form 10........... Sec. 249.210
Form 20-F......... Sec. 249.220f
Form 10-Q......... Sec. 249.308a
Form 10-K......... Sec. 249.310
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\1\ 15 U.S.C. 77a et seq.
\2\ 15 U.S.C. 78a et seq.
Table of Contents
I. Introduction
A. Need for Enhanced and Standardized Climate-Related
Disclosures
B. Summary of the Final Rules
1. Content of the Climate-Related Disclosures
2. Presentation and Submission of the Climate-Related
Disclosures
3. Safe Harbor for Certain Climate-Related Disclosures
4. Phase in Periods
II. Discussion
A. Overview and Purpose of the Climate-Related Disclosure Rules
1. Proposed Rules
2. Comments
3. Final Rules
B. Commission Authority To Adopt Disclosure Rules
C. Disclosure of Climate-Related Risks
1. Definitions of Climate-Related Risks and Climate-Related
Opportunities (Items 1500 and 1502(a))
2. Time Horizons and the Materiality Determination (Item
1502(a))
D. Disclosure Regarding Impacts of Climate-Related Risks on
Strategy, Business Model, and Outlook
1. Disclosure of Material Impacts (Item 1502(b), (c), and (d))
2. Transition Plan Disclosure (Items 1500 and 1502(e))
3. Disclosure of Scenario Analysis If Used (Items 1500 and
1502(f))
4. Disclosure of a Maintained Internal Carbon Price (Item
1502(g))
E. Governance Disclosure
1. Disclosure of Board Oversight (Item 1501(a))
2. Disclosure of Management Oversight (Item 1501(b))
F. Risk Management Disclosure (Item 1503)
1. Proposed Rule
2. Comments
3. Final Rule
G. Targets and Goals Disclosure (Item 1504)
1. Proposed Rule
2. Comments
3. Final Rule
H. GHG Emissions Disclosure (Item 1505)
1. Proposed Rule
2. Comments
3. Final Rule
I. Attestation Over GHG Emissions Disclosure (Item 1506)
1. Overview
2. GHG Emissions Attestation Provider Requirements
3. GHG Emissions Attestation Engagement and Report Requirements
(Item 1506(a)(2) and (c))
4. Additional Disclosure by the Registrant (Item 1506(d))
5. Disclosure of Voluntary Assurance (Item 1506(e))
J. Safe Harbor for Certain Climate-Related Disclosures (Item
1507)
1. Proposed Rules
2. Comments
3. Final Rules
K. Financial Statement Effects (Article 14)
1. Introduction
2. Financial Impact Metrics
3. Expenditure Effects
4. Financial Estimates and Assumptions (Rule 14-02(h))
5. Opportunities
6. Financial Statement Disclosure Requirements
7. Inclusion of Disclosures in the Financial Statements (Rule
14-01(a))
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L. Registrants Subject to the Climate-Related Disclosure Rules
and Affected Forms
1. Proposed Rules
2. Comments
3. Final Rules
M. Structured Data Requirement (Item 1508)
1. Proposed Rules
2. Comments
3. Final Rules
N. Treatment for Purposes of the Securities Act and the Exchange
Act
1. Proposed Rules
2. Comments
3. Final Rules
O. Compliance Date
1. Proposed Rules
2. Comments
3. Final Rules
III. Other Matters
IV. Economic Analysis
A. Baseline and Affected Parties
1. Affected Parties
2. Current Commission Disclosure Requirements
3. Existing State and Other Federal Laws
4. International Disclosure Requirements
5. Current Market Practices
B. Broad Economic Considerations
1. Investor Demand for Additional Climate Information
2. Current Impediments to Climate Disclosures
C. Benefits and Costs
1. General Discussion of Benefits and Costs
2. Analysis of Specific Provisions
3. Quantifiable Direct Costs on Registrants
D. Other Economic Effects
E. Effects on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
F. Reasonable Alternatives
1. Adopt a More (or Less) Principles-Based Approach to
Regulation S-K Disclosures
2. Different Approaches to Assurance Over GHG Emissions
Disclosures
3. Different Thresholds for Financial Statement Disclosures
4. Permit Disclosures To Be Furnished Rather ThanFiled
5. Exempt SRCs/EGCs
6. Permit Registrants To Rely on Home-Country Disclosure
Frameworks/Substituted Compliance
7. Alternative Tagging Requirements
V. Paperwork Reduction Act
A. Summary of the Collections of Information
B. Current Inventory Update To Reflect $600 per Hour Rather Than
$400 per Hour Outside Professional Costs Rate
C. Summary of Comment Letters
D. Sources of Cost Estimates
E. Incremental and Aggregate Burden and Cost Estimates of the
Final Rules
1. Calculation of the Paperwork Burden Estimates of the Final
Rules
2. Estimated Number of Affected Respondents
3. Summary of the Estimated Burden Hour and Cost Increases
Resulting From the Final Rules
VI. Final Regulatory Flexibility Act Analysis
A. Need for, and Objectives of, the Final Amendments
B. Significant Issues Raised by Public Comments
1. Estimate of Affected Small Entities and Impact to Those
Entities
2. Consideration of Alternatives
C. Small Entities Subject to the Final Amendments
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
E. Agency Action To Minimize Effect on Small Entities
Statutory Authority
I. Introduction
Climate-related risks, their impacts, and a public company's
response to those risks can significantly affect the company's
financial performance and position.\3\ Accordingly, many investors and
those acting on their behalf--including investment advisers and
investment management companies--currently seek information to assess
how climate-related risks affect a registrant's business and financial
condition and thus the price of the registrant's securities. Investors
also seek climate-related information to assess a registrant's
management and board oversight of climate-related risks so as to inform
their investment and voting decisions. In light of these investor
needs, the Commission is adopting rules to require registrants to
provide certain information about climate-related risks that have
materially impacted, or are reasonably likely to have a material impact
on, the registrant's business strategy, results of operations, or
financial condition; the governance and management of such risks; and
the financial statement effects of severe weather events and other
natural conditions in their registration statements and annual reports.
This information, alongside disclosures on other risks that companies
face, will assist investors in making decisions to buy, hold, sell, or
vote securities in their portfolio.
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\3\ See infra section I.A. For purposes of this release, we use
the terms ``public companies,'' ``companies,'' ``registrants,'' and
``issuers'' interchangeably and, unless explained in the text, the
use of different terms in different places is not meant to connote a
significant difference.
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Many companies currently provide some information regarding
climate-related risks. For example, as discussed in more detail in
section IV.A.5 below, some studies show that a third of public
companies disclose information about climate-related risks, mostly
outside of Commission filings,\4\ and nearly 40 percent of all annual
reports contain some climate-related discussion.\5\ In addition,
Commission staff analysis found that approximately 20 percent of public
companies provide some information regarding their Scope 1 and 2
greenhouse gas (``GHG'') emissions, often outside of Commission
filings, with the highest rate of emissions disclosures found among
large accelerated filers.\6\ Among companies in the Russell 1000 Index,
based on one analysis, these numbers are even higher, with 90 percent
publicly disclosing some climate-related information \7\ and almost 60
percent providing disclosures regarding their GHG emissions.\8\
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\4\ See, e.g., Center for Capital Markets, 2021 Survey Report:
Climate Change & ESG Reporting from the Public Company Perspective,
available at <a href="https://www.centerforcapitalmarkets.com/wp-content/uploads/2021/08/CCMC_ESG_Report_v4.pdf">https://www.centerforcapitalmarkets.com/wp-content/uploads/2021/08/CCMC_ESG_Report_v4.pdf</a>, discussed infra in Section
IV.A.5.
\5\ See infra notes 2638-2639 and accompanying text.
\6\ See infra notes 2675-2676 and accompanying text.
\7\ See infra note 2666 and accompanying text.
\8\ See infra note 2683 and accompanying text.
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The climate-related information that these companies currently
provide, however, is inconsistent and often difficult for investors to
find and/or compare across companies. As a result, investors have
expressed the need for more detailed, reliable, and comparable
disclosure of information regarding climate-related risks. The
requirements adopted in this release meet that need by providing more
complete and decision-useful information about the impacts of climate-
related risks on registrants, improving the consistency, comparability,
and reliability of climate-related information for investors. As a
result, investors will be able to make more informed investment and
voting decisions.
As discussed in more detail throughout this release, disclosure of
certain climate-related matters is required in a number of Federal,
State, and foreign jurisdictions.\9\ Companies currently often provide
much of this information outside of Commission filings, in varying
levels of detail, and in different documents and formats. Additionally,
because of the importance of this information to investors, a variety
of third parties have developed climate-related reporting
frameworks.\10\ Use of reporting frameworks is also often voluntary.
Companies may disclose certain information under one
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or more frameworks, may provide only partial disclosures, or may choose
not to provide consistent information year over year. As a result,
reporting is fragmented and difficult for investors to compare across
companies or across reporting periods. As commenters have indicated,
this lack of consistency and comparability increases costs to investors
in obtaining and analyzing decision-useful information and impairs
investors' ability to make investment or voting decisions in line with
their risk preferences.\11\ Investors have asked for this information
in Commission filings, alongside other disclosures on the business,
results of operations, and financial condition of a registrant and
information on the other risks companies face to their business,
finances, and operations. Requiring these additional disclosures in
Commission filings will allow investors to evaluate together the range
of risks that a company faces, the existing and potential impacts of
those risks, and the way that company management assesses and addresses
those risks. Providing these disclosures in Commission filings also
will subject them to enhanced liability that provides important
investor protections by promoting the reliability of the disclosures.
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\9\ See, e.g., infra sections I.A (discussing certain
international initiatives) and II.A.3 (discussing the Inflation
Reduction Act and recent California laws).
\10\ See, e.g., Task Force on Climate-related Financial
Disclosures, About, available at <a href="https://www.fsb-tcfd.org/about/">https://www.fsb-tcfd.org/about/</a>;
CDP Worldwide (``CDP''), About us, available at <a href="https://www.cdp.net/en/info/about-us">https://www.cdp.net/en/info/about-us</a>; Sustainability Accounting Standards Board
(``SASB'') Standards, About us, available at <a href="https://sasb.org/about/">https://sasb.org/about/</a>
; and Global Reporting Initiative (``GRI''), About GRI, available at
<a href="https://www.globalreporting.org/about-gri/">https://www.globalreporting.org/about-gri/</a>. See also infra notes
148-151.
\11\ See, e.g., letters from AllianceBernstein (June 17, 2022)
(``AllianceBernstein''); Attorneys General from California and 19
other states (June 17, 2022) (``AGs of Cal. et al.''); California
Public Employees' Retirement System (June 15, 2022) (``CalPERS'');
California State Teachers' Retirement System (June 17, 2022)
(``CalSTRS''); Ceres (June 17, 2022) (``Ceres''); Domini Impact
Investments (June 17, 2022) (``Domini Impact''); Trillium Asset
Management (Oct. 20, 2022) (``Trillium''); and Wellington Management
Company (June 17, 2022) (``Wellington Mgmt.''); see also Proposing
Release, section I.B, note 42 and accompanying text; and infra
section IV.C. We discuss investors' need for more consistent,
comparable, and decision-useful disclosure about registrants'
climate-related risks in Sections I.A and II.A.3 below.
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The Commission has required disclosure of certain environmental
matters for the past 50 years,\12\ most recently issuing guidance in
2010 (``2010 Guidance'') on how existing rules may require disclosure
of climate-related risks and their impacts on a registrant's business
or financial condition.\13\ Since the Commission issued the 2010
Guidance, there has been growing recognition that climate-related risks
affect public companies' business, results of operations, and financial
condition.\14\ Our experience with the 2010 Guidance and current
practices regarding disclosure of this information led us to conclude
that, although many companies disclose some climate-related
information, there was a need to both standardize and enhance the
information available to investors about such matters and thus to
propose an updated approach.\15\ Since the proposal, ongoing regulatory
developments and market practices with respect to disclosure of
climate-related risks have only underscored the need for enhanced
disclosure requirements in this area.\16\ Although current disclosure
practices elicit some useful information about climate-related risks,
there remain significant deficiencies in the consistency and
completeness of this information. We have therefore concluded that
additional requirements are appropriate to ensure that investors have
access to more complete and reliable information that will enable them
to make informed investment and voting decisions.\17\
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\12\ See infra notes 202-203 and accompanying text.
\13\ See Commission Guidance Regarding Disclosure Related to
Climate Change, Release No. 33-9106 (Feb. 2, 2010) [75 FR 6290 (Feb.
8, 2010)] (``2010 Guidance''); and discussion infra notes 204-205
and accompanying text. See also infra section II.B.
\14\ See, e.g., letters from AllianceBernstein; Alphabet,
Autodesk, Dropbox, eBay, Hewlett Packard Enterprise, HP Inc., Intel,
Meta, PayPal, and Workday (June 17, 2022) (``Alphabet et al.'');
Amazon (June 17, 2022); CalPERS; CalSTRS; Eni SpA (June 16, 2022)
(``Eni SpA''); Pacific Investment Management Company (June 17, 2022)
(``PIMCO''); PricewaterhouseCoopers (June 17, 2022) (``PwC''); and
Wellington Mgmt. See also infra note 28 (discussing the Financial
Stability Oversight Council's (``FSOC's'') Report on Climate-Related
Financial Risk 2021).
\15\ See The Enhancement and Standardization of Climate-Related
Disclosures for Investors, Release No. 33-11042 (Mar. 21, 2022) [87
FR 21334 (Apr. 11, 2022)] (``Proposing Release'').
\16\ See infra Section II.A.3 for a discussion of recent foreign
and state regulatory developments regarding the disclosure of
climate-related risks, including the announcement by several
countries of their intention to adopt laws or regulations
implementing the International Sustainability Standards Board's
(``ISSB'') climate reporting standard in whole or part; and certain
recent California laws requiring the disclosure of climate-related
risks and greenhouse gas emissions by certain large companies.
\17\ Even after adoption of the final rules, the 2010 Guidance
will still be relevant because it discusses existing Commission
rules, such as those pertaining to a registrant's description of its
business and certain legal proceedings, which require disclosure
regarding, among other things, compliance with environmental laws
and regulations that are only tangentially mentioned in this
rulemaking. Registrants should continue to consider the 2010
Guidance as they evaluate their disclosure obligations in their
Description of Business, Risk Factors, Legal Proceedings, and
Management's Discussion and Analysis. These disclosures should be
based on the registrant's specific facts and circumstances.
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The rules that we are adopting respond to investors' concerns
regarding the adequacy of current disclosure practices while taking
into account comments received on the proposed rules. In general terms,
the final rules will elicit enhanced and more consistent and comparable
disclosure about the material risks that companies face and how
companies manage those risks by requiring:
<bullet> A description of any climate-related risks that have
materially impacted or are reasonably likely to have a material impact
on the registrant, including on its strategy, results of operations,
and financial condition, as well as the actual or potential material
impacts of those same risks on its strategy, business model, and
outlook;
<bullet> Specified disclosures, regarding a registrant's
activities, if any, to mitigate or adapt to a material climate-related
risk or use of transition plans, scenario analysis or internal carbon
prices to manage a material climate-related risk;
<bullet> Disclosure about any oversight by the registrant's board
of directors of climate-related risks and any role by management in
assessing and managing material climate-related risks;
<bullet> A description of any processes the registrant uses to
assess or manage material climate-related risks; and
<bullet> Disclosure about any targets or goals that have materially
affected or are reasonably likely to materially affect the registrant's
business, results of operations, or financial condition.
In addition, to facilitate investors' assessment of particular
types of risk, the final rules require:
<bullet> Disclosure of Scope 1 and/or Scope 2 emissions on a phased
in basis by certain larger registrants when those emissions are
material, and the filing of an attestation report covering the required
disclosure of such registrants' Scope 1 and/or Scope 2 emissions, also
on a phased in basis; and
<bullet> Disclosure of the financial statement effects of severe
weather events and other natural conditions including costs and losses.
A further summary of the final rules is presented below.\18\
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\18\ See infra section I.B.
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In crafting the final rules, we benefited from extensive public
comments. We received over 4,500 unique comment letters on the proposed
climate-related disclosure rules and over 18,000 form letters.\19\
Commenters included academics, accounting and audit firms, individuals,
industry groups, investor groups, law firms, non-governmental
organizations, pension funds, professional climate advisors,
professional investment advisers and investment management companies,
registrants, standard-setters, state
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government officials, and U.S. Senators and Members of the House of
Representatives. Many commenters generally supported the proposal to
require climate-related disclosure. Others opposed the proposed rules
in whole or in part. In addition, the Commission's Investor Advisory
Committee offered broad support for the proposal, with recommendations
for certain modifications to the proposed rules, as discussed in more
detail below.\20\ The Commission's Small Business Capital Formation
Advisory Committee made several recommendations, including that the
Commission exempt emerging growth companies (``EGCs'') \21\ and smaller
reporting companies (``SRCs'') \22\ from the final rules or otherwise
adopt scaled climate-related disclosure requirements for EGCs and
SRCs.\23\ We considered comments that were supportive as well as those
that were critical of aspects of the proposed rules, including comments
from investors as to the information they need to make informed
investment or voting decisions, as well as concerns expressed by
registrants, trade associations, and others with regard to compliance
burdens, liability risk, and our statutory authority. After considering
all comments, we are adopting final rules with modifications from the
proposal to better effectuate our goals in requiring these additional
disclosures while limiting the final rules' burdens on registrants.\24\
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\19\ These comments are available at <a href="https://www.sec.gov/comments/s7-10-22/s71022.htm">https://www.sec.gov/comments/s7-10-22/s71022.htm</a>. Unless otherwise noted, comments
referenced in this release pertain to these comments.
