September 8, 2022
On March 22, 2022, the US Securities and Exchange Commission (SEC) released its highly anticipated, new proposed rule – The Enhancement and Standardization of Climate Related Disclosures for Investors. The 60-day comment period for the proposed regulation concluded on May 20, 2022.
The goal of the proposal, which spanned almost 500 pages of content, is to offer comparable, consistent, and decision-relevant information to investors. This information covers climate related risks under the greater ESG (environmental, social and governance) reporting framework.
The SEC’s rule has seen both quantitative and qualitative disclosures added. These have been added outside and inside of financial statements under the new Items 1504 and 1505 specified in Regulation S-K. Furthermore, the rule will require new sections to be added to registration statements and annual report documents.
It’s important to note that not all new disclosures will be subject to the attestation required by The Enhancement and Standardization of Climate Related Disclosures for Investors. This means that it will be crucial for registrants and providers alike to correctly structure their disclosures to clarify exactly which disclosures will be subject to attestation.
The Enhancement and Standardization of Climate Related Disclosures for Investors now require registrants to disclose specific climate-related information. This includes data about climate risks that have the potential to enact material impacts on a business or consolidated financial statements and GHG emission metrics. This will enable investors to more accurately identify and assess the risks involved.
The new financial statement metrics include climate impacts on current existing audited financial statement line items. The framework is based on key recommendations from the Task Force on Climate-Related Financial Disclosures’ (TCFD), as well as the GHG Protocol.
The SEC’s new rules will require registrants to disclose information pertaining to two key categories: oversight and risk disclosures and greenhouse gas disclosures.
Information about oversight and risk disclosures that must be disclosed include:
Registrants will need to disclose data on the impacts of climate-related events, physical risks, and transitional activities on their consolidated financial statements’ line items. They’ll also need to disclose pertinent expenditures and financial estimates of the impacts of these climate-related events and transition procedures.
In terms of greenhouse gas disclosures, registrants must disclose data on Scope 1 greenhouse gas emissions and Scope 2 GHG emission metrics, both in terms of intensity and absolute emissions. There is no attestation for Scope 3 disclosures. Scope 3 emissions and their intensity should be disclosed if material, or if a registrant has set a GHG emission reduction goal that includes this scope of emissions.
All climate-related targets, goals and transition plans must also be disclosed. Plus, registrants must include attestation reports from independent GHG emissions experts covering their Scope 1 and 2 emissions disclosure. All attestation reports must be submitted by an independent attestation service provider.
The SEC’s rule requires registrants to provide climate-related disclosures in their registration statements and yearly Exchange Act reports. Regulation S-K-required climate disclosures must get disclosed in separate, captioned sections within annual reports and registration statements. Alternatively, this information must be included in a separate section by reference from other sections like Description of Business or Risk Factors. Registrants must also provide mandated climate-related financial statement metrics and disclosures in separate notes to each audited fiscal statement.
Registrants are further required to electronically tag quantitative and narrative climate-related disclosure data in Inline XBRL. The rule requires accelerated filers and large accelerated filters to submit attestation reports covering disclosures of its Scope 1 emissions and Scope 2 emissions. Its transition periods have provided these filers one fiscal year to transition and offer limited assurance. They allow for another two fiscal years to transition to providing mandated reasonable assurance in line with specified disclosure dates.
The attestation requirements are based on the AICPA (American Institute of Certified Public Accountants) model. This defines attestation types as either limited or reasonable assurance, as mentioned above. Limited assurance must stipulate if a provider is aware of any material modifications that should be made to disclosure subject matter in line with Item 1504 requirements. Reasonable assurance requires that an opinion be provided on whether or not subject matter is aligned with the requirements of S-K Item 1504 with regard to material aspects. Or that any assertions about the subject matter are correctly stated in material terms.
According to the SEC, any organization with an Initial Public Float Determination of $700 million or more is classified as a large accelerated filer. While organizations with Initial Public Float Determinations of less than $700 million but $75 million or more are classified as accelerated filers.
Assurance requirements cover Scope 1 and Scope 2 emissions outside of financial statements for large accelerated filers and accelerated filers. Scope 3 disclosures are not subject to attestation requirements, which will also be subjected to a safe harbor provision for certain registrants.
The attestation disclosure requirements will get phased in over the course of a range of implementation dates. Should the rule be finalized by December of 2022, disclosures for calendar year-end filers would be due as follows:
Not all of the SEC’s new disclosures require attestation. This is why registrants must structure their disclosures appropriately to highlight what is subject to attestation and what is not.
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