Climate-related Disclosure Rules by Public Companies
The US Securities and Exchange Commission (SEC) releases climate-related disclosure rules by public companies, aiming to help investors understand the impact of public companies’ climate information on financial performance.
In March 2022, the SEC launched a solicitation for opinions on climate-related disclosure and received a total of more than 24,000 responses. The final version of the rules formulated this time will provide investors with consistent, comparable, and decision-making information in the financial reports of public companies.
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Current Status of Climate-related Disclosure
Climate-related information can affect the financial performance of public companies, and investors, asset managers and investment advisers are looking for the impact of this information on public company performance and assessing how well boards are monitoring climate risk. Numerous jurisdictions already require public companies to disclose climate-related information for the market to make decisions about holding, buying, or selling securities.
Before the issuance of the climate-related disclosure rules by public companies, one-third of public companies have already disclosed climate-related information, 40% of public companies have added discussions on climate-related content in their annual reports, and 20% of public companies have disclosed Scope 1 and Scope 2 GHG data. Of the Russell 1000 index constituents, 90% disclose climate-related information and 60% provide GHG data.
However, the current disclosure provided by public companies lacks consistent rules, so investors cannot find more detailed, accurate and comparable disclosures. Companies can disclose information under different frameworks or provide partial disclosures. These situations increase the cost for investors to obtain and analyze information, which has a negative impact on investment decisions. Therefore, the SEC believes that it is necessary to propose standardized climate-related disclosure rules by public companies.
Contents of Climate-related Disclosure Rules by Public Companies
When formulating this disclosure rule, the SEC referred to the framework of the Task Force on Climate-related Financial Disclosures (TCFD) and the advisory opinions mentioned in 24,000 responses. The SEC has also adopted protocols related to the GHG Protocol to be consistent with international standards in terms of greenhouse gas emission data. The SEC requires public companies to disclose the following information:
- Climate-related risks that have or are likely to have a significant impact on the listed company’s business strategy, operations, and financial performance, including short-term (within 12 months) and long-term (more than 12 months).
- Climate-related risks that pose actual or potential material impacts on public companies’ strategies, business models and prospects.
- When public companies implement actions to mitigate climate change or adapt to climate change, quantitative and qualitative descriptions of the significant expenditures related to these actions and the significant impact on financial performance.
- When public companies implement a transition plan to reduce transition risks, a description of the transition plan, issues that need to be disclosed in the next few years and how these actions will affect the listed company’s business model, operations, and financial performance.
- When public companies implement scenario analysis, climate risks that have a material impact on the company’s business model, operations and financial performance and related disclosures in the scenario analysis.
- When a public company uses an internal carbon price to measure material climate risk, information about that internal carbon price.
- Public company board oversight of climate risk and management’s actions in assessing and managing climate risk.
- Public companies’ processes for identifying, measuring, and managing material climate risks and how these processes are integrated into whole risk management systems.
- When public companies set climate-related targets, information about the targets and the material impact the targets will have on their business models, operations, and financial performance.
- When the listed company belongs to Large Accelerated Filer (LAF) or Accelerate Filer (AF), material Scope 1 and Scope 2 greenhouse gas emission data, as well as subsequent attestation report.
- Capitalized costs, expenses, expenses, and losses incurred when extreme weather events occur.
- Capitalized costs and expenses incurred from the use of carbon offsets and sustainable energy credits to achieve the public company’s climate goals.
- A qualitative description of the impact of extreme weather on the assumptions and estimates used by public companies in preparing financial reports.
The SEC plans to implement climate-related disclosure rules by public companies in phases. Different types of companies have different implementation times. For example, LAFs’ compliance documents and Scope 1 and Scope 2 data will begin to be disclosed in fiscal year 2023 (released in 2024), and Scope 3 Data will begin to be disclosed in fiscal year 2024 (released in 2025). The time for AFs and NAFs is delayed by one year compared to LAFs, while the time for Smaller Reporting Companies (SRCs) will be delayed by two years and will be exempted from Scope 3 data disclosure.
Reference:
SEC Adopts Rules to Enhance and Standardize Climate-Related Disclosures for Investors