\20\ See U.S. Securities and Exchange Commission Investor
Advisory Committee Recommendation Related to Climate-Related
Disclosure Rule Proposals (Sept. 21, 2022), available at <a href="https://www.sec.gov/spotlight/investor-advisory-committee-2012/20220921-climate-related-disclosure-recommendation.pdf">https://www.sec.gov/spotlight/investor-advisory-committee-2012/20220921-climate-related-disclosure-recommendation.pdf</a> ``IAC
Recommendation''). Specifically, the Investor Advisory Committee
recommended the following changes to the proposed rules, as
discussed in more detail in section II below: (1) adding a
requirement for ``Management Discussion of Climate-Related Risks &
Opportunities''; (2) requiring disclosure of material facility
locations; and (3) eliminating the proposed requirement around board
expertise. In addition to the IAC Recommendation, in June 2022, the
Investor Advisory Committee held a meeting that included a panel
discussion regarding climate disclosures. See the minutes for that
meeting, including the panelists that participated in the
discussion, at <a href="https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac060922-minutes.pdf">https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac060922-minutes.pdf</a>. The Investor Advisory
Committee was established in Apr. 2012 pursuant to section 911 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act [Pub.
L. 111-203, sec. 911, 124 Stat. 1376, 1822 (2010)] (``Dodd-Frank
Act'') to advise and make recommendations to the Commission on
regulatory priorities, the regulation of securities products,
trading strategies, fee structures, the effectiveness of disclosure,
and initiatives to protect investor interests and to promote
investor confidence and the integrity of the securities marketplace.
\21\ An EGC is a registrant that had total annual gross revenues
of less than $1.235 billion during its most recently completed
fiscal year and has not met the specified conditions for no longer
being considered an EGC. See 17 CFR 230.405; 17 CFR 240.12b-2; 15
U.S.C. 77b(a)(19); 15 U.S.C. 78c(a)(80); and Inflation Adjustments
under Titles I and III of the JOBS Act, Release No. 33-11098 (Sep.
9, 2022) [87 FR 57394 (Sep. 20, 2022)].
\22\ An SRC is an issuer that is not an investment company, an
asset-backed issuer (as defined in 17 CFR 229.1101), or a majority-
owned subsidiary of a parent that is not an SRC 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. 17 CFR 229.10 (defining SRC
and also providing how and when an issuer determines whether it
qualifies as an SRC); 17 CFR 230.405 (same); 17 CFR 240.12-2 (same).
\23\ See U.S. Securities and Exchange Commission Small Business
Capital Formation Advisory Committee Recommendation Regarding the
Enhancement and Standardization of Climate-Related Disclosures for
Investors (July 13, 2022), available at <a href="https://www.sec.gov/spotlight/sbcfac/sbcfac-climate-related-disclosures-recommendation-050622.pdf">https://www.sec.gov/spotlight/sbcfac/sbcfac-climate-related-disclosures-recommendation-050622.pdf</a> (``SBCFAC Recommendation''). In addition, the Small
Business Capital Formation Advisory Committee highlights generally
in its parting perspectives letter that ``exemptions, scaling, and
phase-ins for new requirements where appropriate, allows smaller
companies to build their businesses and balance the needs of
companies and investors while promoting strong and effective U.S.
public markets.'' See Parting Perspectives Letter, U.S. Securities
and Exchange Commission Small Business Capital Formation Advisory
Committee (Feb. 28, 2023), available at <a href="https://www.sec.gov/files/committee-perspectives-letter-022823.pdf">https://www.sec.gov/files/committee-perspectives-letter-022823.pdf</a>. Finally, we note that
participants in the Commission-hosted Small Business Forum in 2023
recommended that the Commission revise the proposed rules to exempt
SRCs, non-accelerated filers, EGCs, and other midsized companies and
to consider scaling and delayed compliance (``Small Business Forum
Recommendation (2023)''); participants in 2022 and 2021 Small
Business Forums similarly recommended the Commission provide
exemptions or scaled requirements for small and medium-sized
companies in connection with any new ESG disclosure requirements
adopted by the Commission. See Report on the 42nd Annual Small
Business Forum (April 2023), available at <a href="https://www.sec.gov/files/2023_oasb_annual_forum_report_508.pdf">https://www.sec.gov/files/2023_oasb_annual_forum_report_508.pdf</a>; Report on the 41st Annual
Small Business Forum (April 2022), available at <a href="https://www.sec.gov/files/2022-oasb-annual-forum-report.pdf">https://www.sec.gov/files/2022-oasb-annual-forum-report.pdf</a>; and Report on the 40th
Annual Small Business Forum (May 2021), available at <a href="https://www.sec.gov/files/2021_OASB_Annual_Forum_Report_FINAL_508.pdf">https://www.sec.gov/files/2021_OASB_Annual_Forum_Report_FINAL_508.pdf</a>. See
also U.S. Securities and Exchange Commission Office of the Advocate
for Small Business Capital Formation, Annual Report Fiscal Year 2023
(``2023 OASB Annual Report''), available at <a href="https://www.sec.gov/files/2023-oasb-annual-report.pdf">https://www.sec.gov/files/2023-oasb-annual-report.pdf</a>, at 84-85 (recommending generally
that in engaging in rulemaking that affects small businesses, the
Commission tailor the disclosure and reporting framework to the
complexity and size of operations of companies, either by scaling
obligations or delaying compliance for the smallest of the public
companies). The Small Business Capital Formation Advisory Committee
was established in Dec. 2016 pursuant to the Small Business Advocate
Act of 2016 [Public Law 114-284 (2016)] to advise the Commission on
rules, regulations, and policies with regard to the Commission's
mission of protecting investors, maintaining fair, orderly, and
efficient markets, and facilitating capital formation, as such
rules, regulations, and policies relate to: capital raising by
emerging, privately held small businesses (``emerging companies'')
and publicly traded companies with less than $250,000,000 in public
market capitalization (``smaller public companies'') through
securities offerings, including private and limited offerings and
initial and other public offerings; trading in the securities of
emerging companies and smaller public companies; and public
reporting and corporate governance requirements of emerging
companies and smaller public companies.
\24\ See infra section I.B for a summary of changes from the
proposed rules, including the addition of materiality qualifiers in
certain rule provisions and revisions to make the final rules less
prescriptive.
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As the Commission explained when proposing the climate disclosure
rules,\25\ while climate-related issues are subject to various other
regulatory schemes, our objective is limited to advancing the
Commission's mission to protect investors, maintain fair, orderly, and
efficient markets, and promote capital formation by providing
disclosure to investors of information important to their investment
and voting decisions. We are adopting the final rules to advance these
investor protection, market efficiency and capital formation
objectives, consistent with our statutory authority, and not to address
climate-related issues more generally. The final rules should be read
in that context. Thus, for example, in those instances where the rules
reference materiality--consistent with our existing disclosure rules
and market practices--materiality refers to the importance of
information to investment and voting decisions about a particular
company, not to the importance of the information to climate-related
issues outside of those decisions. The Commission has been and remains
agnostic about whether or how registrants consider or manage climate-
related risks. Investors have expressed a need for this information on
risks in valuing the securities they currently hold or are considering
purchasing. While we recognize that the rules will impose burdens on
registrants, we note that the degree of that burden will vary depending
upon the circumstances facing individual registrants, as not every
registrant will be required to provide all disclosures specified under
the final rules. Moreover, as discussed further throughout the release,
we believe that those burdens are justified by the informational
benefits of the disclosures to investors.
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\25\ See Proposing Release, section I.
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A. Need for Enhanced and Standardized Climate-Related Disclosures
The importance of climate-related disclosures for investors has
grown as investors,\26\ companies, and the markets
[[Page 21672]]
have recognized that climate-related risks \27\ can affect a company's
business and its current and longer-term financial performance and
position in numerous ways.\28\ Climate-related natural disasters can
damage issuers' assets, disrupt their operations, and increase their
costs.\29\ Any widespread market-based transition to lower carbon
products, practices, and services--triggered, for example, by recent or
future changes in consumer preferences \30\ or the availability of
financing, technology, and other market forces \31\--can lead to
material changes in a company's business model or strategy and may have
a material impact on a registrant's financial condition or
operations.\32\
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\26\ Throughout this release, we refer to investors to include
retail investors, institutional investors, and other market
participants (such as financial analysts, investment advisers, and
portfolio managers) that use disclosures in Commission filings as
part of their analysis and to help investors.
\27\ The Commission has a long history of requiring disclosures
to investors of information about risks facing registrants. See
infra notes 184-191 and accompany text for a discussion of that
history. In that time, the Commission has described those risks
using differently terminology, but has largely focused on the same
concepts. See, e.g., 17 CFR 229.105(a) (Where appropriate, provide
under the caption ``Risk Factors'' a discussion of the material
factors that make an investment in the registrant or offering
speculative or risky.); Disclosure of Accounting Policies for
Derivative Financial Instruments and Derivative Commodity
Instruments and Disclosure of Quantitative and Qualitative
Information About Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments, and Derivative Commodity
Instruments, Release No. 33-7386 (Jan. 31, 1997) [62 FR 6044 at n.12
(Feb. 10, 1997)] (Requiring disclosure of qualitative and
quantitative information about market risk for derivatives and other
financial instruments; Market risk is the risk of loss arising from
adverse changes in market rates and prices, such as interest rates,
foreign currency exchange rates, commodity prices, and other
relevant market rate or price changes (e.g., equity prices).);
Guides for Preparation and Filing of Registration Statements,
Release No. 33-4666 (Feb. 7, 1964) [29 FR 2490, 2492 (Feb. 15,
1964)] (In many instances the securities to be offered are of a
highly speculative nature. The speculative nature may be due to such
factors as an absence of operating history of the registrant, an
absence of profitable operations in recent periods, the financial
position of the registrant or the nature of the business in which
the registrant is engaged or proposes to engage. . . In such
instances, and particularly where a lengthy prospectus cannot be
avoided, there should be set forth immediately following the cover
page of the prospectus a carefully organized series of short,
concise paragraphs summarizing the principal factors which make the
offering speculative with references to other parts of the
prospectus where complete information with respect to such factors
is set forth.).
\28\ For example, FSOC's Report on Climate-Related Financial
Risk 2021 found that investors and businesses 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. See 2021 FSOC Report, Chapter
1: From Climate-Related Physical Risks to Financial Risks; From
Climate-related Transition Risks to Financial Risks. In 2023 FSOC
repeated its concern that climate-related risks are an emerging and
increasing threat to U.S. financial stability and stated that
climate-related financial risk can manifest as and amplify
traditional risks, such as credit, market, liquidity, operational,
compliance, reputational, and legal risks. See FSOC, Annual Report
2023; see also letters from AGs of Cal. et al.; Ceres; PIMCO; and
Wellington Mgmt; infra note 99 and accompanying text.
\29\ See, e.g., Greg Ritchie, Bloomberg, 90% of World's Biggest
Firms Will Have at Least One Asset Exposed to Climate Risk, Fresh
Data Show (Sept. 15, 2022) (stating that over 90% of the world's
largest companies will have at least one asset financially exposed
to climate risks such as wildfires or floods by the 2050s, and more
than a third of those companies will see at least one asset lose 20%
or more of its value as a result of climate-related events).
\30\ See, e.g., McKinsey & Company, How electric vehicles will
shape the future (Apr. 23, 2022), available at <a href="https://www.mckinsey.com/featured-insights/themes/how-electric-vehicles-will-shape-the-future">https://www.mckinsey.com/featured-insights/themes/how-electric-vehicles-will-shape-the-future</a> (predicting that by 2035, the major automotive
markets will be fully electric).
\31\ See, e.g., Amrith Ramkumar, Wall Street Journal, JPMorgan
Makes One of the Biggest Bets Ever on Carbon Removal (May 23, 2023),
available at <a href="https://www.wsj.com/articles/jpmorgan-makes-one-of-the-biggest-bets-ever-on-carbon-removal-c7d5fe63">https://www.wsj.com/articles/jpmorgan-makes-one-of-the-biggest-bets-ever-on-carbon-removal-c7d5fe63</a> (noting that ``JPMorgan
Chase has agreed to invest more than $200 million to purchase
credits from several companies in the nascent [carbon removal]
industry'').
\32\ See, e.g., BlackRock, Managing the net-zero transition
(Feb. 2022), available at <a href="https://www.blackrock.com/corporate/literature/whitepaper/bii-managing-the-net-zero-transition-february-2022.pdf">https://www.blackrock.com/corporate/literature/whitepaper/bii-managing-the-net-zero-transition-february-2022.pdf</a> (``On top of physical climate risks, companies and asset
owners must now grapple with the transition [to a net-zero economy].
Economies will be reshaped as carbon emissions are cut. The
transition will involve a massive reallocation of resources. Supply
and demand will shift, with mismatches along the way. Value will be
created and destroyed across companies.'').
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In addition to these market forces, changes in law, regulation, or
policy may prompt companies to transition to lower carbon products,
practices, and services. For example, governments including the United
States and others throughout the world have made public commitments to
transition to a lower carbon economy.\33\ Efforts towards meeting GHG
reduction goals \34\ could have financial effects that materially
impact registrants.\35\ Recently both the Federal Government and
several State governments have adopted or proposed laws and regulations
that incentivize companies to reduce their GHG emissions and transition
to a lower carbon economy in a variety of ways.\36\ How a registrant
assesses and plans in response to such legislative and regulatory
efforts and going forward complies with such laws and regulations, may
have a significant impact on its financial performance and investors'
return on their investment in the company.
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\33\ See United Nations, Net Zero, available at <a href="https://www.un.org/en/climatechange/net-zero-coalition">https://www.un.org/en/climatechange/net-zero-coalition</a> (``More than 140
countries, including the biggest polluters--China, the United
States, India and the European Union--have set a net-zero target. .
. .'').
\34\ See, e.g., Press Statement, Antony J. Blinken, Secretary of
State, The United States Officially Rejoins the Paris Agreement
(Feb. 19, 2021), available at <a href="https://www.state.gov/the-united-states-officially-rejoins-the-paris-agreement/">https://www.state.gov/the-united-states-officially-rejoins-the-paris-agreement/</a>. Over 190 countries
have signed the Paris Climate Agreement, which aims to limit global
temperature rise. 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 including
the U.S. formed a coalition to reduce methane emissions by 30% by
2030. See David Worford, COP26 Net Zero Commitments will Speed
Energy Transition, Increase Pressure on Industries, According to
Moody's Report, Environment+Energy Leader (Nov. 17, 2021), available
at <a href="https://www.environmentenergyleader.com/2021/11/cop26-net-zero-commitments-will-speed-energy-transition-increase-pressure-on-industries-according-to-moodys-report/">https://www.environmentenergyleader.com/2021/11/cop26-net-zero-commitments-will-speed-energy-transition-increase-pressure-on-industries-according-to-moodys-report/</a>. At COP27, participating
countries (which included the U.S.) reaffirmed their commitment to
limit global temperature rise and agreed to provide ``loss and
damage'' funding for vulnerable countries hit hard by climate
disasters. See United Nations Climate Change, COP27 Reaches
Breakthrough Agreement on New ``Loss and Damage'' Fund for
Vulnerable Countries (Nov. 20, 2022), available at <a href="https://unfccc.int/news/cop27-reaches-breakthrough-agreement-on-new-loss-and-damage-fund-for-vulnerable-countries">https://unfccc.int/news/cop27-reaches-breakthrough-agreement-on-new-loss-and-damage-fund-for-vulnerable-countries</a>. More recently, at COP 28,
participating countries (which included the U.S.) signed an
agreement that includes commitments for ``deep emissions cuts and
scaled-up finance.'' See United Nations Climate Change, COP28
Agreement Signals ``Beginning of the End'' of the Fossil Fuel Era
(Dec. 13, 2023), available at <a href="https://unfccc.int/news/cop28-agreement-signals-beginning-of-the-end-of-the-fossil-fuel-era">https://unfccc.int/news/cop28-agreement-signals-beginning-of-the-end-of-the-fossil-fuel-era</a>.
\35\ See, e.g., letter from Eni SpA (``[C]ompanies should
discuss the reference scenario in which they are acting, providing
information about any emerging trends, demands, uncertainties,
commitments or events that are reasonably likely to have material
impacts on the company's future profitability and growth prospects
in dependence of likely or possible evolution of the regulatory or
competitive environment in response to the global need to achieve
the goals of the Paris Agreement.''); see also infra note 108 and
accompanying text (citing comment letters that stated that, as
governments and registrants have increasingly made pledges and
enacted laws regarding a transition to a lower carbon economy, more
consistent and reliable climate-related disclosure has become
particularly important to help investors assess the reasonably
likely financial impacts to a registrant's business, results of
operations, and financial condition in connection with such
governmental pledges or laws and the related financial and
operational impacts of a registrant's progress in achieving its
publicly announced, climate-related targets and goals).
\36\ See infra section II.C for examples of Federal law and
State regulation that may be sources of climate-related risk,
particularly transition risk, for registrants.
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Further, as reflected in comments received in response to the
proposed rules and as discussed throughout this release, investors seek
to assess the climate-related risks that registrants face and evaluate
how registrants are measuring and responding to those risks.\37\
Effective disclosures regarding climate-related risks can help
investors better assess how registrants are measuring and responding to
those
[[Page 21673]]
risks. Those assessments can, in turn, inform investment and voting
decisions.
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\37\ See, e.g., infra notes 99-106 and accompanying text.
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We agree with the many commenters that stated that the current
state of climate-related disclosure has resulted in inconsistent,
difficult to compare, and frequently boilerplate disclosures, and has
therefore proven inadequate to meet the growing needs of investors for
more detailed, consistent, reliable, and comparable information about
climate-related effects on a registrant's business and financial
condition to use in making their investment and voting decisions.\38\
Since the Commission issued the 2010 Guidance, awareness of climate-
related risks to registrants has grown.\39\ Retail and institutional
investors \40\ and investor-led initiatives \41\ have increasingly
expressed the need for more reliable information about the effects of
climate-related risks, as well as information about how registrants
have considered and addressed climate-related risks and opportunities
when conducting operations and developing business strategy and
financial plans.\42\ At the same time, many companies have made
climate-related commitments to reduce GHG emissions or become ``net
zero'' by a particular date.\43\ In response, investors have expressed
the need for more detailed information to aid their investment and
voting decisions, including insight into the potential impacts on
registrants associated with fulfilling such commitments.\44\
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\38\ See, e.g., letters from AllianceBernstein; BlackRock, Inc.
