SEC Proposed Rules to Enhance and Standardize Climate-Related Disclosures for Investors

By: David Franasiak and Mahlet Makonnen

On March 21, the Securities and Exchange Commission (SEC or Commission) proposed a new rulemaking that would require domestic and foreign issuers (“registrants”) to provide certain climate-related information in their registration statements and annual reports.1 The proposal generally impacts companies listed on U.S. stock exchanges or that publicly offer their securities in the U.S. The SEC notes the rules are intended to enhance and standardize climate-related disclosures to address investor needs. The proposed rule was approved by a vote of 3-1, with Commissioner Hester Peirce voting no. Notably, the proposed rule attempts to rely on the existing legal concept of “materiality” (information that a shareholder might consider important); however, there are those who believe the rule creates confusion around materiality as it applies in some parts of the proposal and not others. Companies are currently required to disclose certain material information to their shareholders, and many include climate risk in their disclosures. The proposal attempts to strike a balance between investor interests and industry feedback by requiring safe harbors for certain disclosures and exemptions for small entities for indirect emissions generated by companies’ suppliers and customers (Scope 3 emissions, as discussed below). While the proposal mainly targets issuers of securities, it will also likely have upstream and downstream implications on private companies. Likewise, covered companies may have to retain third-party services to collect certain information required by the proposed rule, as the proposal suggest on page 71.

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