CRS Reviews SEC Proposed Climate Risk Disclosure Rules

The Congressional Research Service ("CRS") reviewed SEC-proposed climate-related disclosure rules which, if adopted, would require "domestic or foreign SEC registrants to include climate-related information in their registration statements."

The proposed rules would require public companies to report on their (i) direct greenhouse gas ("GHG") emissions and, when appropriate, their downstream and upstream GHG emissions and (ii) mitigation efforts to counter climate-related natural events that impact their consolidated financial statements. SEC officials assert that mandated climate-related disclosures are necessary to address inconsistent and incomplete reporting under the current disclosure regime.

CRS highlighted the key elements of the SEC proposal:

  • On Climate-Related Risks: New rules would require a company to disclose (i) identified climate-related risks and any efforts to counter such risks, (ii) the impact of identified climate-related risks on its business model and financial planning and (iii) "[an] estimated cost of carbon emissions [and] how it is formulated."

  • On GHG Emissions: Firms would be required to disclose (i) direct GHG emissions from any operations that the firm owns or controls and (ii) indirect GHG emissions "from purchased electricity and other forms of energy." The proposed rules would provide a safe harbor that would "shield firms from legal liability under the federal securities laws" if certain requirements are met and would exempt smaller reporting companies from such disclosures.

  • On Targets and Goals: Firms that publicly release their climate-related goals would be required to include specific information in them, such as evidence of how those goals will be achieved.

  • On Financial Statement Disclosures: Companies would be required to include footnotes in their audited financial statements where climate-related risks will "materially" impact certain line items and related expenditures.

CRS focused on the current debate over the "central tenet" of the proposed rule - that the information to be disclosed is "material" to investors. CRS noted SEC Chair Gary Gensler's view that the information in the proposed rules are "material" to investors because "GHG emissions have become a commonly used metric to assess a company's exposure to climate related risks that are reasonably likely to impact its business, operations results or financials." CRS also cited sources, including from SEC Commissioner Hester M. Peirce, that the rule lacked "a materiality limitation," and "a credible rationale for such a prescriptive framework."

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