(June 17, 2022) (``BlackRock''); CalPERS; CalSTRS; Calvert Research
and Management (June 17, 2022) (``Calvert''); Decatur Capital
Management (May 29, 2022); Domini Impact; Harvard Management Company
(June 6, 2022) (``Harvard Mgmt.''); Impax Asset Management (May 12,
2022) (``Impax Asset Mgmt.''); Trillium; and Wellington Mgmt. But
see, e.g., letters from the U.S. Chamber of Commerce (June 16, 2022)
(``Chamber'') (June 16, 2022); National Association of Manufacturers
(June 6, 2022) (``NAM'') (June 6, 2022); and Society for Corporate
Governance (June 17, 2022) (``Soc. Corp. Gov.'').
\39\ See, e.g., supra notes 28-32.
\40\ Although some commenters stated that only institutional
investors have demanded that the Commission adopt climate-related
disclosure requirements, see, e.g., letters from Chamber and Soc.
Corp. Gov., most individual retail investors and firms advising such
investors who submitted comments supported the proposed rules. See,
e.g., letters from Barry Gillespie (June 8, 2022); Betterment (June
17, 2022); Helene Marsh (June 7, 2022); and Rodney Smith (June 13,
2022); see also letter from Investment Company Institute (June 17,
2022) (``ICI'') (supporting ``key components of the proposal'' and
noting that its ``members, US regulated funds . . . serv[e] more
than 100 million investors'' and ``clearly have a significant
interest in how the nature and availability of climate-related risk
information provided by public companies evolves'' and ``analyze
this, and other, information in formulating their investment
decisions on behalf of those millions of long-term individual
investors'').
\41\ See Proposing Release, section I.C.1 for a discussion of
some of these investor-led initiatives. Among other initiatives
discussed in the Proposing Release, 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. 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>. 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 $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. 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-Statementto-Governments-on-the-Climate-Crisis.pdf">https://theinvestoragenda.org/wp-content/uploads/2021/09/2021-Global-Investor-Statementto-Governments-on-the-Climate-Crisis.pdf</a>. But see
letter from Lawrence Cunningham for Twenty Professors of Law and
Finance, George Washington University (Feb. 29, 2024) (noting that
some large institutional asset managers or investors have recently
withdrawn membership from certain of the investor-led initiatives
described in the Proposing Release).
\42\ See, e.g., letters from AllianceBernstein; CalPERS;
CalSTRS; Domini Impact; Harvard Mgmt; Impax Asset Mgmt; Trillium;
and Wellington Mgmt.
\43\ See Proposing Release, section I.C.1. See also Dieter
Holger and Pierre Bertrand, U.N. Group Recommends Stricter Rules
Over Net-Zero Pledges, The Wall Street Journal (Nov. 8, 2022)
(stating that roughly 800 of the world's 2,000 largest public
companies by revenue have committed to get to net zero emissions by
2050 or sooner); and United Nations, Recognizing growing urgency,
global leaders call for concrete commitments for clean, affordable
energy for all by 2030 and net-zero emissions by 2050 (May 26,
2021).
\44\ See, e.g., letters from Calvert; Ceres; Investment Adviser
Association (June 17, 2022) (``IAA''); and PIMCO. See also Climate
Action 100+, As The 2023 Proxy Season Continues, Investors Are
Calling On Climate Action 100+ Focus Companies For More Robust
Climate Action (May 9, 2023) (stating that in addition to more
robust corporate governance on climate, investors are calling for
disclosure on key issues including greenhouse gas emissions targets,
transition plans (including policies to ensure a just transition for
workers and communities), and reporting on methane measurements);
Climate Action 100+, Climate Action 100+ Net Zero Company Benchmark
Shows Continued Progress On Ambition Contrasted By A Lack Of
Detailed Plans Of Action (Oct. 18, 2023); and Dieter Holger,
Corporate Climate Plans Fall Well Short of Targets, With a Few
Bright Spots, The Wall Street Journal (Feb. 13, 2023).
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B. Summary of the Final Rules
Having considered the comments received on the proposal, we are
adopting the final amendments described in this release with
modifications in response to those comments.\45\
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\45\ As stated above, the Commission received a large number of
comments on the proposal, and we considered all of those comments.
Nevertheless, considering the overlapping content and themes in the
comments, and for the sake of clarity, we have not cited each
individual comment letter in support of or against a particular
position in the discussion below.
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Like the proposed rules, the final rules' reporting framework has
structural elements, definitions, concepts, and, in some cases,
substantive requirements that are similar to those in the Task Force on
Climate-related Financial Disclosure (``TCFD''), an industry-led task
force charged with promoting better-informed investment, credit, and
insurance underwriting decisions.\46\ The TCFD reporting framework was
designed to elicit information to help investors better understand a
registrant's climate-related risks to make more informed investment
decisions.\47\ We therefore find that it is an appropriate reference
point for the final rules. Indeed, the core categories of the
framework, which focus on governance, risk management, strategy, and
metrics,\48\ align with the type of information called for by existing
disclosure requirements within Regulation S-K.\49\ Accordingly, where
consistent with our objectives, the authority Congress granted, and the
comments received, certain provisions in the final rules are similar to
the TCFD recommendations.\50\ Similarly, we have used concepts
developed by the GHG Protocol for aspects of the final rules, as it has
become a leading reporting standard for GHG emissions.\51\ Because
[[Page 21674]]
many registrants have elected to follow the TCFD recommendations when
voluntarily providing climate-related disclosures,\52\ and/or have
relied on the GHG Protocol when reporting their GHG emissions,\53\
building off these reporting frameworks will mitigate those
registrants' compliance burdens and help limit costs.\54\ Building off
the TCFD framework and the GHG Protocol will also benefit those
investors seeking to make comparisons between Commission registrants
and foreign companies not registered under the Federal securities laws
that make disclosures under the TCFD framework and GHG Protocol,
mitigating the challenges they experience when making investment and
voting decisions.\55\ Nevertheless, while the final rules use concepts
from both TCFD and the GHG Protocol where appropriate, the rules
diverge from both of those frameworks in certain respects where
necessary for our markets and registrants and to achieve our specific
investor protection and capital formation goals.
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\46\ 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>. In Apr. 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.
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. 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. For background on the TCFD and
development of its recommendations, see Proposing Release, section
I.D.1.
\47\ See TCFD, supra note 46, at ii-iii.
\48\ See TCFD, supra note 4646 (listing governance, strategy,
risk management, and metrics and targets as core elements of the
TCFD framework).
\49\ See, e.g., 17 CFR 229.105 (Risk factors), 17 CFR 229.303
(Management's discussion and analysis of financial condition and
results of operation), 17 CFR 229.401 (Directors, executive
officers, promoters and control persons), and 17 CFR 229.407
(Corporate governance).
\50\ As discussed below, a number of commenters recommended that
the Commission incorporate the TCFD recommendations into the final
rules. See infra notes 115-118 and accompanying text.
\51\ 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>. 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. See Greenhouse Gas
Protocol, About Us, available at <a href="https://ghgprotocol.org/about-us">https://ghgprotocol.org/about-us</a>.
The GHG Protocol, which is subject to updates periodically, has been
broadly incorporated into various sustainability reporting
frameworks, including the TCFD.
\52\ See, e.g., infra note 2690 and accompanying text
(describing a report finding that 50 percent of sustainability
reports from Russell 1000 companies aligned with the TCFD
recommendations). In addition, many registrants submit climate
disclosures to the CDP, formerly known as the ``Carbon Disclosure
Project,'' which is aligned with the TCFD framework. See CDP
Worldwide (``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> (last
visited Feb. 21, 2024); CDP, How companies can take action,
available at <a href="https://www.cdp.net/en/companies">https://www.cdp.net/en/companies</a> (noting that ``23,000+
companies representing two thirds of global market capitalization
disclosed through CDP in 2023''); see also CDP, About us, available
at <a href="https://www.cdp.net/en/info/about-us">https://www.cdp.net/en/info/about-us</a> (``CDP is a not-for-profit
charity that runs the global disclosure system for investors,
companies, cities, states and regions to manage their environmental
impacts. . . . CDP was established as the `Carbon Disclosure
Project' in 2000, asking companies to disclose their climate
impact.''). In addition, several international climate disclosure
initiatives are based on the TCFD recommendations. See infra section
II.A.3.
\53\ See infra section II.A; and Proposing Release, section
I.D.2; see also infra note 2621 (noting that, in the U.S. and other
jurisdictions, GHG emissions quantification and reporting are
generally based on the GHG Protocol).
\54\ See infra note 2760 and accompanying text.
\55\ Cf. infra notes 2568-2570 and accompanying text.
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1. Content of the Climate-Related Disclosures
The final rules will create a new subpart 1500 of Regulation S-K
and Article 14 of Regulation S-X. In particular, the final rules will
require a registrant to disclose information about the following items:
<bullet> Any climate-related risks identified by the registrant
that have had or are reasonably likely to have a material impact on the
registrant, including on its strategy, results of operations, or
financial condition in the short-term (i.e., the next 12 months) and in
the long-term (i.e., beyond the next 12 months); \56\
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\56\ See infra section II.D.1.
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<bullet> The actual and potential material impacts of any
identified climate-related risks on the registrant's strategy, business
model, and outlook, including, as applicable, any material impacts on a
non-exclusive list of items; \57\
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\57\ See infra sections II.D.1. That non-exclusive list is
comprised of the registrant's: (1) business operations, including
the types and locations of its operations, (2) products and
services, (3) suppliers, purchasers, or counterparties to material
contracts, to the extent known or reasonably available, (4)
activities to mitigate or adapt to climate-related risks, including
adoption of new technologies or processes, and (5) expenditure for
research and development.
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<bullet> If, as part of its strategy, a registrant has undertaken
activities to mitigate or adapt to a material climate-related risk, a
quantitative and qualitative description of material expenditures
incurred and material impacts on financial estimates and assumptions
that, in management's assessment, directly result from such mitigation
or adaptation activities; \58\
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\58\ See infra sections II.D.1.
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<bullet> If a registrant has adopted a transition plan to manage a
material transition risk, a description of the transition plan, and
updated disclosures in the subsequent years describing the actions
taken during the year under the plan, including how the actions have
impacted the registrant's business, results of operations, or financial
condition, and quantitative and qualitative disclosure of material
expenditures incurred and material impacts on financial estimates and
assumptions as a direct result of the disclosed actions; \59\
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\59\ See infra section II.D.2.
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<bullet> If a registrant uses scenario analysis and, in doing so,
determines that a climate-related risk is reasonably likely to have a
material impact on its business, results of operations, or financial
condition, certain disclosures regarding such use of scenario analysis;
\60\
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\60\ See infra section II.D.3.
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<bullet> If a registrant's use of an internal carbon price is
material to how it evaluates and manages a material climate-related
risk, certain disclosures about the internal carbon price; \61\
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\61\ See infra section II.D.4.
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<bullet> Any oversight by the board of directors of climate-related
risks and any role by management in assessing and managing the
registrant's material climate-related risks; \62\
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\62\ See infra section II.E.
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<bullet> Any processes the registrant has for identifying,
assessing, and managing material climate-related risks and, if the
registrant is managing those risks, whether and how any such processes
are integrated into the registrant's overall risk management system or
processes; \63\
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\63\ See infra section II.F.
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<bullet> If a registrant has set a climate-related target or goal
that has materially affected or is reasonably likely to materially
affect the registrant's business, results of operations, or financial
condition, certain disclosures about such target or goal, including
material expenditures and material impacts on financial estimates and
assumptions as a direct result of the target or goal or actions taken
to make progress toward meeting such target or goal; \64\
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\64\ See infra section II.G.
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<bullet> If a registrant is a large accelerated filer
(``LAF''),\65\ or an accelerated filer (``AF'') \66\ that is not
otherwise exempted, and its Scope 1 emissions and/or its Scope 2
emissions metrics are material, certain disclosure about those
emissions; \67\
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\65\ An LAF is 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 revenue test in paragraph (2) or (3)(iii)(B) of the
SRC definition in Rule 12b-2. 17 CFR 240.12b-2 (defining LAF and
providing how and when an issuer determines whether it qualifies as
an LAF).
\66\ An AF is 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; and
(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 revenue test
in paragraph (2) or (3)(iii)(B) of the SRC definition in Rule 12b-2.
17 CFR 240.12b-2 (defining AF and providing how and when an issuer
determines whether it qualifies as an AF).
\67\ See infra section II.H. The final rules define the terms
``Scope 1 emissions'' (direct GHG emissions from operations that are
owned or controlled by a registrant) and ``Scope 2 emissions''
(indirect GHG emissions from the generation of purchased or acquired
electricity, steam, heat, or cooling that is consumed by operations
owned or controlled by a registrant).
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[[Page 21675]]
<bullet> The capitalized costs, expenditures expensed, charges, and
losses incurred as a result of severe weather events and other natural
conditions, such as hurricanes, tornadoes, flooding, drought,
wildfires, extreme temperatures, and sea level rise, subject to
applicable one percent and de minimis disclosure thresholds; \68\
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\68\ See infra section II.K.
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<bullet> The capitalized costs, expenditures expensed, and losses
related to carbon offsets and renewable energy credits or certificates
(``RECs'') if used as a material component of a registrant's plans to
achieve its disclosed climate-related targets or goals; and \69\
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\69\ See infra section II.K.
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<bullet> If the estimates and assumptions a registrant uses to
produce the financial statements were materially impacted by risks and
uncertainties associated with severe weather events and other natural
conditions, such as hurricanes, tornadoes, flooding, drought,
wildfires, extreme temperatures, and sea level rise, or any disclosed
climate-related targets or transition plans, a qualitative description
of how the development of such estimates and assumptions was
impacted.\70\
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\70\ See infra section II.K.
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In addition, under the final rules, a registrant that is required
to disclose Scopes 1 and/or 2 emissions and is an LAF or AF must file
an attestation report in respect of those emissions subject to phased
in compliance dates. An AF must file an attestation report at the
limited assurance level beginning the third fiscal year after the
compliance date for disclosure of GHG emissions. An LAF must file an
attestation report at the limited assurance level beginning the third
fiscal year after the compliance date for disclosure of GHG emissions,
and then file an attestation report at the reasonable assurance level
beginning the seventh fiscal year after the compliance date for
disclosure of GHG emissions. The final rules also require a registrant
that is not required to disclose its GHG emissions or to include a GHG
emissions attestation report pursuant to the final rules to disclose
certain information if the registrant voluntarily discloses its GHG
emissions in a Commission filing and voluntarily subjects those
disclosures to third-party assurance.
The final rules reflect a number of modifications to the proposed
rules based on the comments we received. As discussed in more detail
below, we have revised the proposed rules in several respects,
including by:
<bullet> Adopting a less prescriptive approach to certain of the
final rules, including, for example, the climate-related risk
disclosure, board oversight disclosure, and risk management disclosure
requirements; \71\
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\71\ See infra sections II.C.1.c, II.E.1.c, and II.F.3 for
discussions of how we made these disclosure requirements less
prescriptive as compared to the proposed rules.
---------------------------------------------------------------------------
<bullet> Qualifying the requirements to provide certain climate-
related disclosures based on materiality, including, for example,
disclosures regarding impacts of climate-related risks, use of scenario
analysis, and maintained internal carbon price;
<bullet> Eliminating the proposed requirement to describe board
members' climate expertise;
<bullet> Eliminating the proposed requirement for all registrants
to disclose Scope 1 and Scope 2 emissions and instead requiring such
disclosure only for LAFs and AFs, on a phased in basis, and only when
those emissions are material and with the option to provide the
disclosure on a delayed basis;
<bullet> Exempting SRCs and EGCs from the Scope 1 and Scope 2
emissions disclosure requirement;
<bullet> Modifying the proposed assurance requirement covering
Scope 1 and Scope 2 emissions for AFs and LAFs by extending the
reasonable assurance phase in period for LAFs and requiring only
limited assurance for AFs;
<bullet> Eliminating the proposed requirement to provide Scope 3
emissions disclosure (which the proposal would have required in certain
circumstances);
<bullet> Removing the requirement to disclose the impact of severe
weather events and other natural conditions and transition activities
on each line item of a registrant's consolidated financial statements;
<bullet> Focusing the required disclosure of financial statement
effects on capitalized costs, expenditures expensed, charges, and
losses incurred as a result of severe weather events and other natural
conditions in the notes to the financial statements;
<bullet> Requiring disclosure of material expenditures directly
related to climate-related activities as part of a registrant's
strategy, transition plan and/or targets and goals disclosure
requirements under subpart 1500 of Regulation S-K rather than under
Article 14 of Regulation S-X;
<bullet> Extending a safe harbor from private liability for certain
disclosures, other than historic facts, pertaining to a registrant's
transition plan, scenario analysis, internal carbon pricing, and
targets and goals; \72\
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\72\ In addition, the existing safe harbors for forward-looking
statements under the Securities Act and Exchange Act will be
available for other aspects of the climate-related disclosures. See
Securities Act section 27A [15 U.S.C. 77z-2], Exchange Act section
21E [15 U.S.C. 78u-5], 17 CFR 230.175 (``Securities Act Rule 175'')
and 17 CFR 240.3b-6 (``Exchange Act Rule 3b-6'').
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<bullet> Eliminating the proposal to require a private company that
is a party to a business combination transaction, as defined by
Securities Act Rule 165(f), registered on Form S-4 or F-4 to provide
the subpart 1500 and Article 14 disclosures;
<bullet> Eliminating the proposed requirement to disclose any
material change to the climate-related disclosures provided in a
registration statement or annual report in a Form 10-Q (or, in certain
circumstances, Form 6-K for a registrant that is a foreign private
issuer that does not report on domestic forms); and
<bullet> Extending certain phase in periods.
