04/08/2024 | News release | Distributed by Public on 04/08/2024 05:43
Newly adopted rules by the Securities and Exchange Commission are poised to have a transformative impact on climate-related disclosures by public companies and in public offerings.
The SEC's climate disclosure rules seek to enhance and standardize disclosures, and they represent a significant overhaul of existing disclosure requirements and expand reporting obligations for public companies. While portions of the rules were scaled back compared to earlier proposals, they do require public companies to disclose, among other things:
"The rules were scaled back, that is the positive takeaway," said Dan Romito, consulting partner at Pickering Energy Partners, who detailed how organizations can prepare for the rules to go into effect during a special AEM Member Education Webinar held late last month. "However, it is still very comprehensive in terms of what it will require. In addition, the SEC's Final Climate Rule will address 94% of the U.S. market capitalization. So, the odds are you fall under its purview in one way or another."
In addition, to facilitate investors' assessment of certain climate-related risks, the final rules require disclosure of Scope 1 and/or Scope 2 greenhouse gas (GHG) emissions on a phased-in basis by certain larger registrants when those emissions are material. In addition, they require the filing of an attestation report covering the required disclosure of such registrants' Scope 1 and/or Scope 2 emissions, also on a phased-in basis; as well as disclosure of the financial statement effects of severe weather events and other natural conditions (including, for example, costs, and losses).
"Generally speaking, if you are a publicly traded company, or if you are a private company that is a supplier to a large accelerated filer, there is some aspect of disclosure that you're going to have to provide," said Romito.
The following key takeaways of the final rule highlight the importance of adopting the Task Force on Climate-related financial disclosures (TCFD) reporting:
"From a regulatory perspective, it is now a requirement to have TCFD in the registration documents," added Romito, who also noted four distinct pillars comprise the TCFD - governance (S-K Item 1501), strategy (S-K Item 1502), risk management (S-K item 1503), and targets and goals (S-K item 1504).
"In most cases, targets and goals is where you are going to struggle the most, because it's not only quantitative, but now that it's in the registration documents, you don't want to go overboard or be overly aggressive with any sort of target or climate-related goal you put in place in terms of GHG emissions," he added.
In terms of GHG emissions, the SEC was very prescriptive in terms of how it defined Scope 1 and Scope 2. And while many companies track and disclose these emissions, there is a wide range of ways in which they are actually measured and defined.
"So, you have to be very mindful of how the SEC is defining Scope 1 and Scope 2 GHG emissions," said Romito.
The SEC defines Scope 1 and Scope 2 metrics as follows:
Emissions are to be disclosed in the following manner:
These disclosures must be provided separately for Scope 1 or 2 on a gross basis (before considering any offsets)
"What people tend to forget is there has to be a separate disclosure of each constituent GHG that is deemed individually material," said Romito. "So, there are actually two separate considerations."
According to Romito, the considerations are:
In addition, according to Romito, statement footnotes include three new key disclosures:
"You do have to be very mindful that disclosure is not necessarily a net consideration, meaning if you're utilizing any sort of carbon offsets or renewable energy credits to get to a goal, you have to disclose your scope one at a gross level and disclose what offsets or renewable energy credits you're utilizing and provide the net," said Romito. "So, it's not just one or the other, it's actually both."
If Scope 1 and Scope 2 GHG emission metrics are material to the registrant, disclosure within its SEC filing of the GHG emission metrics is required for the fiscal year beginning in 2026 for large accelerated filers. Limited assurance comes into play in 2029 for large accelerated filers and reasonable assurance comes into play in 2033 for accelerated filers.
"Obviously, you want to get things ready and prepared today, but you can take a little bit of solace, and management teams and boards can be a little bit relieved, knowing that they do have a reasonable amount of time to prepare," said Romito.
For more information, on the SEC's climate disclosure rules, contact AEM's Curt Blades at [email protected].
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