On March 21, 2022, the U.S. Securities and Exchange Commission (SEC) issued proposed rules to significantly expand and standardize climaterelated disclosures in SEC periodic reports and registration statements.  According to the SEC, the purpose of these rules is to provide consistent, comparable, and reliable information to investors to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.

Modeled in part on recommendations of the Task Force on Climate-Related Financial Disclosures and on the greenhouse gas accounting and reporting standards of the Greenhouse Gas Protocol, these long-awaited rules create an extensive new disclosure framework regarding climate risk, carbon emissions and a variety of climate-related topics.  This new framework would dramatically increase the scope and complexity of public company disclosure requirements and would require a substantial expansion of a registrant’s internal controls, audit and governance functions.

Location of Disclosures and Impacted Filings

Domestic and foreign issuers would be subject to the new rules. The climate changerelated disclosures would be disclosed under Part II, Item 6. Climate-Related Disclosure of Form 10K (replacing the current “Reserved” heading). Any material changes to such disclosures during the fiscal year would need to be disclosed in new Part II, Item 1B. ClimateRelated Disclosure of Form 10Q. Registration statements on Forms S1, S3, S4 and S11 would also be amended to require the climaterelated disclosures. Foreign private issuers’ periodic annual reports on Form 20-F and registration statements on Forms F1, F3 and F4 would also be required to contain the disclosures.

Financial statements are also impacted, as the proposed rules include a new Article 14 to Regulation SX that would require registrants to disclose climaterelated metrics impacting their consolidated financial statements beyond the 1% threshold (as discussed in more detail below) in a note to their financial statements. The disclosure required by Article 14 of Regulation SX would be included in annual reports and registration statements.

Compliance Dates

The proposed rules would include a phasein period, with compliance dates dependent upon the registrant’s filer status, as follows.

Large Accelerated Filers

  • Fiscal year 2023 (filed in 2024) for all proposed disclosures excluding Scope 3 greenhouse gas (GHG) emissions, as defined below.
  • Fiscal year 2024 (filed in 2025) for (i) Scope 3 GHG emissions disclosures, if required, and (ii) limited assurance independent GHG emissions auditor attestation for Scopes 1 and 2 GHG emissions (as defined below) disclosures.
  • Fiscal year 2026 (filed in 2027) for reasonable assurance independent GHG emissions auditor attestation of Scopes 1 and 2 GHG emissions disclosures.

Accelerated and Non-accelerated Filers

  • Fiscal year 2024 (filed in 2025) for all proposed disclosures excluding Scope 3 GHG emissions.
  • Fiscal year 2025 (filed in 2026) for (i) Scope 3 GHG emissions disclosures, if required, and (ii) for accelerated filers only, limited assurance independent GHG auditor attestation of GHG emissions disclosures (nonaccelerated filers are exempt from the attestation requirements).
  • For accelerated filers only, fiscal year 2027 (filed in 2028) for reasonable assurance independent GHG emissions auditor attestation of GHG emissions disclosures.

Smaller Reporting Companies

  • Fiscal year 2025 (filed in 2026) for all proposed disclosures other than the Scope 3 GHG emissions disclosures. Smaller reporting companies are exempt from the requirements to provide Scope 3 GHG emissions disclosures and independent GHG emissions auditor attestation.

Summary of Proposed Disclosure Requirements

The proposed disclosures include requirements about a registrant’s climaterelated risks that are reasonably likely to have a material impact on its business and/or consolidated financial statements.  In addition, the disclosures would require information about the registrant’s Scopes 1 and 2 greenhouse gas (GHG) emissions, regardless of materiality, and Scope 3 GHG emissions if they are material to the registrant.  The proposed rules also would require registrants to disclose climaterelated financial metrics and expenditures in their audited financial statements and governance issues regarding climaterelated issues.

The following is a summary of the key disclosures proposed by the rules.