2. Presentation and Submission of the Climate-Related Disclosures
The final rules provide that a registrant (both domestic and
foreign private issuer \73\) must:
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\73\ 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. See infra section II.L.3 for a
discussion of certain types of registrants (both domestic and
foreign private issuer) that are not subject to the final rules.
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<bullet> File the climate-related disclosure in its registration
statements and Exchange Act annual reports; \74\
---------------------------------------------------------------------------
\74\ See infra section II.N.3.
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<bullet> Include the climate-related disclosures required under
Regulation S-K, except for any Scopes 1 and/or 2 emissions disclosures,
in a separate, appropriately captioned section of its filing or in
another appropriate section of the filing, such as Risk Factors,
Description of Business, or Management's Discussion and Analysis of
Financial Condition and Results of Operations (``MD&A''), or,
alternatively, by incorporating such disclosure by reference from
another Commission filing as long as the disclosure meets the
[[Page 21676]]
electronic tagging requirements of the final rules; \75\
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\75\ See infra section II.A.3.
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<bullet> If required to disclose its Scopes 1 and 2 emissions,\76\
provide such disclosure:
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\76\ See, e.g., infra section II.H.3.c (noting that unlike the
proposed rules, which would have exempted SRCs from the requirement
to disclose Scope 3 emissions, the final rules will exempt SRCs and
EGCs from any requirement to disclose its GHG emissions, including
its Scopes 1 and 2 emissions).
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[cir] If a registrant filing on domestic forms, in its annual
report on Form 10-K, in its quarterly report on Form 10-Q for the
second fiscal quarter in the fiscal year immediately following the year
to which the GHG emissions metrics disclosure relates incorporated by
reference into its Form 10-K,or in an amendment to its Form 10-K filed
no later than the due date for the Form 10-Q for its second fiscal
quarter; \77\
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\77\ See infra section II.H.3.d.
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[cir] If a foreign private issuer not filing on domestic forms, in
its annual report on Form 20-F, or in an amendment to its annual report
on Form 20-F, which shall be due no later than 225 days after the end
of the fiscal year to which the GHG emissions metrics disclosure
relates; \78\ and
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\78\ See infra section II.H.3.d.
---------------------------------------------------------------------------
[cir] If filing a Securities Act or Exchange Act registration
statement, as of the most recently completed fiscal year that is at
least 225 days prior to the date of effectiveness of the registration
statement;
<bullet> If required to disclose Scopes 1 and 2 emissions, provide
such disclosure for the registrant's most recently completed fiscal
year and, to the extent previously disclosed, for the historical fiscal
year(s) included in the filing; \79\
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\79\ See infra section II.H.3.d.
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<bullet> If required to provide an attestation report over Scope 1
and Scope 2 emissions, provide such attestation report and any related
disclosures in the filing that contains the GHG emissions disclosures
to which the attestation report relates; \80\
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\80\ See infra section II.I.
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<bullet> Provide the financial statement disclosures required under
Regulation S-X for the registrant's most recently completed fiscal
year, and to the extent previously disclosed or required to be
disclosed, for the historical fiscal year(s) included in the filing, in
a note to the registrant's audited financial statements; \81\ and
---------------------------------------------------------------------------
\81\ See infra section II.K.
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<bullet> Electronically tag both narrative and quantitative
climate-related disclosures in Inline XBRL.\82\
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\82\ See infra section II.M.3.
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3. Safe Harbor for Certain Climate-Related Disclosures
The final rules provide a safe harbor for climate-related
disclosures pertaining to transition plans, scenario analysis, the use
of an internal carbon price, and targets and goals, provided pursuant
to Regulation S-K sections 229.1502(e), 229.1502(f), 229.1502(g), and
229.1504. The safe harbor provides that all information required by the
specified sections, except for historical facts, is considered a
forward-looking statement for purposes of the Private Securities
Litigation Reform Act (``PSLRA'') \83\ safe harbors for forward-looking
statements provided in section 27A of the Securities Act \84\ and
section 21E of the Exchange Act \85\ (``PSLRA safe harbors'').\86\
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\83\ Public Law 104-67, 109 Stat. 737.
\84\ 15 U.S.C. 77z-2.
\85\ 15 U.S.C. 78u-5.
\86\ See infra sections II.D and II.J.3.
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4. Phase in Periods
As discussed in more detail below,\87\ the final rules will be
phased in for all registrants, with the compliance date dependent upon
the status of the registrant as an LAF, an AF, a non-accelerated filer
(``NAF''),\88\ SRC, or EGC, and the content of the disclosure.
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\87\ See infra section II.O.
\88\ Although Rule 12b-2 defines the terms ``accelerated filer''
and ``large accelerated filer,'' see supra notes 65-66, it does not
define the term ``non-accelerated filer.'' If an issuer does not
meet the definition of AF or LAF, it is considered a NAF. See
Accelerated Filer and Large Accelerated Filer Definitions, Release
No. 34-88365 (Mar. 12, 2020) [85 FR 17178, 17179 n.5 (Mar. 26,
2020)].
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II. Discussion
A. Overview and Purpose of the Climate-Related Disclosure Rules
1. Proposed Rules
a. Consistent, Comparable, and Reliable Disclosures for Investors
The Commission proposed the climate-related disclosure rules in
order to elicit more consistent, comparable, and reliable information
for investors to enable them to make informed assessments of the impact
of climate-related risks on current and potential investments.\89\
Accordingly, the Commission proposed to amend Regulation S-K to add a
new subpart 1500 that would require a registrant to disclose: any
material climate-related impacts on its strategy, business model, and
outlook; its governance of climate-related risks; its climate-related
risk management; GHG emissions metrics; and climate-related targets and
goals, if any.\90\
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\89\ See Proposing Release, section I.B.
\90\ See id.
---------------------------------------------------------------------------
The Commission also proposed to amend Regulation S-X to add a new
article (Article 14), which would have required a registrant to
disclose in a note to its financial statements certain disaggregated
climate-related financial statement metrics.\91\ The proposed rules
would have required disclosure falling under the following three
categories of information: financial impact metrics; expenditure
metrics; and financial estimates and assumptions. The Commission
proposed the financial statement metrics requirement to increase
transparency about how climate-related risks impact a registrant's
financial statements.\92\ Under the proposed amendments to both
Regulation S-K and Regulation S-X, disclosure of climate-related
opportunities would be optional.
---------------------------------------------------------------------------
\91\ See id.
\92\ See Proposing Release, section II.A.1.
---------------------------------------------------------------------------
As noted above, the proposed rules were modeled on the TCFD
disclosure framework.\93\ The TCFD framework consists of 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.\94\ The Commission proposed
to model its climate-related disclosure rules on the TCFD framework
given that many registrants and their investors are already familiar
with the framework and are making disclosures voluntarily consistent
with the framework. The Commission indicated that this should help to
mitigate both the compliance burden for registrants and any burdens
faced by investors in analyzing the new disclosures and would
facilitate comparability across registrants.\95\
---------------------------------------------------------------------------
\93\ See supra section I.B.
\94\ See TCFD, supra note 4646, at iv.
\95\ See Proposing Release, section II.A.1.
---------------------------------------------------------------------------
b. Proposed Location of the Disclosure
In proposing to include the climate-related disclosure rules in
Regulation S-K and Regulation S-X, the Commission stated its belief
that the proposed disclosure would be fundamental to investors'
understanding of 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 financial condition.\96\ The Commission proposed to
require a registrant to include the climate-related disclosure in
Securities
[[Page 21677]]
Act or Exchange Act registration statements and Exchange Act annual
reports in a separately captioned ``Climate-Related Disclosure''
section and in the financial statements. The Commission stated that the
proposed presentation would facilitate review of the climate-related
disclosure by investors alongside other relevant company financial and
non-financial information and further the comparability of the
disclosure across registrants.\97\
---------------------------------------------------------------------------
\96\ See Proposing Release, section II.A.2.
\97\ See id.
---------------------------------------------------------------------------
The Commission also proposed to permit a registrant to incorporate
by reference disclosure from other parts of the registration statement
or annual report (e.g., Risk Factors, MD&A, Description of Business, or
the financial statements) or from other filed or submitted reports into
the Climate-Related Disclosure section if it would be responsive to the
topics specified in the proposed Regulation S-K items and if the
registrant satisfied the incorporation by reference requirements under
the Commission's rules and forms. As the Commission explained, 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.\98\
---------------------------------------------------------------------------
\98\ See id.
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2. Comments
Many commenters, including both investors and registrants, stated
that climate-related risks can have material impacts on companies'
financial position or performance.\99\ Commenters indicated that when
it is available, information about climate-related risks is currently
used to assess the future financial performance of public companies and
inform investment decision-making.\100\ Some commenters provided
specific examples of how that type of information helps investors make
investment decisions today.\101\ However, many commenters stated that
the Commission's current reporting requirements do not yield adequate
or sufficient information regarding climate-related risks.\102\ Many
commenters also expressed the view that the current, largely voluntary
reporting of climate-related information under various third-party
frameworks, which differ in certain respects, has allowed registrants
to selectively choose which climate-related disclosures to provide and
has failed to produce complete, consistent, reliable, and comparable
information with the level of detail needed by investors to assess the
financial impact of climate-related risks on registrants.\103\
Commenters stated that, despite the Commission's issuance of the 2010
Guidance, registrants often provided climate-related disclosure that is
boilerplate, with some being or bordering on ``greenwashing.'' \104\
Commenters further indicated that investors, both institutional and
retail,\105\ were in need of more consistent and comparable climate-
related disclosure to enable them to make fully informed decisions and
ensure securities are priced to better reflect climate-related
risk.\106\ Commenters indicated that adoption of mandatory, climate-
related disclosure rules would improve the timeliness, quality, and
reliability of climate-related information, which would facilitate
investors' comparison of climate-related risks and lead to more
accurate securities valuations.\107\ Commenters also stated that, as
governments and registrants have increasingly made pledges and enacted
laws regarding a transition to a lower carbon economy, more consistent
and reliable climate-related disclosure has become particularly
important to help investors assess the reasonably likely financial
impacts to a registrant's business, results of operations, and
financial condition in connection with such governmental pledges or
laws and the related financial and operational impacts of a
registrant's progress in achieving its publicly announced, climate-
related targets and goals.\108\
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\99\ See, e.g., letters from AllianceBernstein; Alphabet et al.;
Amazon (June 17, 2022); Americans for Financial Reform Education
Fund, Public Citizen, Sierra Club, Ocean Conservancy, and the
Sunrise Project (June 16, 2022) (``Amer. for Fin. Reform, Sunrise
Project et al.''); Bloomberg L.P. (June 22, 2022) (``Bloomberg'');
CalPERS (June 15, 2022); CalSTRS (June 17, 2022); Calvert; Ceres;
Harvard Mgmt.; IAA; Miller/Howard; Morningstar, Inc. (June 16, 2022)
(``Morningstar''); Soros Fund; and Wellington Mgmt.
\100\ See, e.g., letters from AllianceBernstein; Amer. for Fin.
Reform, Sunrise Project et al.; CalPERS; CalSTRS; Calvert; Ceres;
Miller/Howard; Soros Fund; and Wellington Mgmt.
\101\ See, e.g., letters from CalSTRS; Calvert; and Wellington
Mgmt.
\102\ See, e.g., letters from AllianceBernstein; Amer. for Fin.
Reform, Sunrise Project et al.; As You Sow (June 21, 2022);
BlackRock; Bloomberg; Boston Common Asset Mgmt.; CalPERS; CalSTRS;
Calvert; Ceres; Consumer Federation of America (June 17, 2022)
(``CFA''); Franklin Templeton Investments (June 17, 2022)
(``Franklin Templeton''); Harvard Mgmt.; IAA; Miller/Howard;
Morningstar; New York State Comptroller (June 3, 2022) (``NY St.
Comptroller''); Principles for Responsible Investment (Consultation
Response) (June 17, 2022) (``PRI''); Soros Fund; Union of Concerned
Scientists (June 17, 2022) (``UCS''); US SIF (June 17, 2022); and
Wellington Mgmt.
\103\ See, e.g., letters from BlackRock; Bloomberg; Calvert;
Ceres; Franklin Templeton; Miller/Howard; PRI; and US SIF.
\104\ See, e.g., letters from Ceres; Interfaith Center on
Corporate Responsibility (June 17, 2022) (``ICCR''); and Maple-Brown
Abbott (May 31, 2022) (``Maple-Brown''). As the Commission stated
when proposing the climate disclosure rules, there does not appear
to be a universally accepted definition of ``greenwashing.'' See
Proposing Release, section IV.C.1. The Commission did not define
greenwashing in the Proposing Release and is not defining it now. As
a general matter, others have defined greenwashing to mean the set
of activities conducted by firms or funds to falsely convey to
investors that their investment products or practices are aligned
with environmental or other ESG principles. See Proposing Release,
section IV.C.1. See also OICU-IOSCO Supervisory Practices to Address
Greenwashing, (Dec 2023), available at <a href="https://www.iosco.org/library/pubdocs/pdf/IOSCOPD750.pdf">https://www.iosco.org/library/pubdocs/pdf/IOSCOPD750.pdf</a>.
\105\ See, e.g., letters from Americans for Financial Reform
Education Fund and Public Citizen (June 16, 2022) (``Amer. for Fin.
Reform and Public Citizen'') (noting that the commenters
commissioned a survey of retail investors and describing the results
of that survey as ``show[ing] that investors care about climate-
related risks and opportunities of public companies, support the SEC
requiring climate-related disclosures with third-party audit, and
would factor the information disclosed into their investment
practices''); Ceres (Dec. 2, 2022); and PRI; see also supra note 40
(noting that most individual retail investors and firms advising
such investors who submitted comments supported the proposed rules
and citing comment letters from some retail investors and investment
advisers in support of that proposition); infra note 139 (citing
several comment letters in support of the proposition that retail
investors have stated that they found much of the voluntary climate-
related reporting to be lacking in quality and completeness and
difficult to compare and as a result have incurred costs and
inefficiencies when attempting to assess climate-related risks and
their effect on the valuation of a registrant's securities). But
see, e.g., letter from Soc. Corp. Gov. (asserting that the retail
investor survey in the letter from Amer. for Fin. Reform and Public
Citizen ``do[es] not support the position that retail investors
demand more climate-related information in companies' SEC filings,
and certainly not the detailed disclosures that would be required
under the Proposed Rule'' based on its criticisms of the questions
in the survey and calculation methodologies that the letter Amer.
for Fin. Reform and Public Citizen used to report findings from the
survey).
\106\ See, e.g., letters from Bloomberg; Ceres; and Miller/
Howard.
\107\ See, e.g., letters from CalSTRS (stating that ``[u]sing
the TCFD framework as the basis for guiding issuers to more
comparable disclosures would help [investors] more easily compare
companies' approach to climate risk management in a timelier
fashion''); Ceres (stating that ``the proposed rule would promote
both allocative and informational efficiency'' and that ``[t]imely,
comparable information about each company's climate related risks
and opportunities would improve informational efficiency, leading to
more accurate valuation''); and PwC (stating that ``[m]andatory
disclosure in annual filings--including the notes to the financial
statements--would enhance comparability while ensuring that the
timeliness, quality, and reliability of climate information is
commensurate with that of the financial data'').
\108\ See, e.g., letters from Amer. for Fin. Reform (Dec. 1,
2022) (stating that, with passage of the Inflation Reduction Act,
investors will need the Commission's proposed climate-related
disclosures to determine which companies and sectors are best
positioned and ready to capitalize on the IRA's GHG reduction
incentives over the coming decade, and to analyze the progress
towards and profitability of companies' transition strategies in
this new investment context); CalPERS; and Ceres.
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[[Page 21678]]
Other commenters, however, opposed adoption of the proposed rules
and requested either that the Commission rescind the proposal or make
significant revisions in the final rules.\109\ Some of these
commenters, while opposing specific aspects of the proposed rules,
agreed with the overall intent of the proposal or otherwise stated that
rules requiring climate-related information were appropriate and would
be helpful to investors.\110\ As discussed in more detail below, other
commenters asserted that the Commission lacks statutory authority to
adopt the proposed climate-related disclosure rules.\111\ Other
commenters asserted that current voluntary reporting practices are
sufficient to serve the needs of investors and markets, and so the
proposed rules are unnecessary.\112\ Similarly, some opposing
commenters stated that, because in their view the Commission's current
disclosure regime already requires a registrant to disclose climate-
related risks if material, adoption of the proposed rules would impose
a significant burden on registrants while resulting in little
additional benefit for investors.\113\ Opposing commenters further
stated that, because the proposed rules were overly prescriptive and
not bound in every instance by materiality, their adoption would result
in the disclosure of a large volume of immaterial information that
would be confusing for investors.\114\
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\109\ See, e.g., letters from American Bar Association, Business
Law Section (June 24, 2022) (``ABA''); Chamber; David R. Burton,
Senior Fellow in Economic Policy, The Heritage Foundation (June 17,
2022) (``D. Burton, Heritage Fdn.''); NAM; and Soc. Corp. Gov. See
also Form Letter AG.
\110\ See letters from Bank of America (June 17,2022) (``BOA'')
(``Various stakeholders, including asset owners and asset managers,
will benefit from consistent, standardized disclosures addressing
climate-related risks and opportunities to help them make decisions
on where best to deploy capital in alignment with investor
goals.''); Bank Policy Institute (June 16, 2022) (``BPI''); Dominion
Energy, Inc. (June 17, 2022) (``Dominion Energy'') (``We believe
climate-related disclosures are important to our investors and
support the Commission's efforts to design rules and guidance to
provide investors with the disclosures that they need in order to
make informed decisions.''); Long-Term Stock Exchange (June 17,
2022) (``LTSE'') (stating that climate ``represents an investment
risk, and investors deserve to understand what public companies are
doing to address this issue. . . [w]e believe the proposal
represents a significant step toward standardizing, clarifying and
verifying disclosures so as to enable investors to make more
informed investment decisions. . .''); United Air. (June 17, 2022);
and Walmart Inc. (June 17, 2022) (``Walmart'') (``The Company
supports the adoption of rules that can facilitate the disclosure of
consistent, comparable, and reliable material climate-related
information.'').
