SEC proposes extensive climate change-related disclosure rules

The U.S. Securities and Exchange Commission (SEC) has proposed rules that, if adopted, would require most U.S. reporting companies¹ to report detailed climate-related information in certain SEC filings. Most of the proposed rules would not apply to Canadian companies that report under the multijurisdictional disclosure system (MJDS). The deadline for commenting on the SEC proposal has been extended to June 17, 2022.

What you need to know

• If the SEC’s proposed rules are adopted, U.S. reporting companies other than Canadian MJDS issuers would be required to make extensive disclosures in registration statements and annual reports about their physical and transition-related climate change risks², climate-related effects on their strategy, business model and outlook, board and management oversight of climate-related issues, climate-related risk management practices, greenhouse gas (GHG) emissions, and climate targets and goals.
• Like the proposed climate change-related disclosure rules published for comment by the Canadian Securities Administrators (CSA) in October 2021, the SEC’s proposal is modelled in part on the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD). However, the SEC’s proposed rules are much more prescriptive than the TCFD’s recommendations and the CSA’s principles-based rule proposal.
• The SEC’s proposed rules also go further than the CSA’s proposed rules in some areas. For example, the SEC is proposing mandatory disclosure of Scope 1 and 2 emissions³. Disclosure of Scope 3 emissions would also be required if a) such emissions are material to the company or b) the company includes Scope 3 emissions as part of a public GHG emissions reduction target or goal. By contrast, the CSA proposed a comply-or-explain model for GHG emissions disclosure while indicating that it was considering mandatory Scope 1 emissions reporting. In addition, unlike the CSA, the SEC has proposed mandatory filing of third-party attestation reports covering certain GHG emissions disclosures as well as disclosure of certain climate-related information in the notes to companies’ audited annual financial statements.
• If adopted, the SEC’s proposed requirements would be phased in over several years, with the compliance date depending on the company’s filer status and the specific requirement. For example, if the proposed rules become effective before the end of 2022, the earliest compliance date would apply to large accelerated filers in respect of SEC reports for fiscal year 2023 (filed in 2024).
• Climate change disclosure is increasingly a focus of other regulators as well, including the Canadian Office of the Superintendent of Financial Institutions (OSFI), which on May 26 released draft guidelines that would provide regulated financial institutions with a framework for managing climate-related risk and require them to make climate-related financial disclosures.

Applicability of the SEC’s proposed rules to domestic and foreign U.S. reporting companies

The proposed SEC rules would apply to U.S. reporting companies, including SEC foreign issuers other than Canadian MJDS filers, and would require such issuers to include prescribed climate-related disclosures in specified registration statements for securities offerings (Forms F-1, S-1, F-3 and S-3) and M&A transactions (Forms F-4 and S-4), annual reports on Forms 10-K (for domestic U.S. reporting companies) and 20-F (for foreign non-MJDS issuers), and audited financial statements. In addition, domestic U.S. reporting companies would be required to disclose in their quarterly reports on Form 10-Q any material changes to their previous climate-related disclosure.

Although the SEC is not proposing to amend Form 40-F, the annual reporting form that Canadian MJDS issuers use, it has requested feedback on whether Form 40-F filers should be required to comply with the SEC’s proposed climate-related disclosure requirements.

If the SEC’s proposed rules are adopted, a Canadian issuer planning to go public in the U.S. that was not eligible to use the southbound MJDS system would be required to provide climate-related disclosures in its initial SEC registration statement and in its annual reports thereafter, unless and until it became MJDS-eligible. By contrast, an MJDS-eligible Canadian company completing a cross-listing in the U.S. would not have to comply with the SEC rules as currently proposed in connection with its initial SEC registration or thereafter (unless and until MJDS status was lost).

The SEC has not proposed any changes to Form 8-K, the form of current report for U.S. domestic reporting companies. It is proposing, however, to amend Form 6-K, which is the form of current report that foreign private issuers (including MJDS issuers) furnish to the SEC in lieu of Form 8-K. In Form 6-K, “climate-related disclosure” would be added as an item that might trigger a requirement to furnish a report on Form 6-K to the extent the information is material and the issuer:

• makes or is required to make the information public under the laws of its jurisdiction of incorporation;
• files or is required to file the information under the rules of any stock exchange; or
• otherwise distributes, or is required to distribute, the information to its securityholders.

Consistent with other disclosure requirements in Form 6-K, the proposed amendments to Form 6-K do not specify whether or when a foreign private issuer must report material climate-related information or what the content should be of such disclosure. Instead, the form and content of any such climate-related disclosure that would be attached to the Form 6-K generally would be determined by home country disclosure requirements.