Climate-Related Risks

The proposed rules would require a registrant to disclose any climaterelated risks reasonably likely to have a material adverse impact on its business or consolidated financial statements over the short, medium and long term — time horizons the registrant must describe. “Climaterelated risks” are defined as “the actual or potential negative impacts of climaterelated conditions and events on a registrant’s consolidated financial statements, business operations, or value chain, as a whole.”  The categories of risks required to be disclosed would include “physical risks,” “transition risks,” “acute risks” and “chronic risks.”


The proposed rules would require disclosure regarding a registrant’s climaterelated risk governance.  Some of the required disclosures include the following:

  • Board members or board committees responsible for the oversight of climaterelated risks.
  • Whether any member of the registrant’s board of directors has expertise in climaterelated risks.
  • A description of the processes and frequency by which the board or board committee discusses climaterelated risks.
  • How the board is informed about climate-related risks, and how frequently the board considers such risks.
  • Whether and how the board or board committee considers climate-related risks as part of its business strategy, risk management and financial oversight.
  • Whether and how the board sets climate-related targets or goals and how it oversees progress against those targets or goals, including any interim targets or goals.
  • Management’s role in assessing and managing climaterelated risks, including whether certain positions of management are responsible for assessing and managing climaterelated risks, the processes by which such parties are informed about climaterelated risks, and whether and how frequently such parties report to the board on climaterelated risks.

Risk Management

The proposed rules would require disclosure of a registrant’s processes for identifying, assessing and managing climaterelated risks and how such processes are integrated into the registrant’s overall risk management system.  Specifically, a registrant would be required to disclose, as applicable: (i) how it determines the relative significance of climaterelated risks compared to other risks; (ii) how it considers existing or likely regulatory requirements or policies, such as GHG emissions limits, when identifying climaterelated risks; (iii) how it considers shifts in customer or counterparty preferences, technological changes or changes in market prices in assessing potential transition risks; and (iv) how it determines the materiality of climaterelated risks, including how it assesses the potential size and scope of any identified climaterelated risk.

Transition Plans – A registrant would be required to describe any transition plan it maintains to mitigate or adapt to climaterelated risks that is an important part of its climaterelated risk management strategy, especially in jurisdictions where it has made commitments to reduce GHG emissions.  Such descriptions should include plans to mitigate or adapt to any identified risks, including laws, regulations and polices that restrict GHG emissions.  A registrant would also be required to disclose steps taken during the prior year to achieve the transition plan’s targets and goals.

Climate-Related Impacts on Strategy, Business Model and Outlook

The proposed rules would require a registrant to disclose how climaterelated risks have affected or are likely to affect its strategy, business model and outlook, including a time horizon for each described impact.  The registrant would be required to disclose impacts on its: (i) business operations, including the types and locations of its operations; (ii) products or services; (iii) suppliers and other parties in its value chain; (iv) activities to mitigate or adapt to climaterelated risks, including new technologies or processes; (v) expenditure for research and development; and (vi) any other significant changes or impact.

Carbon Offsets  If a registrant uses carbon offsets or renewable energy credit or certificates (RECs) in its climaterelated business strategy, the registrant would be required to disclose the role of carbon offsets or RECs in the strategy.  Under the proposed rules, carbon offsets represent “an emissions reduction or removal of greenhouse gases in a manner calculated and traced for the purpose of offsetting an entity’s GHG emissions” and would use the EPA definition of REC­  a credit or certificate representing each purchased megawatthour of renewable electricity generated and delivered to a registrant’s power grid.  Registrants would also need to disclose any short- and longterm costs and risks associated with the carbon offsets or RECs, including potential risks in availability or value of offsets or RECs associated with regulation or changes in the market.

Internal Carbon Price – A registrant using an internal estimated cost of carbon emissions (internal carbon price) would be required to disclose (i) the per-metric-ton of carbon dioxide equivalent (CO2e) of the currency used by the registrant, (ii) the total price including any changes over time, (iii) boundaries for measurement of overall CO2e on which the total price is based and (iv) the rationale for selecting the internal carbon price applied.  The registrant would be required to provide this information for each internal carbon price it uses if it uses more than one.  In addition, the registrant would need to disclose how the internal carbon price is used to evaluate and manage climaterelated risks. Forwardlooking statements included in the internal carbon price disclosure would be protected under the Private Securities Litigation Reform Act (PSLRA) safe harbors if all other statutory requirements are met.