\111\ See infra section II.B. Some of these commenters stated
that the Commission exceeded its statutory authority when issuing
the proposed rules because those rules would require disclosure of
information that is not financially material and is only of general
or environmental interest. See, e.g., letters from Boyden Gray (June
17, 2022); D. Burton, Heritage Fdn.; and National Ocean Industries
Association (June 17, 2022) (``NOIA'').
\112\ See, e.g., letters from Chamber; NAM; and Soc. Corp. Gov.
\113\ See, e.g., letters from Attorneys General of the States of
Texas, Alaska, Arkansas, Idaho, Indiana, Kentucky, Louisiana,
Mississippi, Missouri, Montana, South Carolina, and Utah (June 17,
2022) (``AGs of TX et al.''); Cato Institute (June 17, 2022) (``Cato
Inst.''); and Society for Mining, Metallurgy, & Exploration (June
17, 2022) (``SMME'').
\114\ See, e.g., letters from American Petroleum Institute (June
17, 2022) (``API''); Business Roundtable (June 17, 2022); Chamber;
ConocoPhillips (June 17, 2022); Fenwick & West (June 17, 2022)
(``Fenwick West''); Soc. Corp. Gov.; and Williams Companies (June
17, 2022) (``Williams Cos.'').
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Many commenters supported basing the Commission's climate
disclosure rules on the TCFD framework.\115\ Commenters stated that
because the TCFD framework has been widely accepted globally by both
issuers and investors, its use as a model for the Commission's rules
would help elicit climate-related disclosures that are consistent,
comparable, and reliable.\116\ Commenters also stated that basing the
Commission's climate disclosure rules on the TCFD framework would
benefit investors because of their familiarity with the framework and
its usefulness in understanding the connection between climate-related
risk and financial impact.\117\ Commenters also stated that basing the
Commission's climate-related disclosure rules on the TCFD framework,
with which many registrants are familiar and already using, should help
mitigate the compliance burden.\118\
---------------------------------------------------------------------------
\115\ See, e.g., letters from AllianceBernstein; Alphabet et
al.; As You Sow; Alan Beller, Daryl Brewster, Robert G. Eccles,
Camen X. W. Lu, David A. Katz, and Leo E. Strine, Jr. (June 16,
2022) (``Beller et al.''); BHP (June 13, 2022); Bloomberg; BNP
Paribas (June 16, 2022); BP Americas (June 17, 2022) (``BP'');
CalPERS; CalSTRS; Chevron (June 17, 2022); CEMEX (June 17, 2022);
Dell Technologies (May 19, 2022) (``Dell''); Eni SpA; Etsy, Inc.
(June 16, 2022) (``Etsy''); Fidelity Investments (June 17, 2022)
(``Fidelity''); Harvard Mgmt.; Impax Asset Mgmt.; IAC
Recommendation; Maple-Brown; Miller/Howard; Natural Resources
Defense Council (June 17, 2022) (``NRDC''); New York City Office of
Comptroller (June 17, 2022) (``NY City Comptroller''); PIMCO; PRI;
PwC; Unilever PLC (June 17, 2022) (``Unilever''); and The Vanguard
Group, Inc. (June 17, 2022) (``Vanguard'').
\116\ See, e.g., letters from Beller et al.; BNP Paribas;
CalPERS; CEMEX; Chevron; Eni SpA; Harvard Mgmt.; NRDC; NY City
Comptroller; PIMCO; PRI; Unilever; and Vanguard.
\117\ See, e.g., letters from CalSTRS; NRDC; and PRI.
\118\ See, e.g., letters from Alphabet et al.; Eni SpA; Harvard
Mgmt.; PRI; and Unilever.
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One commenter expressed support for basing the rule proposal on the
TCFD framework while also stating that the Commission should consider
requiring the use of the International Sustainability Standards Board's
(``ISSB'') climate reporting standard.\119\ This commenter noted that,
like the rule proposal, the ISSB climate reporting standard is based on
the TCFD framework. This commenter, among others, stated that requiring
the use of, or basing the Commission's climate disclosure rules on, the
ISSB climate reporting standard would contribute substantially to the
establishment of a global climate disclosure baseline, which would
reduce the reporting burden on companies listed in multiple
jurisdictions.\120\ Some commenters, however, opposed basing the
Commission's climate disclosure rules on the TCFD framework. One
commenter stated that the Commission should not base its rules on a
disclosure framework, such as the TCFD framework, that has not been
developed by a U.S. regulatory agency because there is no process in
place for domestic companies, such as oil and gas companies, to provide
their input into potential changes to the framework.\121\ Another
commenter stated that the Commission should not base its climate
disclosure rules on the TCFD because, in its view, there is currently
no third-party framework, including the TCFD, capable of providing
reliable and consistent metrics for climate-related risks.\122\ A
different commenter disputed that U.S. companies have widely adopted
the TCFD framework and recommended instead that the Commission base its
climate disclosure rules on the EPA's Greenhouse Gas Reporting Program,
with which many U.S. registrants are familiar.\123\
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\119\ See letter from CalSTRS.
\120\ See id.; see also letters from Douglas Hileman Consulting
LLC (May 2, 2022) (``D. Hileman Consulting''); T Rowe Price (June
16, 2022); and Vodafone Group Plc (June 17, 2022) (``Vodafone'')
(stating that the Commission should allow the use of the ISSB
climate reporting standard as an alternative reporting regime to the
Commission's climate disclosure rules).
\121\ See letter from Petroleum Alliance of Oklahoma (June 16,
2022) (``Petrol. OK'').
\122\ See letter from Reason Foundation (June 17, 2022)
(``Reason Fnd.'').
\123\ See letter from Western Midstream Partners, LP (June 15,
2022) (``Western Midstream'').
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Commenters expressed mixed views regarding the proposed location of
the climate-related disclosure rules. Many commenters supported the
proposed placement of climate-related disclosure rules in a new subpart
of Regulation S-K and the placement of the proposed financial metrics
in a new article of
[[Page 21679]]
Regulation S-X.\124\ Commenters stated that amending Regulation S-K and
Regulation S-X to include climate-related disclosure requirements would
facilitate the presentation of climate-related business and financial
information as part of a registrant's regular business reporting \125\
and appropriately reflect the fact that information about climate-
related risks is essential to investors' decision-making and
fundamental to understanding the nature of a company's operating
prospects and financial performance.\126\ Commenters further stated
that requiring climate-related disclosures in annual filings, including
the notes to the financial statements, would enhance the accessibility,
comparability, and reliability of such disclosures for investors.\127\
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\124\ See, e.g., letters from Amer. for Fin. Reform, Sunrise
Project et al.; Attorneys General from California and 19 other
states (June 17, 2022) (``AGs of Cal. et al.''); Bloomberg; CalSTRS;
Eni SpA; Miller/Howard; Morningstar; New York State Insurance Fund
(June 17, 2022) (``NY SIF''); PRI; PwC; and SKY Harbor Capital
Management (June 16, 2022) (``SKY Harbor'').
\125\ See, e.g., letter from Amer. for Fin. Reform, Sunrise
Project et al.
\126\ See, e.g., letters from AGs of Cal. et al.; CalSTRS; and
PRI.
\127\ See, e.g., letters from Bloomberg; and PwC.
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Many other commenters, however, opposed adoption of the proposed
financial metrics under Regulation S-X because of various concerns
relating to implementation and interpretation of the proposed financial
metrics.\128\ A number of these commenters recommended instead
requiring disclosure of the financial impact of climate-related events
as part of a registrant's MD&A pursuant to 17 CFR 229.303 (``Item 303
of Regulation S-K'').\129\
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\128\ See, e.g., letters from ABA; AllianceBernstein; Alphabet
et al.; BOA; BlackRock; Business Roundtable; Cleary Gottlieb Steen &
Hamilton LLP (June 16, 2022) (``Cleary Gottlieb''); FedEx
Corporation (June 17, 2022) (``FedEx''); General Motors Company
(June 17, 2022) (``GM''); Grant Thornton LLP (June 17, 2022)
(``Grant Thornton''); National Association of Manufacturers (June 6,
2022) (``NAM''); Securities Industry and Financial Markets
Association (June 17, 2022) (``SIFMA''); Soc. Corp. Gov.; Sullivan &
Cromwell (June 17, 2022) (``Sullivan Cromwell''); Trillium;
Unilever; and Walmart. See infra section II.K for further discussion
of these comments.
\129\ See, e.g., letters from AllianceBernstein; Alphabet et
al.; Cleary Gottlieb; IAC Recommendation; GM; Grant Thornton; SIFMA;
Soc. Corp. Gov.; Unilever (recommending placement of the financial
disclosure in either a registrant's MD&A or its Operating and
Financial Review (``OFR'')); and Walmart.
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Commenters also had mixed views on the proposed placement of the
climate-related disclosures in a separately captioned section of a
registration statement or annual report. Several commenters supported
the proposed placement because it would facilitate access to and
comparability of the climate-related disclosures for investors.\130\
Commenters also supported the proposed alternative to permit
registrants to incorporate by reference climate-related disclosures
from other sections of a filing or from other filings because it would
avoid duplication in the filing, would add flexibility regarding the
presentation of the disclosures, and would be consistent with the
Commission's incorporation by reference rules regarding other types of
disclosure.\131\ Some of the commenters specifically recommended
allowing registrants to include climate-related governance disclosure
in their proxy statements, which could then be incorporated by
reference into their annual reports.\132\
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\130\ See, e.g., letters from Amer. for Fin. Reform, Sunrise
Project et al.; (supporting placement of the climate-related
disclosure in a separate section as well as in other existing
sections of the annual report or registration statement, as
applicable); Breckinridge Capital Advisors (June 17, 2022); CEMEX;
CFA; Eni SpA; Clifford Howard (June 17, 2022) (``C. Howard'');
Institute for Agriculture and Trade Policy (June 17, 2022)
(``IATP''); PRI; PwC; and SKY Harbor.
\131\ See, e.g., letters from CalSTRS; CEMEX; Eni SpA; IAA; and
PwC.
\132\ See, e.g., ABA; BlackRock; Business Roundtable; CalSTRS;
GM; C. Howard; ICCR; Microsoft; Morningstar; PwC; SIFMA; Shearman &
Sterling (June 20, 2022) (``Shearman Sterling''); and Sullivan
Cromwell.
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Some commenters opposed placing climate-related disclosures in a
separate section of a filing, asserting that existing sections, such as
MD&A and Risk Factors, are more appropriate places to provide the
climate-related disclosures and stating that it should be up to each
registrant to determine the most suitable place for such
disclosure.\133\ Some commenters recommended that the Commission
require some or all of the climate-related disclosures to be included
in a new, separate report to be furnished to the Commission following
the filing of the annual report because of concerns about the timing
and liability for disclosures related to GHG emissions, financial
metrics, and certain other aspects of the climate-related
disclosures.\134\
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\133\ See, e.g., letters from AGs of TX et al.; Brendan Herron
(Nov. 1, 2022) (``B. Herron''); FedEx; Reason Fnd.; Soc. Corp, Gov.;
and Unilever.
\134\ See, e.g., letters from BlackRock; Chevron;
ConocoPhillips; FedEx; D. Hileman Consulting; HP Inc. (June 17,
2022) (``HP''); PIMCO; and Sullivan Cromwell.
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3. Final Rules
As discussed in greater detail below, we are adopting climate-
related disclosure rules because, as many commenters have indicated,
despite an increase in climate-related information being provided by
some companies since the Commission issued its 2010 Guidance, there is
a need to improve the consistency, comparability, and reliability of
climate-related disclosures for investors.\135\ As climate-related
risks have become more prevalent,\136\ investors have increasingly
sought information from registrants about the actual and potential
impacts of climate-related risks on their financial performance or
position.\137\ Both
[[Page 21680]]
institutional \138\ and retail investors \139\ have stated that they
found much of the voluntary climate-related reporting to be lacking in
quality and completeness and difficult to compare and as a result have
incurred costs and inefficiencies when attempting to assess climate-
related risks and their effect on the valuation of a registrant's
securities. Moreover, although the 2010 Guidance reflects that climate-
related information may be called for by current Commission disclosure
requirements, climate-related information has often been provided
outside of Commission filings, such as in sustainability reports or
other documents posted on registrants' websites, which are not subject
to standardized disclosure rules, and, as noted by some commenters, are
not necessarily prepared with the informational needs of investors in
mind.\140\ Such information also may not be prepared with the same
level of rigor that results from the disclosure controls and procedures
(``DCP'') required for disclosure in Commission filings,\141\ and as a
result may not be as reliable.\142\
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\135\ See supra notes 102 and 103 and accompanying text. The
Commission also stated in the Proposing Release that, as part of its
filing review process, Commission staff had assessed the extent to
which registrants currently disclose climate-related risks in their
filings. Proposing Release at 21339. The staff noted that, since
2010, disclosures climate-related disclosures 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. Id. The staff also observed
significant inconsistency in the depth and specificity of
disclosures by registrants across industries and within the same
industry. Id. The staff 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. Id. In addition, the disclosures in
registrants' Forms 10-K frequently contained general, boilerplate
discussions that provide limited information as to the registrants'
assessment of their climate-related risks or their impact on the
companies' business. Id.
\136\ See, e.g., US Global Change Research Program, The Fifth
National Climate Assessment (2023) (stating that extreme weather
events cause direct economic losses through infrastructure damage,
disruptions in labor and public services, and losses in property
values, and that the United States currently experiences an extreme
weather event causing a billion dollars or more in costs and losses
every three weeks compared to one such event every four months in
the 1980s).
\137\ See, e.g., letters from BlackRock; Bloomberg; Boston
Common Asset Mgmt; Breckinridge Capital Advisors; Calvert; Ceres;
CFA; East Bay Municipal Utility District Employee Retirement System
(June 6, 2022) (``East Bay Mun.'') (``[B]ecause climate-related
impacts or risks can materially affect a company's financial
position and operations, we support the inclusion of some climate-
related information in the financial statements; this also promotes
consistency in information across a company's reporting.''); Harvard
Mgmt.; Impax Asset Mgmt; Parnassus Investments (June 14, 2022)
(``Parnassus'') (``We commend the Commission for understanding the
urgency and materiality of the disclosure categories addressed in
the Proposed Rule. This demonstrates a recognition that the
decisions companies and investors make today regarding emissions and
climate-related matters can have financial impacts in the short-,
medium-, and long-term.''); Rockefeller Asset Management (June 1,
2022); Rebecca Palacios (June 6, 2022) (``R. Palacios'') (``[I]t is
vital for you to require climate-related disclosures in order to
meet the SECs mandate to protect investors ensure fair, orderly, and
efficient markets and facilitate capital formation.'');
(``Rockefeller Asset Mgmt.'') (``Our fundamental research and
company engagements have revealed that climate related risks and
opportunities are increasingly relevant to company valuations.'');
PIMCO; PRI; SKY Harbor; Trillium; Allyson Tucker, Chief Executive
Officer, Washington State Investment Board (June 17, 2022) (``We
also support the SEC's inclusion of a greenhouse gas (GHG) emissions
reporting requirement in line with the Greenhouse Gas Protocol
because this information is critical to our understanding of the
quality of a company's earnings in the face of climate change and
the energy transition.''); and Vanguard. See also Form Letter AM.
\138\ See, e.g., letters from AllianceBernstein; Franklin
Templeton; Harvard Mgmt.; Miller/Howard; Trillium; and Wellington
Mgmt.
\139\ See, e.g., letters from Americans for Financial Reform
Education Fund, Public Citizen, Ocean Conservancy, Sierra Club,
Evergreen Action and 72 additional undersigned organizations (June
17, 2022) (``Amer. for Fin. Reform, Evergreen Action et al.'');
Amer. for Fin. Reform and Public Citizen; Americans for Financial
Reform, on behalf of 64,357 advocates (June 16, 2022) (``Enclosed
are 64,357 petition signatures supporting the [Commission's]
proposed rule on climate-related financial disclosures that would
provide investors with the long-awaited and necessary information
they and their investment advisors need to make informed investment
decisions.''); see also letter from Betterment (June 17, 2022)
(noting that, based on responses of 3,000 retail investors to a
survey the commenter conducted, ``a reasonable interpretation . . .
would be that 95% of respondents would potentially consider GHG
emissions reporting . . . as material to whether they would purchase
a security'' and asserting that ``[a] retail investor's exposure to
equities via index funds makes the uniform availability of
standardized climate-related disclosure at the company level that
much more critical, and the Proposed Rule would drastically improve
the efficiency and robustness of the underlying process that
produces such low fee, diversified investing products'' (emphasis in
original)). In addition, the Commission received many unique letters
from individual investors expressing their support for the proposed
rules, with several stating that there was a need for more
consistent and comparable disclosure about climate-related risk from
registrants. See, e.g., letters from Kim Leslie Shafer (June 16,
2022) (``[A]s an investor and a citizen, I support the SEC
prescribing consistent, comparable, reliable and mandatory
disclosure of climate-related information.''); Neetin Gulati (June
17, 2022); Sandy Spears (June 16, 2022); R. Palacios.
\140\ See letter from PwC (expressing concern about permitting
registrants to incorporate by reference from their sustainability
reports or corporate responsibility reports because such reports
``may be prepared using a basis of presentation designed for a
stakeholder group with different information needs than investors
and other providers of capital'').