Some Canadian public companies already disclose climate-related information pursuant to general securities law or stock exchange requirements to disclose material information or voluntarily, for example, in alignment with TCFD or general sustainability reporting frameworks. As Canadian climate-related disclosure requirements evolve, Canadian companies that are also U.S. reporting companies will need to consider, among other things, whether the climate-related information they are required to make public, file under stock exchange rules or distribute to their securityholders is material and should be furnished to the SEC on Form 6-K.

The SEC’s proposed rules may also have implications for M&A transactions. For example, the proposed rules require climate-related disclosures with respect to the company being acquired under certain circumstances and do not contemplate any transition period in respect of newly acquired companies. (However, the SEC has asked commentators if transitional relief should be provided in respect of recently acquired companies.)

Financial statement disclosure

The SEC is proposing to require U.S. reporting companies (other than Canadian MJDS issuers) to disclose in the notes to their annual financial statements certain disaggregated climate-related financial statement metrics and related disclosures. The disclosures would be required for the company’s most recently completed fiscal year and for the fiscal years included in the consolidated financial statements for the relevant filing. The scope of the proposed disclosures would encompass matters such as:

• the financial impact of severe weather events and other natural conditions;
• expenditures to mitigate the risks of severe weather events and other natural conditions;
• the financial impact of transition activities, such as efforts to reduce GHG emissions or otherwise mitigate exposure to transition risks; and
• expenditures related to any such transition activities (such as efforts to increase energy efficiency).

The SEC is also proposing to require companies to quantify any such impact if the positive or negative effect exceeded 1% for any financial statement line item in the relevant fiscal period. In addition, for each type of financial statement metric, the company would also have to disclose contextual information to enable the reader to understand how the company derived the metric, including a description of significant inputs and assumptions used, and, if applicable, policy decisions made by the registrant to calculate the specified metrics. Companies would also be required to provide a qualitative discussion of the impact of any severe weather events or transition activities on estimates and assumptions used in the financial statements.

As part of the financial statements, the climate-related metrics would be subject to audit by the company’s independent public accounting firm and come within the scope of the company’s internal controls over financial reporting.

Notable differences between the SEC and CSA proposals

The CSA has not proposed any climate-related financial statement disclosure requirements.

Governance

Like the CSA, the SEC is proposing to require U.S. reporting companies (other than Canadian MJDS issuers) to disclose how the board oversees climate-related risks, as well as management’s role in assessing and managing climate-related risks, both of which are key TCFD recommendations. Also like the CSA, the SEC is not proposing to set any materialitity threshold for such disclosures.

Notable differences between the SEC and CSA proposals

The SEC’s proposed rules specify in significantly more detail than the CSA’s proposed rules what companies must disclose regarding their governance structures and processes relating to climate-related risks. For example, the SEC is proposing to require disclosure, of among other things:

• which board members or committees are responsible for the oversight of climate-related risks and which board members, if any, have expertise in climate-related risks;
• the processes and frequency of board and/or board committee discussions of climate-related risks;
• whether and how the board sets climate-related targets or goals and how it oversees progress against such targets and goals;
• whether certain management positions or committees are responsible for assessing and managing climate-related risks and, if so, the identity of such positions or committees and the relevant expertise of the position holders or members;
• the processes by which the relevant managers or management committees are informed about and monitor climate-related risks; and
• whether and how frequently management reports to the board about climate-related risks.

Risk management and strategy

The SEC is proposing to require U.S. reporting companies (other than Canadian MJDS issuers) to describe climate-related risks (whether physical or transitional) that are reasonably likely to have a material impact over the short, medium and long term (Identified Climate Risks) and how any Identified Climate Risks have affected or are likely to affect the company’s strategy, financial planning, capital allocation, business model and outook. These proposed requirements are generally consistent with the CSA proposal.

The SEC is also proposing to require descriptions of companies’ processes for identifying, assessing and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes (without regard to materiality). These requirements (including the lack of a materiality qualifier) are broadly similar to the CSA’s proposed requirements.

Notable differences between the SEC and CSA proposals

The SEC’s proposed rules specify in significantly more detail what must be disclosed about the nature, extent, severity and potential impacts of Identified Climate Risks and regarding their risk identification, assessment and management practices and strategies. For example, companies would be required to disclose:

• the nature, location (if physical) and severity of Identified Climate Risks;
• the actual and potential impacts, including the time horizon, of such Identified Climate Risks on, for example, their business operations (including types and locations), products or services, suppliers and other parties in the value chain, research and development expenditures, and activities to mitigate or adapt to climate-related risks (including the adoption of new technologies or processes);
• any transition plan the company has adopted as part of its climate-related risk management strategy (including the relevant metrics and targets used to identify and manage any physical and transition risks);
• any scenario analysis that the company uses to assess the resilience of its business strategy to Identified Climate Risks (including the scenarios used, as well as the parameters, assumptions, analytical choices, and projected principal financial impacts); and
• the role that any carbon offsets or renewable energy credits or certificates play in the company’s strategy.