Scenario Analysis – The proposed rules would require a registrant to describe the resilience of its business strategy in light of potential future changes in climaterelated risks. To help investors evaluate the resilience of a registrant’s business strategy, the registrant would be required to disclose any scenario analysis or other analytical tools used to assess the resilience of its strategy and business model against climaterelated risks. The proposed rules define scenario analysis as a tool to consider how, under various possible future climate scenarios, climaterelated risks potentially impact the registrant’s operations, business strategy and financial statements when applied to climaterelated assessments, and that can be used to test the resilience of the registrant’s strategy under various future climate scenarios.  Similar to forwardlooking statements contained in the internal carbon price disclosures, forwardlooking statements provided in the scenario analysis disclosure would also be protected under PSLRA safe harbors if all other statutory requirements are met.

Financial Statements

Financial Impact Metrics – Unless the aggregated impact is less than 1% of the total line item for the relevant fiscal year, a registrant would be required to disclose the financial impacts, both positive and negative, of severe weather events (flooding, drought, wildfires, extreme temperatures and sea level rise) and other natural conditions, and transition activities on any relevant line item in its financial statements.  For example, revenues could decrease and costs could increase if severe weather events negatively impacted the registrant’s supply chain.

Expenditure Metrics – A registrant would need to disclose separately the aggregate amounts of both expenditures expensed and capitalized costs incurred toward (i) positive and negative events associated with climate-related events and known risks, and (ii) transition activities specifically to reduce GHG emissions. The expenditure metrics would be subject to the same 1% disclosure threshold as the financial impact metrics.

Financial Estimate and Assumptions – A registrant would be required to disclose whether the estimates and assumptions it used to produce its consolidated financial statements were impacted by risks or impacts from climate-related events such as flooding, drought, wildfires, extreme temperatures and sea level rise.

GHG Emissions Disclosures

Metrics Required to Be Disclosed – Under the proposed rules, a registrant would be required to disclose its GHG emissions for the most recently completed fiscal year as well as the historical years included in the financial statements. The proposed rules for GHG emissions are based primarily on the GHG Protocol, including the concept of scopes developed by the GHG Protocol and using definitions substantially similar to those provided by the GHG Protocol.

As such, the proposed rules would require that direct GHG emissions from operations a registrant owns or controls (Scope 1) be disclosed separately from disclosures of indirect GHG emissions from the generation of purchased or acquired electricity and other forms of energy consumed by such operations (Scope 2), and the disclosure of all indirect emissions from upstream and downstream activities in a registrant’s value chain (Scope 3) if material or if a registrant has set a GHG emissions target or goal that includes Scope 3 emissions. A registrant would be required to disclose Scopes 1, 2 and 3 emissions, in terms of the CO2e, in the aggregate and disaggregated by each GHG and in gross terms, excluding purchased or generated offsets.

As noted above, Scope 3 disclosures are required only if material or if a registrant has included Scope 3 emissions in its targets or goals. The proposed rules define material as “a substantial likelihood that a reasonable investor would consider them important when making an investment or voting decision.”  The proposed rules discuss a number of items a registrant might consider when determining whether Scope 3 emissions are material, including:

  • Whether Scope 3 emissions make up a relatively significant portion of the overall emissions.
  • Whether Scope 3 emissions represent a significant risk factor.
  • Consideration of future impacts, including the probability of an event occurring and its magnitude should it occur.

Because Scope 3 emissions are indirect and based largely on third-party data, a registrant that discloses Scope 3 emissions would also be required to describe the data sources used to obtain the information. Such sources would include the use of emissions reported by parties inside the registrant’s value chain and whether such reports were verified or unverified, activity data reported by parties in the registrant’s value chain, and data redirected from other third-party sources outside the registrant’s value chain.