\141\ See Rule 13a-15 and Rule 15d-15 [17 CFR 240.13a-15 and 17
CFR 240.15d-15]. Pursuant to Exchange Act Rules 13a-15 and 15d-15, a
company's principal executive officer and principal financial
officer must make certifications regarding the maintenance and
effectiveness of disclosure controls and procedures. These rules
define ``disclosure controls and procedures'' as those controls and
procedures designed to ensure that information required to be
disclosed by the company in the reports that it files or submits
under the Exchange Act is (1) ``recorded, processed, summarized and
reported, within the time periods specified in the Commission's
rules and forms,'' and (2) ``accumulated and communicated to the
company's management . . . as appropriate to allow timely decisions
regarding required disclosure.''
\142\ See, e.g., letter from Ceres; see also letter from Calvert
(stating that ``we believe the disclosures mandated by the SEC in
the proposed rule should be filed in annual reports, as well as
quarterly reports where appropriate'' because ``it is supported by
disclosure controls, CEO/CFO certification, audit requirements and a
level of scrutiny by management appropriate for climate risks'').
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Consistent with and as authorized by our enabling statutes, we are
adopting the climate-related disclosure requirements discussed herein,
so that investors will have the information they need to make informed
investment and voting decisions by evaluating a registrant's exposure
to material climate-related risks. We modeled the proposed disclosure
requirements in large part on the TCFD framework. As discussed in the
Proposing Release and as many commenters noted, that framework has been
widely accepted by issuers and investors.\143\ The TCFD framework
focuses on matters that are material to an investment or voting
decision and is grounded in concepts that tie climate-related risk
disclosure considerations to matters that may affect the results of
operations, financial condition, or business strategy of a registrant.
Because the TCFD framework is intended to elicit disclosure of climate-
related risks that have materially affected or are reasonably likely to
materially affect the business, results of operations, or financial
condition of a company, it served as an appropriate model for the
Commission's proposed climate-related disclosure rules. We therefore
disagree with commenters that stated that the Commission's proposed
rules would require disclosure of information that is primarily of
general or environmental interest and not of financial interest.\144\
The final rules continue to reflect many of the TCFD's recommendations,
modified based on the input of commenters, which will enhance the
usefulness and comparability of the required climate-related
disclosures for investors and better serve their informational needs
when making investment and voting decisions.\145\
---------------------------------------------------------------------------
\143\ See supra notes 115 and 116 and accompanying text.
\144\ See supra note 111 and accompanying text.
\145\ See supra note 107 and accompanying text.
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At the same time, in consideration of some commenters'
concerns,\146\ we have revised the proposed climate-related disclosure
requirements in certain respects to reduce the likelihood that the
final rules result in disclosures that could be less useful for
investors and costly for registrants to produce and to provide added
flexibility for registrants regarding the content and presentation of
the disclosure. Modeling the climate-related disclosure requirements on
the TCFD framework while also adopting these revisions will help
mitigate the compliance burden of the final rules, particularly for
registrants that are already providing climate-related disclosures
based on the TCFD framework or soon will be doing so pursuant to other
laws or regulations.\147\
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\146\ See, e.g., supra note 109 and accompanying text.
\147\ See supra sections I.B. In this regard, we note that some
commenters recommended that the Commission require or allow the use
of the ISSB's climate-related disclosure standards as an alternative
to the Commission's climate disclosure rules. See supra note 120 and
accompanying text. While we acknowledge that there are similarities
between the ISSB's climate-related disclosure standards and the
final rules, and that registrants may operate or be listed in
jurisdictions that will adopt or apply the ISSB standards in whole
or in part, those jurisdictions have not yet integrated the ISSB
standards into their climate-related disclosure rules. Accordingly,
at this time we decline to recognize the use of the ISSB standards
as an alternative reporting regime.
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In this regard, we note certain ongoing developments related to
climate-risk reporting:
<bullet> The formation of the ISSB by the IFRS Foundation \148\ in
November 2021, which consolidated several sustainability disclosure
organizations into a single organization.\149\ In June
[[Page 21681]]
2023, the ISSB issued General Requirements for Disclosure of
Sustainability-related Financial Information (``IFRS S1'') and Climate-
related Disclosures (``IFRS S2'').\150\ Notably, IFRS S1 and S2
integrate the recommendations of the TCFD.\151\
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\148\ The IFRS Foundation refers to the International Financial
Reporting Standards Foundation, whose mission is to develop high-
quality IFRS Standards that bring transparency, accountability, and
efficiency to financial markets around the world. 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>.
\149\ 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>. See also Proposing Release, section
I.C.2.
\150\ IFRS S1 sets out the general requirements for a company to
disclose information about its sustainability related risks and
opportunities. IFRS S2 sets out the requirements for companies to
disclose information about their climate-related risks and
opportunities, building on the requirements in IFRS S1. See IFRS--
Project Summary IFRS Sustainability Disclosure Standards, IFRS S1
General Requirements for Disclosure of Sustainability-related
Financial Information and IFRS S2 Climate-related Disclosures (June
2023), available at <a href="https://www.ifrs.org/content/dam/ifrs/project/general-sustainability-related-disclosures/project-summary.pdf">https://www.ifrs.org/content/dam/ifrs/project/general-sustainability-related-disclosures/project-summary.pdf</a>.
\151\ Concurrent with the release of its 2023 status report, the
TCFD fulfilled its remit and transferred to the ISSB its
responsibility for tracking company activities on climate-related
disclosure. Fin. Stability Bd., FSB Roadmap for Addressing Financial
Risks from Climate Change Progress Report (July 13, 2023), available
at <a href="https://www.fsb.org/wp-content/uploads/P130723.pdf">https://www.fsb.org/wp-content/uploads/P130723.pdf</a>. As discussed
infra, the TCFD recommendations are incorporated into the ISSB
standards. Although the TCFD has disbanded, in this release we
continue to refer to ``TCFD recommendations'' as distinct from ISSB
standards, both for clarity and because not all jurisdictions that
implemented TCFD-aligned disclosure requirements have implemented
the broader and more recent ISSB standards.
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<bullet> Several jurisdictions have announced plans to adopt,
apply, or otherwise be informed by the ISSB standards, including
Australia, Brazil, Canada, Hong Kong, Japan, Malaysia, Nigeria,
Singapore, and the United Kingdom (``UK''), although it is not yet
clear how specifically the ISSB standards may be incorporated into
certain foreign legal frameworks.\152\
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\152\ For example, the UK has announced that its Sustainability
Disclosure Standards (``SDS'') will be based on the ISSB Standards.
See Dep't of Bus. & Trade, UK Sustainability Disclosure Standards,
Gov.UK (Aug. 2, 2023), available at <a href="https://www.gov.uk/guidance/uk-sustainability-disclosure-standards">https://www.gov.uk/guidance/uk-sustainability-disclosure-standards</a>. Australia recently published
draft legislation mandating comprehensive climate-related reporting
and assurance for large and medium-sized companies that is aligned
with the ISSB Standards. See Australian Government-the Treasury,
Climate-related financial disclosure: exposure draft legislation
(Jan. 12, 2024), available at <a href="https://treasury.gov.au/consultation/c2024-466491">https://treasury.gov.au/consultation/c2024-466491</a>.
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<bullet> Other jurisdictions were already well advanced in the
process of adopting climate disclosure rules when the ISSB standards
were announced. For example, in 2022, the European Union (``EU'')
adopted the Corporate Sustainability Reporting Directive
(``CSRD''),\153\ which requires certain large and listed companies and
other entities, including non-EU entities, to report on sustainability-
related issues in line with the European Sustainability Reporting
Standards (``ESRS'').\154\
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\153\ See Directive (EU) 2022/2464 of the European Parliament
and of the Council of 14 December 2022 amending Regulation (EU) No
537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive
2013/34/EU, as regards corporate sustainability reporting (Text with
EEA relevance), available at <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv%3AOJ.L_.2022.322.01.0015.01.ENG">https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv%3AOJ.L_.2022.322.01.0015.01.ENG</a>. In
adopting the CSRD, 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.
\154\ See id. The CSRD requires large companies and listed
companies to publish regular reports on the social and environmental
risks they face, and how their activities impact people and the
environment. In July 2023, the European Commission (``EC'') adopted
the delegated act containing the first set of ESRS under the CSRD
and the ESRS became effective on Jan. 1, 2024, for companies within
scope of the first phase of reporting under the CSRD. See EC,
Corporate sustainability reporting, available at <a href="https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en">https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en</a> (last visited Feb. 6, 2024). See also EC
Press Release, The Commission Adopts the European Sustainability
Reporting Standards (July 31, 2023), available at <a href="https://finance.ec.europa.eu/news/commission-adopts-european-sustainability-reporting-standards-2023-07-31_en">https://finance.ec.europa.eu/news/commission-adopts-european-sustainability-reporting-standards-2023-07-31_en</a>. Separate reporting standards will
be developed for SMEs and certain non-EU companies operating in the
EU. See EC, Questions and Answers on the Adoption of European
Sustainability Reporting Standards (July 31, 2023), <a href="https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_4043">https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_4043</a>.
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<bullet> California recently adopted the Climate-Related Financial
Risk Act (Senate Bill 261), which will require certain public and
private U.S. companies that do business in California and have over
$500 million in annual revenues to disclose their climate-related
financial risks and measures based on the TCFD recommendations or a
comparable disclosure regime in a report published biennially on the
company's website commencing no later than January 2026.\155\
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\155\ See SB-261, Greenhouse gases: climate-related financial
risk (Oct. 7, 2023), available at <a href="https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB261">https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB261</a>.
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<bullet> In addition, California recently adopted the Climate
Corporate Data Accountability Act (Senate Bill 253), which will require
certain public and private U.S. companies that do business in
California and have over $1 billion in annual revenues to disclose
their GHG emissions (Scopes 1 and 2 emissions by 2026 and Scope 3
emissions by 2027).\156\
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\156\ See SB-253, Climate Corporate Data Accountability Act
(Oct. 7, 2023), available at <a href="https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB253">https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB253</a>. The Act directs
the California Air Resources Board (CARB) to adopt regulations to
implement the requirements of the Act, with disclosures being
required as early as 2026, subject to the CARB's finalization of the
rules. The Act further requires the disclosure of Scope 1 and Scope
2 emissions to be subject to assurance, which must be performed at a
limited assurance level beginning in 2026 and at a reasonable
assurance level beginning in 2030. See SB-253, section II.c.1.F.ii.
The statute is currently subject to litigation. See Compl., Chamber
of Commerce v. California Air Resources Board, No. 2:24-cv-00801 (D.
C.D. Cal. Jan. 30, 2024).
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These laws may reduce the compliance burden of the final rules to
the extent they impose similar requirements for registrants that are
subject to them. However, the disclosure required by these laws will
appear in documents outside of Commission filings and therefore will
not be subject to the same liability, DCPs, and other investor
protections as the climate-related disclosures required under the final
rules. In addition, these laws may serve different purposes than the
final rules or apply different materiality or other standards. For
example, the California laws were adopted to protect the health and
safety of California residents,\157\ among other reasons, whereas we
are adopting the final rules to enhance disclosures of emergent risks
companies face so that investors can have the information they need to
make informed investment and voting decisions. Regardless of the extent
of overlap with other jurisdictions' reporting requirements and
consistent with the Commission's mission, the final rules are tailored
to the particular needs of investors and the specific situations of
Commission registrants, as documented in the comment file, and are
designed to work within the existing framework of U.S. securities laws
that call for disclosure about the material risks that companies face.
Integrating the required disclosures into the existing framework of
U.S. securities laws will provide investors with more complete
information about a company, the risks it faces, and its business,
finances, and results of operations while affording investors the
protections of the securities laws for this information.
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\157\ See SB-253, supra note 156, at section 1 (stating that
``Californians are already facing devastating wildfires, sea level
rise, drought, and other impacts associated with climate change that
threaten the health and safety of Californians. . .'').
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We acknowledge the concerns expressed by some commenters about
relying on a third-party framework, such as the TCFD, that may not
afford affected parties the ability to provide input on potential
future changes.\158\ While we considered the TCFD framework in both
proposing and now adopting the Commission's own climate-related
disclosure rules, the final rules do not incorporate the TCFD
recommendations or its procedures. Any future updates to the TCFD
framework or any successor framework will have no bearing or impact on
the
[[Page 21682]]
final rules without future action by the Commission. Any consideration
of such updates by the Commission will be subject to the Commission's
own procedures, and any subsequent rulemaking to reflect those updates
will be subject to the Administrative Procedure Act's requirements,
including notice and comment, as well as requirements under other
relevant laws. The final rules also do not follow every TCFD
recommendation. For example, unlike the TCFD, which recommends the
disclosure of executive compensation that is linked to climate-related
risk management considerations, we have elected not to include such a
requirement in the final rules, as discussed below.\159\
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\158\ See letter from Petrol. OK.
\159\ See TCFD, Implementing the Recommendations of the Task
Force on Climate-related Financial Disclosures (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>; infra section II.E.2.
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Like the proposed rules, the final rules amend Regulation S-K by
adding a new section (subpart 1500) composed of the climate-related
disclosure rules, other than for the financial statement disclosures,
and Regulation S-X by adding a new article (Article 14) to govern the
financial statement disclosures. We continue to believe that it is
appropriate to amend Regulation S-K and Regulation S-X to require
climate-related disclosures in Securities Act or Exchange Act
registration statements and Exchange Act reports. Information about
climate-related risks and their financial impacts is fundamental in
many cases to understanding a company's financial condition and
operating results and prospects and therefore should be treated like
other business and financial information, including information on
risks to the company.\160\
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\160\ See supra notes 125 and 126 and accompanying text.
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The proposed rules would have required a registrant to include its
climate-related disclosures, other than its financial statement
disclosures, either in a separately captioned ``Climate-Related
Disclosure'' section in the registration statement or Exchange Act
annual report or in other parts of the Commission filing that would
then be incorporated by reference into the separately captioned
section. While some commenters supported this proposal because it would
facilitate the comparability of the disclosures among registrants,\161\
other commenters stated that existing parts of the registration
statement or annual report could be more appropriate for placement of
the climate-related disclosures, and indicated that it should be up to
each registrant to determine the most suitable place for the
disclosures according to the context of the disclosures and structure
of the filing.\162\
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\161\ See supra note 130 and accompanying text.
\162\ See, e.g., letter from Unilever.
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While enhancing the comparability of climate-related disclosures
remains an important objective of the rulemaking, we also recognize the
benefits of granting each registrant sufficient flexibility to
determine the most appropriate location within a filing for the
disclosures based on its particular facts and circumstances. Therefore,
the final rules leave the placement of the climate-related disclosures,
other than the financial statement disclosures, largely up to each
registrant. Further, we are adopting as proposed structured data
requirements that will enable automated extraction and analysis of the
information required by the final rules, further facilitating
investors' ability to identify and compare climate-related disclosures,
regardless of where they are presented.\163\ A registrant may elect to
place most of the subpart 1500 disclosures in a separately captioned
``Climate-Related Disclosure'' section. Alternatively, a registrant may
elect to include these climate-related disclosures in applicable,
currently existing parts of the registration statement or annual report
(e.g., Risk Factors, Description of Business, or MD&A). If it chooses
the latter alternative, then the registrant should consider whether
cross-referencing the other disclosures in the separately captioned
section would enhance the presentation of the climate-related
disclosures for investors.
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\163\ See discussion of 17 CFR 229.1508 infra section II.M.
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A registrant may also incorporate by reference some of the climate-
related disclosures from other filed registration statements or
Exchange Act reports if the incorporated disclosure is responsive to
the topics specified in the Regulation S-K climate-related disclosure
items and if the registrant satisfies the incorporation by reference
requirements under the Commission's rules and forms.\164\ In addition,
any climate-related disclosure that is being incorporated by reference
must include electronic tags that meet the final rules' structured data
requirement.\165\ As commenters noted, allowing incorporation by
reference of climate-related disclosures will avoid duplication in the
filing, add flexibility regarding the presentation of the disclosures,
and be consistent with the Commission's incorporation by reference
rules regarding other types of disclosure.\166\
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\164\ See 17 CFR 230.411 and 17 CFR 240.12b-23.
\165\ See 17 CFR 229.1508.
\166\ See supra note 131 and accompanying text.
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Some commenters recommended that we permit a registrant to include
disclosure regarding its climate-related corporate governance in its
proxy statement, together with its discussion of other corporate
governance matters, which would then be incorporated by reference into
the registrant's Form 10-K.\167\ Form 10-K currently permits the
incorporation by reference pursuant to General Instruction G.3 of
certain corporate governance matters from a proxy statement involving
the election of directors.\168\ While disclosure pursuant to Item 401
of Regulation S-K, which pertains to the identification and business
experience of directors and executive officers, is permitted to be
incorporated by reference from the proxy statement, disclosure pursuant
to Item 407(h) of Regulation S-K, which pertains to the board's
leadership structure and its role in risk oversight, is not one of the
enumerated matters permitted to be incorporated by reference from the
proxy statement. As discussed below, the final rules do not include the
proposed provisions that would have most likely elicited disclosure
drawn from the information required by Item 401 (i.e., the proposed
requirements to identify the board members responsible for the
oversight of climate-related risks and to disclose whether any board
member has expertise in climate-related risks).\169\ Additionally, the
retained governance provisions of the final rules require disclosure
that is relevant to understanding more generally the board's oversight
of climate-related risks and management's role in assessing and
managing such risks, and do not necessarily pertain to the election of
directors. For these reasons, while the final rules do not preclude
incorporation by reference from a registrant's proxy statement to the
extent allowed by existing rules,\170\ we decline to expressly permit
the disclosure to be incorporated by reference from a registrant's
proxy statement pursuant to General Instruction G.3 of Form 10-K.
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\167\ See, e.g., letters from Microsoft; and SIFMA.
\168\ See General Instruction G.3 of Form 10-K, which pertains
to information permitted under Part III of Form 10-K, including,
among other matters, Item 401 and certain provisions of Item 407.
\169\ See infra section II.E.1.
\170\ See supra note 164 and accompanying text.