Under the SEC proposal, companies would also be required to provide current and forward-looking disclosure of whether and how any Identified Climate Risks affected, or would be reasonably likely to affect, their consolidated financial statements, including the climate-related financial metrics described above and regarding the resilience of the company’s business strategy in light of potential future changes in climate-related risks.

GHG emissions disclosure

The SEC is proposing to require U.S. reporting companies (other than Canadian MJDS issuers) to disclose:

• Scope 1 emissions (i.e., direct GHG emissions from sources owned or controlled by the company) and Scope 2 emissions (i.e., those resulting from the generation of electricity purchased by the company), separately and regardless of materiality;
• Scope 3 emissions (i.e., all other indirect emissions) if: a) they are material to the company; or b) if the company has included Scope 3 emissions as part of a public GHG emissions target or goal (unless the company is a “smaller reporting company”, in which case Scope 3 reporting would not be required); and
• a description of the methodology, significant inputs and significant assumptions used to calculate the GHG emissions.

These disclosures would be required for the current fiscal year in which the report was made. For historical financial years included in the report, such disclosures would be required only if “reasonably available”.

In addition, certain U.S. reporting companies (other than Canadian MJDS issuers) would be subject to independent third-party attestation requirements in respect of their emissions disclosure, depending on their filer status.

In respect of Scope 3 emissions disclosures, the SEC is proposing a safe harbour that would provide that disclosure of Scope 3 emissions by or on behalf of a company would be deemed not to be a fraudulent statement unless it was shown that the statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith.

Notable differences between the SEC and CSA proposals

The CSA proposed a comply-or-explain approach to Scope 1, 2 and 3 GHG emissions disclosure, while indicating that it was also considering mandatory reporting of Scope 1 emissions.

Unlike the SEC, the CSA did not propose any requirements relating to attestation reports.

Disclosure of climate-related targets and other metrics

The SEC is proposing to require U.S. reporting companies (other than Canadian MJDS issuers) that have publicly set climate-related targets or goals to disclose information about the scope, time horizon and strategy to meet such targets as well as performance against such targets. The proposal would also require disclosure of the use of carbon offsets and renewable energy credits to the extent they play a role in the company’s climate-related strategy. In addition, if a company used an internal carbon price, information about that price and how it is set would have to be disclosed.

Notable differences between the SEC and CSA proposals

The CSA’s approach to targets and metrics differs in several respects. For example, disclosure regarding the metrics that a company uses to assess climate-related risks and opportunities, the targets used by the company to manage such risks and opportunities and the company’s performance against such targets would be required only if the information was material. Second, the CSA’s proposed rules do not specifically address internal carbon prices, renewable energy credits or the use of carbon offsets.

Safe harbour for forward-looking statements

The SEC rule proposal makes it clear that to the extent any climate-related disclosures constitute “forward-looking statements”, the safe harbours in the U.S. Private Securities Litigation Reform Act (PSLRA) would apply, if the other prescribed conditions for such safe harbours were met. For example, the PSLRA’s safe harbours are not available for initial public offerings or offerings by partnerships.

Phased-in compliance

The SEC’s proposed climate-related disclosure requirements would be phased in over several years, with the compliance deadline depending on the company’s filer status and the specific disclosure requirement. For example, if the rules become effective before the end of 2022:

• Large accelerated filers would be required include all of the prescribed disclosures, except Scope 3 emissions disclosure, in their filings due in 2024 (in respect of fiscal 2023). Scope 3 emissions disclosure would be required in their filings due in 2025 (in respect of fiscal 2024).
• Accelerated and non-accelerated filers would be required to include all disclosures, except Scope 3 emissions disclosures, in their filings due in 2025 (in respect of fiscal 2024). Scope 3 emissions disclosure would be required in their filings due in 2026 (in respect of fiscal 2025).
• Smaller reporting companies would be required to include all prescribed disclosures in their filings due in 2026 (in respect of fiscal 2025).
• There also are phase-in periods for the level of assurance required for attestation reports.

Similar to the SEC, the CSA is proposing to phase in its climate-related disclosure requirements. Assuming that the CSA’s rules are finalized before the end of 2022, non-venture issuers with a December 31 year-end would have to comply in their annual filings due in 2024 (in respect of fiscal 2023). Venture issuers would have a three-year transition phase. For example, venture issuers with a December 31 year end would need to comply in their annual filings due in 2026 (in respect of fiscal year 2025).