GHG Intensity – In addition to disaggregated and aggregate disclosures, the proposed rules would require a registrant to disclose Scopes 1, 2 and 3 emissions in terms of GHG (or carbon) intensity, defined as “a ratio that expresses the impact of GHG emissions per unit of economic value or per unit of production.” To further the SEC’s goal of providing uniform climate-related information investors can use to compare registrants, the proposed rules standardize the definition of GHG intensity, requiring a registrant to disclose GHG intensity in terms of metric tons of CO2e per unit of total revenue and per unit of production for the fiscal year.  A registrant without revenue would be required to use another financial measure and explain the reason it used that measure.

GHG Emissions Methodology – A registrant would also be required to describe the methodology, significant inputs and significant assumptions used in calculating the metrics disclosed. The methodology disclosure must include:

  • Boundaries used to determine the operations the registrant owns or controls (organizational boundaries).
  • Boundaries used to determine the direct and indirect emissions associated with the business operations the registrant owns or controls (operational boundaries).
  • Calculation approach.
  • Any calculation tools used.

Scope 3 Emissions Accommodations – In the proposed rules, the SEC acknowledges the potential difficulties of reporting Scope 3 emissions as opposed to Scopes 1 and 2 emissions.  To counter those concerns, the proposed rules provide a safe harbor for Scope 3 emissions disclosures, an exemption from Scope 3 emissions disclosure for smaller reporting companies and a delayed compliance date for Scope 3 emissions disclosures. Under the safe harbor provision, a Scope 3 emissions disclosure would be deemed not a fraudulent statement unless it is shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith. The safe harbor is intended to mitigate the concerns arising from using third-party data when the disclosure was made in good faith. In addition, Exchange Act Rule 12b-21 would provide accommodations for information that is unknown or not reasonably available.


The proposed rules would require an accelerated filer and a large accelerated filer (including such filers that are foreign private issuers) to include an attestation report covering, at a minimum, the disclosure of its Scopes 1 and 2 emissions and to provide certain related disclosures about the attestation service provider.  The proposed rules do not contain specific attestation standards and do not require a registrant’s attestation service provider to be a registered public accounting firm.  Providers of attestation reports, however, must have significant experience with GHG emissions reporting and be independent from the registrant.  Both accelerated filers and large accelerated filers would have time to transition to the minimum attestation requirements.  Specifically, the proposed rules would require: (i) limited assurance for Scopes 1 and 2 emissions disclosures that transition to reasonable assurance after a transition period, and (ii) minimum qualifications for the attestation provider and report.  The GHG emissions service provider would need to provide its written consent as an expert, as required under the Securities Act and related rules, which would be filed as an exhibit to the report.

Targets and Goals Disclosures

For registrants that have identified climaterelated goals, the proposed rules would require disclosure of the following related information:

  • The scope of activities and emissions included in the target as well as the unit of measurement and whether the target is absolute or intensity-based.
  • The defined time horizon by which the registrant intends to achieve the target, and whether the time horizon is consistent with one or more goals established by a climaterelated treaty, law, regulation, policy or organization.
  • The defined baseline time period and baseline emissions against which progress will be tracked with a consistent base year set for multiple targets.
  • Any interim targets the registrant set in addition to interim disclosures discussing any progress made toward the stated goals and how it achieved this progress.
  • How the registrant intends to meet its climaterelated targets or goals.

The registrant would be required to update these disclosures each year, describing the actions taken and progress made throughout the year. A registrant that uses carbon offsets or RECs in its plan would be required to provide the amount of carbon reduction the offsets represent or the amount of generated renewable energy the RECs represent, any sources used to provide the offsets or RECs, the description and location of the underlying projects, any authentication of the offsets or RECs, and the cost of the offset or RECs.

The targets and goals disclosures may be provided in a separately labeled section or in the disclosures discussing climate-related impacts on the registrant’s strategy, business model and outlook, or when disclosing the transition plan in the risk management disclosure. To the extent the targets and goals include forward-looking statements and meet all other statutory requirements, PSLRA safe harbors would apply to those statements.