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Placement of the new disclosures required by the final rules in
Commission filings further serves our
[[Page 21683]]
investor protection goals because it will subject these disclosures to
DCPs. These controls and procedures will enhance not only the
reliability of the climate-related disclosures themselves, including
both qualitative climate-related information and quantitative climate-
related data, but also their accuracy and consistency.\171\
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\171\ See supra notes 141-142 and accompanying text. As we have
stated before, a company's disclosure controls and procedures should
not be limited to disclosure specifically required, but should also
ensure timely collection and evaluation of ``information potentially
subject to [required] disclosure,'' ``information that is relevant
to an assessment of the need to disclose developments and risks that
pertain to the [company's] businesses,'' and ``information that must
be evaluated in the context of the disclosure requirement of
Exchange Act Rule 12b-20.'' Certification of Disclosure in
Companies' Quarterly and Annual Reports, Release No. 33-8124 (Aug.
28, 2002) [67 FR 57275 (Sept. 9, 2002)].
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B. Commission Authority To Adopt Disclosure Rules
Some commenters \172\ asserted that the Commission lacks authority
to promulgate the proposed rules. We disagree. The rules we are
adopting fall within the statutory authority conferred by Congress
through the Securities Act and the Exchange Act.
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\172\ See, e.g., letter from Soc. Corp. Gov. (stating that the
``subject of the Proposed Rule is clearly of great economic and
political significance,'' and that ``[a]bsent express authorization
by Congress, we believe that the SEC fundamentally lacks the
authority to promulgate the Proposed Rule''); see also letters from
Bernard S. Sharfman (Feb. 6, 2024) (stating that the SEC ``has
exceeded its delegated authority in promulgating its proposed rule
on climate-related disclosures by not adhering to the ascertainable
standards found in the 33 and 34 Acts: `for the protection of
investors,' promoting `efficiency, competition, and capital
formation,' and `materiality'''); Lawrence A. Cunningham and 21
other signatories (Apr. 25, 2022) (``Cunningham et al.'') (stating
that the ``EPA's empowerment over this topic probably preempts any
statutory authority the SEC might claim,'' that ``the SEC's mission
does not include adopting positions intended to promote particular
conceptions of acceptable corporate behavior,'' and that ``[c]limate
change is a politically-charged issue'' and the ``Proposal would
compel corporations and officials to regularly speak on those
issues''); Patrick Morrisey, Attorney General of West Virginia, and
the Attorneys General of 23 other states (``Morrissey et al.'')
(June 15, 2022) (stating that the proposed rule ``sidesteps the
materiality requirement,'' ``offends the major questions doctrine,''
would ``upend the balance between federal and state powers in the
corporate sphere,'' and that ``if the SEC's understanding of its
powers were right, then the statutes providing it that authority
would offend the non-delegation doctrine''); and Andrew N. Vollmer
(May 9, 2022) (stating that adopting the proposal would ``determine
significant national environmental policies without direction from
Congress, creating a high risk of proving to be a futile gesture
because of the likelihood that a court will overturn final rules'');
and Andrew N. Vollmer (Apr. 12, 2022) (stating that ``[c]limate-
change information is outside the scope of the subjects Congress has
allowed the SEC to cover in disclosure rules, and adopting the
Proposal would have a subject and objective different from the
disclosure provisions in the federal securities laws''); Jones Day;
Chamber; Bernard S. Sharfman & James R. Copland (June 16, 2022)
(``Sharfman et al.'').
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In section 7(a)(1) of the Securities Act,\173\ Congress authorized
the Commission to require, in a publicly filed registration statement,
that issuers offering and selling securities in the U.S. public capital
markets include information--such as the general character of the
issuer's business, the remuneration paid to its officers and directors,
details of its material contracts, and certain financial information--
specified in Schedule A to that Act, as well as ``such other
information . . . as the Commission may by rules or regulations require
as being necessary or appropriate in the public interest or for the
protection of investors.'' \174\ In addition, under sections 12(b) and
(g) of the Exchange Act,\175\ issuers of securities traded on a
national securities exchange or that otherwise have total assets and
shareholders of record that exceed certain thresholds must register
those securities with the Commission by filing a registration
statement. That registration statement must contain ``[s]uch
information, in such detail, as to the issuer'' regarding, among other
things, ``the organization, financial structure and nature of the
[issuer's] business'' as the Commission by rule or regulation
determines to be in the public interest or for the protection of
investors.\176\ These same issuers must also provide, as the Commission
may prescribe ``as necessary or appropriate for the proper protection
of investors and to insure fair dealing in the security,'' (1) ``such
information and documents . . . as the Commission shall require to keep
reasonably current the information and documents required to be
included in or filed with [a] . . . registration statement,'' and (2)
such annual and quarterly reports as the Commission may prescribe.\177\
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\173\ 15 U.S.C. 77g(a)(1).
\174\ Securities Act section 7(a)(1) and Schedule A; see also
Securities Act section 10(a) and (c) [15 U.S.C. 77j(a) and (c)]
(generally requiring a prospectus to contain much of the same the
information contained in a registration statement and granting the
Commission the authority to require additional information in a
prospectus as ``necessary or appropriate in the public interest or
for the protection of investors'').
\175\ 15 U.S.C. 78l(b) and (g).
\176\ Exchange Act sections 12(b) and 12(g).
\177\ Exchange Act section 13(a) [15 U.S.C. 78m(a)]. Other
issuers that are required to comply with the reporting requirements
of section 13(a) include those that voluntarily register a class of
equity securities under section 12(g)(1), and issuers that file a
registration statement under the Securities Act that becomes
effective, pursuant to section 15(d) [15 U.S.C. 78o].
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As the text of each of these provisions demonstrates, Congress not
only specified certain enumerated disclosures, but also authorized the
Commission to update and build on that framework by requiring
additional disclosures of information that the Commission finds
``necessary or appropriate in the public interest or for the protection
of investors.'' \178\ When read in the context of these enumerated
disclosures and the broader context of the Securities Act and Exchange
Act, these provisions authorize the Commission to ensure that public
company disclosures provide investors with information important to
making informed investment and voting decisions.\179\ Such disclosure
facilitates the securities laws' core objectives of protecting
investors, facilitating capital formation, and promoting market
efficiency.\180\
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\178\ Securities Act section 7 [15 U.S.C. 77g]; see Exchange Act
section 13(a) [15 U.S.C. 78m(a)] (``necessary or appropriate for the
proper protection of investors and to insure fair dealing in the
security''); see also Exchange Act sections 12, 13, and 15 [15
U.S.C. 78l, 78m, and 78o].
\179\ See NAACP v. Fed. Power Comm'n, 425 U.S. 662, 669-70
(1976) (``[T]he use of the words `public interest' in a regulatory
statute . . . take meaning from the purposes of the regulatory
legislation.'').
\180\ See, e.g., Securities Act of 1933, Pub. L. 73-22, 48 Stat.
74, 74 (preamble) (``An Act to provide full and fair disclosure of
the character of securities sold in interstate and foreign commerce
and through the mails, and to prevent frauds in the sale
thereof.''); 15 U.S.C. 78b (``Necessity for regulation''); 15 U.S.C.
77b(b), 78c(f) (protection of investors, efficiency, competition,
and capital formation); Omnicare, Inc. v. Laborers Dist. Council
Const. Indus. Pension Fund, 575 U.S. 175, 178 (2015) (``The
Securities Act of 1933 . . . protects investors by ensuring that
companies issuing securities (known as `issuers') make a full and
fair disclosure of information relevant to a public offering.''
(quotation omitted)); Basic Inc. v. Levinson, 485 U.S. 224, 230
(1988) (``The [Exchange] Act was designed to protect investors
against manipulation of stock prices. Underlying the adoption of
extensive disclosure requirements was a legislative philosophy:
There cannot be honest markets without honest publicity . . . . This
Court repeatedly has described the fundamental purpose of the
[Exchange] Act as implementing a philosophy of full disclosure.''
(quotation omitted)); see also Lorenzo v. SEC, 139 S. Ct. 1094, 1103
(2019) (``The fundamental purpose'' of the securities laws is
substituting ``a philosophy of full disclosure for the philosophy of
caveat emptor.'').
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Both courts and the Commission have long recognized as much.\181\
The Commission has amended its disclosure requirements dozens of times
over the last 90 years based on the determination
[[Page 21684]]
that the required information would be important to investment and
voting decisions. And courts have routinely applied and interpreted the
Commission's disclosure provisions without suggesting that the
Commission lacked the authority to promulgate them.\182\ When
determining that additional ``information'' is ``necessary or
appropriate'' to protect investors, the Commission has responded to
marketplace developments, investors' need for information important to
their decision-making, and advances in economic, financial, and
investment analysis and analytical frameworks, as well of the costs of
such disclosures. In addition, the Commission has eliminated existing
disclosure requirements, or updated and tailored existing disclosures
for similar reasons.\183\
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\181\ See supra note 180; see also Nat'l Res. Def. Council, Inc.
v. SEC, 606 F.2d 1031, 1050 (D.C. Cir. 1979) (``The SEC . . . was
necessarily given very broad discretion to promulgate rules
governing corporate disclosure. The degree of discretion accorded
the Commission is evident from the language in the various statutory
grants of rulemaking authority.''); id. at 1045 (``Rather than
casting disclosure rules in stone, Congress opted to rely on the
discretion and expertise of the SEC for a determination of what
types of additional disclosure would be desirable.''); H.R. Rep. No.
73-1383, at 6-7 (1934).
\182\ See SEC v. Life Partners Holdings, Inc., 854 F.3d 765 (5th
Cir. 2017) (applying regulations regarding disclosure of risks and
revenue recognition); SEC v. Das, 723 F.3d 943 (8th Cir. 2013)
(applying Regulation S-K provisions regarding related-party
transactions and executive compensation); Panther Partners Inc v.
Ikanos Communs., Inc., 681 F.3d 114 (2d Cir. 2012) (applying Item
303 of Regulation S-K, which requires disclosure of management's
discussion and analysis of financial condition); SEC v. Goldfield
Deep Mines Co., 758 F.2d 459 (9th Cir. 1985) (applying disclosure
requirement for certain legal proceedings).
\183\ See, e.g., FAST Act Modernization and Simplification of
Regulation S-K, Release No. 33-10618 (Mar. 20, 2019) [84 FR 12674,
12676 (Apr. 2, 2019)] (stating that the amendments ``are intended to
improve the quality and accessibility of disclosure in filings by
simplifying and modernizing our requirements'' and ``also clarify
ambiguous disclosure requirements, remove redundancies, and further
leverage the use of technology'' which, the Commission expected,
``will increase investor access to information without reducing the
availability of material information''); Disclosure Update and
Simplification, Release No. 33-10532 (Aug. 17, 2018) [83 FR 50148,
50176-79 (Oct. 4, 2018)] (discussing amendments to, among other
things, eliminate certain disclosure requirements that ``have become
obsolete as the regulatory, business, or technological environments
have changed over time'').
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For example, the Commission's predecessor agency,\184\ immediately
upon enactment of the Securities Act, relied upon Section 7 of that Act
as authority to adopt Form A-1, the precursor to today's Form S-1
registration statement, to require disclosure of information important
to investor decision-making but not specifically enumerated in Schedule
A of the Securities Act. This information included a list of states
where the issuer owned property and was qualified to do business, the
length of time the registrant had been engaged in its business,\185\
and a statement of all litigation that may materially affect the value
of the security to be offered.\186\
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\184\ Prior to enactment of the Exchange Act, the Federal Trade
Commission was empowered with administration of the Securities Act.
\185\ Items 3 through 5 of Form A-1; see Release No. 33-5 (July
6, 1933) [not published in the Federal Register]. The Commission's
disclosure requirements no longer explicitly call for this
information.
\186\ This early requirement called for certain information
related to those legal proceedings, including a description of the
origin, nature, and names of parties to the litigation. Item 17 of
Form A-1. The Commission has retained a disclosure requirement
related to legal proceedings in both Securities Act registration
statements and in Exchange Act registration statements and periodic
reports. See 17 CFR 229.103.
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The Commission has further exercised its statutory authority to
require disclosures that provide investors with information on risks
facing registrants. These specific disclosure items are consistent with
the Commission's longstanding view that understanding the material
risks faced by a registrant and how the registrant manages those risks
can be just as important to assessing its business operations and
financial condition as knowledge about its physical assets or material
contracts. These disclosures also reflect investors' increased demand
for, and growing ability to use, information regarding the risks faced
by registrants through the application of increasingly sophisticated
and specialized measurement and analysis frameworks to make investment
and voting decisions.\187\
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\187\ See infra notes 200, 206-207 and accompanying text.
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For instance, the Commission in 1982 adopted a rule requiring
registrants to disclose ``Risk Factors,'' i.e., a ``discussion of the
material factors that make an investment in the registrant or offering
speculative or risky.'' \188\ Also, in 1997, the Commission first
required registrants to disclose quantitative information about market
risk.\189\ Those rules included requirements to present ``separate
quantitative information . . . to the extent material'' for different
categories of market risk, such as ``interest rate risk, foreign
currency exchange rate risk, commodity price risk, and other relevant
market risks, such as equity price risk.'' \190\ Under these market
risk disclosure requirements, registrants must also disclose various
metrics such as ``value at risk'' and ``sensitivity analysis
disclosures.'' In addition, registrants must provide certain
qualitative disclosures about market risk, to the extent material.\191\
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\188\ 17 CFR 229.105(a); see also Adoption of Integrated
Disclosure System, Release No. 33-6383 [47 FR 11380 (Mar. 16, 1982)]
(``1982 Release''). Prior to 1982, the Commission stated in guidance
that, if the securities to be offered are of a highly speculative
nature, the registrant should provide ``a carefully organized series
of short, concise paragraphs summarizing the principal factors that
make the offering speculative.'' See Guides for Preparation and
Filing of Registration Statements, Release No. 33-4666 (Feb. 7,
1964) [29 FR 2490 (Feb. 15, 1964)]. A guideline to disclose a
summary of risk factors relating to an offering was first set forth
by the Commission in 1968 and included consideration of five factors
that may make an offering speculative or risky, including with
respect to risks involving ``a registrant's business or proposed
business.'' See Guide 6, in Guides for the Preparation and Filing of
Registration Statements, Release No. 33-4936 (Dec. 9, 1968) [33 FR
18617 (Dec. 17, 1968)].
\189\ See 17 CFR 229.305; and Disclosure of Accounting Policies
for Derivative Financial Instruments and Derivative Commodity
Instruments and Disclosure of Quantitative and Qualitative
Information About Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments, and Derivative Commodity
Instruments, Release No. 33-7386 (Jan. 31, 1997) [62 FR 6044 (Feb.
10, 1997)].
\190\ 17 CFR 229.305(a)(1).
\191\ See 17 CFR 229.305(b).
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Commission rules have also required disclosures regarding specific
elements of the risks facing registrants, such as a registrant's
material legal proceedings,\192\ as part of its description of
business, the material effects that compliance with government
regulations, including environmental regulations, may have upon a
registrant's capital expenditures, earnings, and competitive
position,\193\ compensation discussion and analysis,\194\ and the
extent of the board's role in the risk oversight of the
registrant.\195\ In addition, the Commission has adopted comprehensive
disclosure regimes related to particular industries,\196\ offering
structures,\197\ and types of transactions, when it has determined
[[Page 21685]]
that disclosure in those particular areas was justified.\198\
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\192\ See 17 CFR 229.103; Modernization of Regulation S-K Items
101, 103, and 105, Release No. 33-10825 (Aug. 26, 2020) [85 FR
63726, 63740 (Oct. 8, 2020)] (``The Commission first adopted a
requirement to disclose all pending litigation that may materially
affect the value of the security to be offered, describing the
origin, nature and name of parties to the litigation, as part of
Form A-1 in 1933.'').
\193\ See 17 CFR 229.101(c)(2)(i); Adoption of Disclosure
Regulation and Amendments of Disclosure Forms and Rules, Release No.
33-5893 (Dec. 23, 1977) [42 FR 65554, 65562 (Dec. 30, 1977)]
(``Appropriate disclosure shall also be made as to the material
effects that compliance with Federal, State and local provisions
which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the
protection of the environment, may have upon the capital
expenditures, earnings and competitive position of the registrant
and its subsidiaries.'').
\194\ See 17 CFR 229.402; Executive Compensation and Related
Person Disclosure, Release No. 33-8732 (Aug. 11, 2006 [71 FR 53158
(Sept. 8, 2006)].
\195\ See 17 CFR 229.407(h); Proxy Disclosure Enhancements,
Release No. 33-9089 (Dec. 16, 2009) [74 FR 68334 (Dec. 23, 2009)].
\196\ See 17 CFR Subpart 1200 (Oil and Gas); 17 CFR Subpart 1300
(Mining); and 17 CFR Subpart 1400 (Banks and Savings and Loan).
\197\ See 17 CFR Subpart 1100 (Asset-Backed Securities).
\198\ See 17 CFR Subpart 900 (Roll-Up Transactions); and 17 CFR
Subpart 1000 (Mergers and Acquisitions).
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Relatedly, the Commission has exercised its statutory authority to
require registrants to include in registration statements and annual
reports a narrative explanation of a number of aspects of the issuer's
business, most prominently in the MD&A.\199\ These requirements are
``intended to give the investor an opportunity to look at the company
through the eyes of management by providing both a short and long-term
analysis of the business of the company,'' and they reflected increased
investor need for this type of information as an important tool to make
investment and voting decisions.\200\
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\199\ See Amendments to Annual Report Form, Related Forms,
Rules, Regulations and Guides; Integration of Securities Acts
Disclosure Systems, Release No. 33-6231 (Sept. 2, 1980) [45 FR 63630
(Sept. 25, 1980)]. Item 303 of Regulation S-K requires a registrant
to discuss its financial condition, changes in its financial
condition, and results of operations, 17 CFR 229.303(a), other
disclosure items, see, e.g., 17 CFR 229.303(b)(1)(i), (1)(ii)(B),
and (2)(ii), and requires registrants to ``provide such other
information that the registrant believes to be necessary to an
understanding of its financial condition, changes in financial
condition, and results of operation.'' 17 CFR 229.303(b).