These proposed rules would require collaboration between the registrant and third parties, such as consultants and auditors with climate-related expertise, to establish the necessary controls and procedures to support compliance.  In addition to the substantial human and capital resources at stake, the proposed rules have other far-reaching and meaningful consequences.

Impact on Voluntary Disclosure Practices and Commitments

Sustainability Reports. Based on the scope of the proposed rules and the discussion included in the proposing release, it is clear that the SEC disfavors the practice of including “significantly more extensive information” on climate change in separate publications and on company websites as compared to formal SEC filings.  This sentiment was also prevalent in the staff’s comment letters on climate change disclosure over the past year, many of which focused on the disparities between a company’s voluntary disclosures and what it includes in its SEC filings.  Going forward, companies may be hesitant to provide various stakeholders with additional climate-related disclosure beyond that required for its SEC filings, to avoid the possible implication that such disclosures are also material and should be included in filed documents and subject to securities liability.

Climate Pledges. The proposed rules, if finalized, could have the unintended consequence of discouraging some registrants from having formal pledges to achieve net-zero emissions or other GHG reduction goals. The proposed rules would require a registrant with GHG emission reduction targets to disclose information regarding its progress and plans to achieve them. Also, a registrant with a Scope 3 emissions goal would necessarily be required to disclose those emissions. Because calculating and disclosing Scope 3 emissions are onerous tasks, registrants may be hesitant to set targets for Scope 3 emissions.

However, following the new guidance on shareholder proposals issued by the staff in 2021 (Staff Legal Bulletin 14L), shareholders can now submit proposals to registrants that include specific carbon emission reduction targets and timelines.  As a result, for the 2022 proxy season, many registrants have received shareholder proposals asking them to adopt emission reduction targets or timelines or to expand current pledges to include Scope 3 emissions. Based on voting trends from last year’s proxy season, these proposals very likely will receive significant shareholder support. This will pressure registrants to adopt and expand emission reduction goals, despite any desire to avoid the additional disclosures and related costs the proposed rules would trigger, similar to the private ordering that occurred regarding proxy access.

Litigation Implications

Securities Litigation. The proposed rules have important implications for civil securities litigation.  The rules would require information about climate-related risks that, in the SEC’s view, would have a material impact on a registrant’s operations and financial condition.  When facing allegations of misstatements or omissions related to climate-related risks (especially when those statements implicate disclosures required by the proposed rules), defendants would be limited in the ways they could argue against materiality of that information, a key element in Rule 10b-5 claims.

On the other hand, the proposed rules recognize that climate-related disclosures may constitute forward-looking information subject to the protections of the PSLRA’s safe harbor rules.  While the safe harbor does not apply to initial public offerings (which are among the events to which the proposed rules would apply), the proposed rules do call out specific disclosures that could be shielded from liability.  This includes those for internal carbon pricing, scenario analysis, transition planning, and climate-related targets or goals.

Although plaintiffs have based securities fraud suits on climate-related disclosures before, the breadth and depth of disclosures in the proposed rules may present new angles for plaintiff’s attorneys to pursue in civil securities fraud claims.

Climate Litigation. In the past several years, state and local governments around the country have filed over 20 lawsuits against fossil fuel companies, seeking monetary damages for alleged climate change-related harm. The proposed rules, if finalized, could provide potential plaintiffs with information (e.g., internal carbon prices, scenario analyses and Scope 3 disclosures) for similar tort claims against registrants in other industries. Plaintiffs in existing cases allege that fossil fuel companies engaged in a campaign to misinform consumers about the dangers of their fossil fuel products. Among other things, plaintiffs claim that the companies’ promotion and selling of fossil fuels have exacerbated climate change leading to environmental conditions that constitute a public nuisance. Oil and gas companies maintain that the lawsuits are really seeking to regulate GHG emissions, which is primarily the responsibility of the U.S. Environmental Protection Agency (EPA).