\200\ Concept Release on Management's Discussion and Analysis of
Financial Condition and Operations, Release No. 33-6711 (Apr. 17,
1987) [52 FR 13715 (Apr. 24, 1987)]. The Commission also has stated
that it is important that investors understand the extent to which
accounting changes and changes in business activity have affected
the comparability of year-to-year data and they should be in a
position to assess the source and probability of recurrence of net
income (or loss). Id. (quoting Guidelines for Registration and
Reporting, Release No. 33-5520 (Aug. 14, 1974) [39 FR 31894 (Sept.
3, 1974)]).
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Finally, the Commission for the last fifty years has also required
disclosure about various environmental matters.\201\ In adopting those
requirements, the Commission recognized the number of ways that
environmental issues can impact a company's business and its financial
performance and determined that these requirements would provide
information important to investment and voting decisions. Throughout
the 1970s and early 1980s, 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
relating to environmental protection were the subject of several
rulemaking efforts, extensive litigation, and public hearings.\202\ As
a result of this process, in 1982, the Commission adopted rules that
address disclosure of certain environmental issues.\203\
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\201\ In addition to Commission rules requiring disclosures
regarding specific elements of the risks facing registrants that are
discussed supra notes 192-198 and accompanying text, the Commission
has adopted disclosure requirements that are similarly subject to
substantive regulation under other statutes and by other agencies,
as discussed infra note 207.
\202\ See Environmental Disclosure, Interpretive Release No. 33-
6130 (Sept. 27, 1979) [44 FR 56924 (Oct. 3, 1979)] (discussing this
history); Proposed Amendments to Item 5 of Regulation S -K Regarding
Disclosure of Certain Environmental Proceedings, Release No. 33-6315
(May 4, 1981) [46 FR 25638]; NRDC v. SEC, 606 F.2d 1031, 1036-42
(D.C. Cir. 1979) (same).
\203\ See 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
requirement to disclose information regarding the material effects
of compliance with Federal, State and local provisions regulating
the discharge of materials into the environment, or otherwise
relating to the protection of the environment, on the registrant's
capital expenditures, earnings and competitive position, as well as
the disclosure of its material estimated capital expenditures for
environmental control facilities, to 17 CFR 229.101(c)(1)(xii).
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More recently, the Commission published the 2010 Guidance,
explaining how the Commission's existing disclosure rules may require
disclosure of the impacts of climate change on a registrant's business
or financial condition.\204\ And in 2020, the Commission amended its
disclosure rules 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.\205\
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\204\ See 2010 Guidance. As the Commission discussed in the
guidance, the agency reviewed its full disclosure program relating
to environmental disclosures in SEC filings in connection with a
Government Accountability Office review. Among other things, 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 MD&A;
identified certain climate-related issues that companies may need to
consider in making their disclosures; and stated that registrants
should consider any financial statement implications of climate
change issues in accordance with applicable accounting standards.
\205\ See Modernization of Regulation S-K Items 101, 103, and
105, Release No. 33-10825 (Aug. 26, 2020) [85 FR 63726 (Oct. 8,
2020)].
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Similarly, the Commission is adopting the final rules based on its
determination that the required disclosures will elicit information
that investors have indicated is important to their investment and
voting decisions.\206\ As explained throughout this release, climate-
related risks can affect a company's business and its financial
performance and position in a number of ways. A growing number of
investors across a broad swath of the market consider information about
climate-related risks to be important to their decision-making. These
investors have expressed the need for more reliable information about
the effects of climate-related and other severe weather events or other
natural conditions on issuers' businesses, as well as information about
how registrants have considered and addressed climate-related risks
when conducting operations and developing business strategy and
financial plans. These rules respond to this need by providing
investors more reliable and decision-useful disclosure of strategies
and risks that a registrant has determined will likely materially
impact its business, results of operations, or financial condition. The
disclosure of such information--whether climate-related or otherwise--
falls within the authority conferred by Congress in the Securities Act
and the Exchange Act.\207\
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\206\ See supra section I.A.
\207\ The final rules are also consistent with other disclosure
items that are similarly subject to substantive regulation under
other statutes and by other agencies. For example, banks, bank
holding companies, savings and loan associations, and savings and
loan holding companies are subject to subpart 1400 of Regulation S-K
despite the substantive jurisdiction and regulation of other state
and Federal prudential regulators. Similarly, here, the importance
of climate-related risks to investor decision-making makes them
appropriate for disclosure regardless of other regimes that
substantively regulate those issues.
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The Regulation S-X provisions of the final rules are also within
the Commission's authority. In addition to the statutory provisions
discussed above, the Federal securities laws provide the Commission
with extensive and specific authority to prescribe financial statement
disclosures, set accounting standards, and establish accounting
principles for entities that file financial statements with the
Commission.
As noted above, Section 7(a)(1) of the Securities Act specifies
that a registration statement shall contain, among other things, the
information specified in Schedule A. Schedule A in turn requires
disclosure of balance sheet and profit and loss statement (i.e.,
comprehensive income statement) information ``in such detail and in
such form as the Commission shall prescribe.'' \208\ In addition,
Section 12(b)
[[Page 21686]]
of the Exchange Act provides the Commission with specific authority to
require not only balance sheet and income statement disclosure, but
also ``any further financial statements which the Commission may deem
necessary or appropriate for the protection of investors.'' \209\
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\208\ See Schedule A, paras. 25 and 26. The ``form'' required by
the Commission includes both financial statements and notes to those
statements. See 17 CFR 210.1-01(b) (specifying the term ``financial
statements'' includes all notes to the statements and related
schedules).
\209\ 15 U.S.C. 78l(b)(1)(J) through (L).
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Section 19(a) of the Securities Act also grants the Commission
extensive authority to ``make, amend, and rescind such rules and
regulations as may be necessary to carry out the provisions of,'' the
Securities Act, which includes ``defining accounting, technical, and
trade terms used in'' the Securities Act. ``Among other things,'' this
section grants the Commission the authority to ``prescribe . . . the
items or details to be shown in the balance sheet and earning
statement, and the methods to be followed in the preparation of
accounts, in the appraisal or valuation of assets and liabilities, in
the determination of depreciation and depletion, in the differentiation
of recurring and nonrecurring income, in the differentiation of
investment and operating income, and in the preparation, where the
Commission deems it necessary or desirable, of consolidated balance
sheets or income accounts of any person directly or indirectly
controlling or controlled by the issuer, or any person under direct or
indirect common control with the issuer.'' \210\ Sections 13 and 23 of
the Exchange Act grant the Commission similar authority with respect to
reports filed under that Act.\211\
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\210\ 15 U.S.C. 77s(a).
\211\ 15 U.S.C. 78m(b)(1); see 15 U.S.C. 78w(a)(1) (``The
Commission . . . shall . . . have the power to make such rules and
regulations as may be necessary or appropriate to implement the
provisions of [the Exchange Act] for which [it is] responsible or
for the execution of the functions vested in [it] by [the Exchange
Act], and may for such purposes classify persons, securities,
transactions, statements, applications, reports, and other matters
within their respective jurisdictions, and prescribe greater,
lesser, or different requirements for different classes thereof.'');
see also 15 U.S.C. 7218(c) (``Nothing in the [Sarbanes-Oxley Act of
2002] . . . shall be construed to impair or limit the authority of
the Commission to establish accounting principles or standards for
purposes of enforcement of the securities laws.''); Policy
Statement: Reaffirming the Status of the FASB as a Designated
Private-Sector Standard Setter, Release No. 33-8221 (Apr. 25, 2003)
[68 FR 23333, 23334 (May 1, 2003)] (``While the Commission
consistently has looked to the private sector in the past to set
accounting standards, the securities laws, including the Sarbanes-
Oxley Act, clearly provide the Commission with authority to set
accounting standards for public companies and other entities that
file financial statements with the Commission.'').
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Relying on these provisions, the Commission has prescribed the form
and content of the financial statements to ensure that investors have
access to information necessary for investment and voting decisions.
The Commission adopted Regulation S-X in 1940, which governs the form
and content of the financial statements, pursuant to its authority
under, among other provisions, Sections 7 and 19(a) of the Securities
Act and Sections 12 and 23(a) of the Exchange Act.\212\ Over time, the
Commission has amended Regulation S-X to add, modify, and eliminate
requirements, as appropriate, with respect to the form and content of
the financial statements, taking into consideration the development of
accounting practices in the marketplace, investors' need for
information important to their decision-making, as well of the costs of
such disclosures.
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\212\ See Adoption of Regulation S-X, 5 FR 949, 954 (Mar. 6,
1940).
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For example, the Commission has on numerous occasions amended
Regulation S-X to require the disclosure of particular items of
information in the balance sheet or in the income statement.\213\ The
Commission has similarly amended Regulation S-X to require additional
information in the financial statements with respect to particular
issuers or types of transactions, when it has determined that action in
those specific areas was responsive to the information needs of
investors.\214\
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\213\ See Improved Disclosures of Leases, Release No. 33-5401
(June 6, 1973) [38 FR 16085, 16085 (June 20, 1973)] (proposing
amendments to Rule 3-16 of Regulation S-X to require disclosure of,
among other things, total rental expenses and minimum rental
commitments, explaining that for many years corporate disclosure of
leased assets ``has not been sufficient to enable investors to
determine the nature and magnitude of such assets, the size of
financial commitments undertaken and the impact upon net income of
this kind of financing''); Improved Disclosures of Leases, Release
No. 33-5428 (Oct. 23, 1973) [38 FR 29215 (Oct. 23, 1973)] (adopting
amendments to Rule 3-16); General Revision of Regulation S-X,
Release No. 6233 (Sept. 25, 1980) [45 FR 63660, 63664 (Sept. 25,
1980)] (requiring separate disclosure of domestic and foreign pre-
tax income, in part because the Commission had ``seen substantial
voluntary inclusion by registrants of this tax information in their
annual reports to shareholders'').
\214\ See Amendments to Financial Disclosures About Acquired and
Disposed Businesses, Release No. 33-10786 (May 20, 2020) [85 FR
54002 (Aug. 31, 2020)] (amending Regulation S-X as part of ``an
ongoing, comprehensive evaluation of our disclosure requirements''
to improve for investors the financial information about acquired
and disposed businesses); Financial Statements and Periodic Reports
for Related Issuers and Guarantors, Release No. 33-7878 (Aug. 4,
2000) [65 FR 51692 (Aug. 24, 2000)] (amending Regulation S-X to
require additional disclosures relating to guaranteed securities,
and explaining that the amendments codified Commission staff
practices over the years and would eliminate uncertainty regarding
financial statement requirements and ongoing reporting).
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Similarly, the Commission is adopting the final rules based on its
determination that the required financial statement disclosures will
provide investors with information that is important to their
investment and voting decisions. Specifically, the Commission is
exercising its authority to prescribe the content and form of the
financial statements to require registrants to disclose certain
information about costs and expenditures related to: (1) severe weather
events and other natural conditions; and (2) in connection with the
purchase and use of carbon offsets and RECs, as well as certain
information about financial estimates and assumptions, in the notes to
the financial statements. As explained in greater detail below,
investors have expressed a need for this information,\215\ and we
believe the final rules will allow investors to make better informed
investment or voting decisions by eliciting more complete disclosure of
financial statement effects and by improving the consistency,
comparability, and reliability of the disclosures.
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\215\ See infra notes 1741 and 2133. See also infra note 1961
(commenters generally supportive of the proposed expenditure
disclosures).
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For similar reasons, we disagree with objections by commenters
based on the non-delegation and major-questions doctrines.\216\ The
non-delegation objection is misplaced because the long-standing
statutory authority that we rely on provides intelligible principles to
which the Commission must conform in its rulemaking.\217\ Indeed, the
Supreme Court early in the Commission's history rejected a non-
delegation challenge to one of the securities laws that the Commission
administered, and the well-tested delegation of rulemaking authority
that we exercise here likewise falls comfortably within the Court's
holding that a delegation poses no constitutional difficulty when it
provides standards that derive ``meaningful content from the purpose of
the Act, its factual background and the statutory context in which they
appear.'' \218\ Also, the major-questions objection is misplaced
because the Commission is not claiming to ``discover in a long-extant
statute an unheralded power representing a
[[Page 21687]]
transformative expansion in [its] regulatory authority.'' \219\ Nor is
it seeking to determine national environmental policy or dictate
corporate policy, as commenters suggest.\220\ Rather, it is adopting
the final rules based on its long standing authority to require
disclosures that provide investors with information that is important
to their investment and voting decisions, as discussed above.
Consistent with this authority and its traditional role, the Commission
is agnostic as to whether and how issuers manage climate-related risks
so long as they appropriately inform investors of material risks.
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\216\ See, e.g., letter from Morrisey et al. (June 15, 2022);
see also note 172.
\217\ See Gundy v. United States, 139 S. Ct. 2116, 2123
(plurality op.); see also note 182and accompanying text.
\218\ Am. Power & Light Co. v. SEC, 329 U.S. 90, 104 (1946).
\219\ West Virginia v. EPA, 597 U.S. 697, 724 (2022) (quotations
omitted).
\220\ See, e.g., letters from Andrew N. Vollmer (May 9, 2022);
Andrew N. Vollmer (Apr. 12, 2022); Morrisey et al. (June 15, 2022);
Cunningham et al. (Apr. 25, 2022); Sharfman et al. For similar
reasons, we disagree with commenters who suggested the disclosures
required by the final rules impermissibly interfere with state
corporate law. See, e.g., letters from Morrisey et al. (June 15,
2022); Cunningham et al. (Apr. 25, 2022) Sharfman et al.
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Finally, we disagree with commenters who raised objections to the
proposed rules on First Amendment grounds.\221\ The required
disclosures are factual information about certain risks companies face
to their businesses, finances, and operations-the type of information
that companies routinely disclose when seeking investments from the
public. And as discussed throughout this release, these required
disclosures also advance crucial interests: the final rules respond to
the growing investor need for more reliable information regarding
climate-related risks by providing investors with information that is
important to their investment and voting decisions. Further, the final
rules have been appropriately tailored to serve those interests,
including with a number of significant changes having been made from
the proposal to take account of the burdens imposed by requiring such
disclosures.
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\221\ See, e.g., letters from Cunningham et al. (Apr. 25, 2022);
Morrisey et al. (June 15, 2022); Sean J. Griffith (June 1, 2022);
Jones Day; Chamber; Sharfman et al.
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C. Disclosure of Climate-Related Risks
1. Definitions of Climate-Related Risks and Climate-Related
Opportunities (Items 1500 and 1502(a))
a. Proposed Rule
The Commission proposed to 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.\222\ As
proposed, a registrant could also optionally disclose the actual and
potential impacts of any climate-related opportunities it is
pursuing.\223\ The Commission proposed definitions of ``climate-related
risks'' and ``climate-related opportunities'' that were substantially
similar to the TCFD's corresponding definitions of those terms \224\ to
provide a common terminology that would allow registrants to disclose
climate-related risks and opportunities in a consistent and comparable
way. In the Proposing Release, the Commission expressed its belief that
grounding the definitions in a framework that is already widely
accepted could help limit the burden on registrants to identify and
describe climate-related risks while improving the comparability and
usefulness of the disclosures for investors.\225\
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\222\ See Proposing Release, section II.B.1.
\223\ See id.
\224\ See TCFD, Recommendations of the Task Force on Climate-
related Financial Disclosures, Appendix 5 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>.
\225\ See Proposing Release, section II.B.1.
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The Commission proposed to 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 a whole.\226\ The Commission
proposed to define ``value chain'' to mean the upstream and downstream
activities related to a registrant's operations.\227\ Under the
proposed definition, upstream activities would 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 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).\228\ The Commission
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.\229\
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\226\ See id.
\227\ See id.
\228\ See id.
\229\ See id.
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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''). The Commission proposed to define ``physical
risks'' to include both acute and chronic risks to a registrant's
business operations or the operations of those with whom it does
business.\230\ The Commission proposed to define ``acute risks'' to
mean event-driven risks related to shorter-term extreme weather events,
such as hurricanes, floods, and tornadoes.\231\ Under the proposed
rule, ``chronic risks'' would be defined to mean those risks that a
business may face as a result of longer term weather 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.\232\ The Commission proposed to
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.\233\ Transition risks would include, but not be
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.\234\
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\230\ See id.
\231\ See id.
\232\ See id.
\233\ See id.
\234\ See id.
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The Commission proposed to 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.\235\ If a
physical risk, the rule proposal would require a registrant to describe
the nature of the risk, including whether it may be categorized as an
acute or chronic risk.\236\ A registrant would also be required to
describe the location and nature of the properties, processes, or
operations subject to the physical
[[Page 21688]]
risk.\237\ The rule proposal defined ``location'' to mean a ZIP code
or, in a jurisdiction that does not use ZIP codes, a similar
subnational postal zone or geographic location.
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\235\ See id.
\236\ See id.
\237\ See id.
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The Commission proposed to require additional disclosure from a
registrant that has identified a climate-related risk related to
flooding or high water stress. As proposed, if a risk concerns the
flooding of buildings, plants, or properties located in flood hazard
areas, the registrant would be required to disclose the percentage of
those assets that are located in flood hazard areas in addition to
their location.\238\ If a risk concerns the location of assets in
regions of high or extremely high water stress, as proposed, the
registrant would be required to disclose the amount of assets (e.g.,
book value and as a percentage of total assets) located in those
regions in addition to their location. The registrant would also be
required to disclose the percentage of the registrant's total water
usage from water withdrawn in those regions.\239\
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\238\ See id.
\239\ See id.
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The Commission proposed to require a registrant to describe the
nature of an identified transition risk, including whether it relates
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.\240\ In this regard, the proposed rule
stated that a registran
[…truncated; see source link]Indexed from Federal Register on March 28, 2024.
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