SEC Enforcement Implications. In March 2021, the SEC announced the formation of the Climate and ESG Task Force (Task Force) within the Division of Enforcement. Although the public results of the Task Force’s efforts remain to be seen, the proposed rules signal that the Task Force will play an active role in future enforcement efforts concerning registrant disclosures. Additionally, on March 30, 2022, the SEC’s Division of Examinations announced its 2022 examination priorities, which highlighted ESG investing as one of its five significant focus areas. Citing investor demand for investments that involve ESG strategies and criteria, the Division of Examinations will focus on ESG-related advisory services and investment products (e.g., mutual funds, exchange-traded funds and private fund offerings) in the upcoming examination cycle. The financial sector, particularly registered investment advisers and registered funds, can anticipate increased scrutiny of ESG-tied offerings and portfolio management processes and procedures.

Implications on Other Agency Activities and Regulations

Potential Future Environmental Regulation.  The proposed rules could provide the EPA with information on GHG emissions that could inform future rulemaking actions from the agency. Under EPA’s Greenhouse Gas Reporting Program (GHGRP), nearly 8,000 industrial facilities and other sources in the United States already must report their direct emissions to the agency. EPA estimates that approximately 85%-95% of annual manmade U.S. GHG emissions are reported under the program. Although the SEC disclosures would apply on a registrant-to-registrant basis, rather than to individual facilities or sources, it is possible that EPA could still utilize information provided in SEC filings to establish new source categories that must report under the GHGRP or to advance new substantive standards on particular industries.

Impact on Private Companies

The proposed rules would not impact private companies or issuers, at least not directly. But because of the expansive nature of these rules, especially regarding Scope 3 emissions reporting, registrants would need to collect and report on emissions from their suppliers and customers, including private companies. The availability of this information, as well as the relative impact on the reporting company’s carbon disclosures, may influence purchasing and selling decisions.

It is also possible that the SEC could propose additional rules that will create a climate reporting framework applicable to some private companies.  Amendments to Regulation D are listed on the SEC’s flex agenda, and in the March 2021 statement from then-acting chair Allison Herren Lee seeking public input on the SEC’s climate change rulemaking initiatives, one of the questions indicated the SEC may consider requiring private company climate disclosure through exempt offerings. Additionally, many private companies already produce sustainability reports and provide other voluntary climate-related disclosures to various stakeholders. Any such disclosures by private issuers are subject to the general securities fraud provisions of Rule 10b-5, and as discussed above, the proposed rules may impact the materiality analysis of such disclosures.

What’s Next and What to Do

The proposed rules will be open to public comments until the later of May 20, 2022 or 30 days after publication in the Federal Register.  The proposing release contains over 200 requests for comment. After the comment period, the proposed rules will be revised before going to another vote.  Many parties impacted by the proposed rules will view them as expensive to comply with, burdensome, overly prescriptive and a drain on resources.  Given the complexity and expected expense to comply with the rules, the public comment period is likely to be extensive. Expect multiple litigation challenges as well.

Even though it is uncertain to what extent the SEC’s proposed rules may be adopted as proposed or otherwise become effective, registrants should begin educating themselves on the requirements and prepare for potential implementation.  Each registrant’s situation will be unique as to what action will be needed to comply with the proposed rules, but registrants should consider taking some of the following measures:

  • Assess climate-related risk exposure, including GHG emissions.
  • Create and develop internal controls for climate-related disclosures.
  • Determine whether proper procedures are in place to obtain, review and disclose climate-related information required by the proposed rules, and whether there is adequately trained staff to execute those procedures.
  • Train or hire employees with the required expertise, if necessary, to assist the registrant to comply with the rules.
  • Determine if the board of directors has the necessary experience and expertise in climate-related issues, and if not, nominate directors to the board with the requisite experience.
  • Hire attestation firms, auditors and advisers as needed.
  • Integrate litigation counsel into the planning of disclosure practices, since methods to assess materiality may be subject to litigation and increased disclosures will be grounds for activist investors to demand even more information.