The Enhancement and Standardization of Climate-Related Disclosures for Investors

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is proposing for public comment amendments to its rules under the Securities Act of 1933 (“Securities Act”) and Securities Exchange Act of 1934 (“Exchange Act”) that would require registrants to provide certain climate-related information in their registration statements and annual reports. The proposed rules would require information about a registrant's climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition. The required information about climate-related risks would also include disclosure of a registrant's greenhouse gas emissions, which have become a commonly used metric to assess a registrant's exposure to such risks. In addition, under the proposed rules, certain climate-related financial metrics would be required in a registrant's audited financial statements.

DATES:

Comments should be received on or before May 20, 2022.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form ( https://www.sec.gov/rules/submitcomments.htm ).

• Send an email to rule-comments@sec.gov. Please include File Number S7-xx-xx on the subject line.

Paper Comments

• Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-10-22. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method of submission. The Commission will post all comments on the Commission's website ( https://www.sec.gov/rules/proposed.shtml ). Comments are also available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10 a.m. and 3 p.m. Operating conditions may limit access to the Commission's Public Reference Room. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly.

Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on our website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Elliot Staffin, Special Counsel, Office of Rulemaking, at (202) 551-3430, in the Division of Corporation Finance; or Anita H. Chan, Professional Accounting Fellow or Shehzad K. Niazi, Acting Deputy Chief Counsel, in the Office of the Chief Accountant, at (202) 551-5300, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

We are proposing to add 17 CFR 210.14-01 and 14-02 (Article 14 of Regulation S-X) and 17 CFR 17 CFR 229.1500 through 1506 (subpart 1500 of Regulation S-K) under the Securities Act and the Exchange Act, and amend 17 CFR 239.11 (Form S-1), 17 CFR 239.18 (Form S-11), 17 CFR 239.25 (Form S-4), and 17 CFR 239.34 (Form F-4) under the Securities Act, and 17 CFR 249.210 (Form 10), 17 CFR 249.220f (Form 20-F), 17 CFR 249.306 (Form 6-K), 17 CFR 249.308a (Form 10-Q), and 17 CFR 249.310 (Form 10-K) under the Exchange Act.

Table of Contents

I. Introduction

A. Background

B. The March 2021 Request for Public Input

C. The Growing Investor Demand for Climate-Related Risk Disclosure and Related Information

1. Major Investor Climate-Related Initiatives

2. Third-Party Data, Voluntary Disclosure Frameworks, and International Disclosure Initiatives

D. Development of a Climate-Related Reporting Framework

1. The Task Force on Climate-Related Financial Disclosure

2. The Greenhouse Gas Protocol

E. Summary of the Proposed Rules

1. Content of the Proposed Disclosures

2. Presentation of the Proposed Disclosures

3. Attestation for Scope 1 and Scope 2 Emissions Disclosure

4. Phase-In Periods and Accommodations for the Proposed Disclosures

II. Discussion

A. Overview of the Climate-Related Disclosure Framework

1. Proposed TCFD-Based Disclosure Framework

2. Location of the Climate-Related Disclosure

B. Disclosure of Climate-Related Risks

1. Definitions of Climate-Related Risks and Climate-Related Opportunities

2. Proposed Time Horizons and the Materiality Determination

C. Disclosure Regarding Climate-Related Impacts on Strategy, Business Model, and Outlook

1. Disclosure of Material Impacts

2. Disclosure of Carbon Offsets or Renewable Energy Credits if Used

3. Disclosure of a Maintained Internal Carbon Price

4. Disclosure of Scenario Analysis, if Used

D. Governance Disclosure

1. Board Oversight

2. Management Oversight

E. Risk Management Disclosure

1. Disclosure of Processes for Identifying, Assessing, and Managing Climate-Related Risks

2. Transition Plan Disclosure

F. Financial Statement Metrics

1. Overview

2. Financial Impact Metrics

3. Expenditure Metrics

4. Financial Estimates and Assumptions

5. Inclusion of Climate-Related Metrics in the Financial Statements

G. GHG Emissions Metrics Disclosure

1. GHG Emissions Disclosure Requirement

2. GHG Emissions Methodology and Related Instructions

3. The Scope 3 Emissions Disclosure Safe Harbor and Other Accommodations

H. Attestation of Scope 1 and Scope 2 Emissions Disclosure

1. Overview

2. GHG Emissions Attestation Provider Requirements

3. GHG Emissions Attestation Engagement and Report Requirements

4. Additional Disclosure by the Registrant

5. Disclosure of Voluntary Attestation

I. Targets and Goals Disclosure

J. Registrants Subject to the Climate-Related Disclosure Rules and Affected Forms

K. Structured Data Requirement

L. Treatment for Purposes of Securities Act and Exchange Act

M. Compliance Date

III. General Request for Comments

IV. Economic Analysis

A. Baseline and Affected Parties

1. Affected Parties

2. Current Regulatory Framework

3. Existing State and Federal Laws

4. International Disclosure Requirements

5. Current Market Practices

B. Broad Economic Considerations

1. Investors' Demand for Climate Information

2. Impediments to Voluntary Climate-Related Disclosures

C. Benefits and Costs

1. Benefits

2. Costs

D. Anticipated Effects on Efficiency, Competition, and Capital Formation

1. Efficiency

2. Competition

3. Capital Formation

E. Other Economic Effects

F. Reasonable Alternatives

1. Requirements Limited to Only Certain Classes of Filers

2. Require Scenario Analysis

3. Require Specific External Protocol for GHG Emissions Disclosure

4. Permit GHG Emissions Disclosures To Be “Furnished” Instead of “Filed”

5. Do Not Require Scope 3 Emissions for Registrants With a Target or Goal Related to Scope 3

6. Exempt EGCs From Scope 3 Emissions Disclosure Requirements

7. Eliminate Exemption for SRCs From Scope 3 Reporting

8. Remove Safe Harbor for Scope 3 Emissions Disclosures

9. Require Large Accelerated Filers and Accelerated Filers To Provide a Management Assessment and To Obtain an Attestation Report Covering the Effectiveness of Controls Over GHG Emissions Disclosures

10. Require Reasonable Assurance for Scopes 1 and 2 Emissions Disclosures From All Registrants

11. Require Limited, Not Reasonable, Assurance for Large Accelerated Filers and/or Accelerated Filers and/or Other Filers

12. In Lieu of Requiring Assurance, Require Disclosure About Any Assurance Obtained Over GHG Emissions Disclosures

13. Permit Host Country Disclosure Frameworks

14. Alternative Tagging Requirements

G. Request for Comment

V. Paperwork Reduction Act

A. Summary of the Collections of Information

B. Summary of the Proposed Amendments' Effects on the Collections of Information

C. Incremental and Aggregate Burden and Cost Estimates for the Proposed Amendments

D. Request for Comment

VI. Initial Regulatory Flexibility Act Analysis

A. Reasons for, and Objectives of, the Proposed Action

B. Legal Basis

C. Small Entities Subject to the Proposed Rules

D. Reporting, Recordkeeping, and Other Compliance Requirements

E. Duplicative, Overlapping, or Conflicting Federal Rules

F. Significant Alternatives

VII. Small Business Regulatory Enforcement Fairness Act

VIII. Statutory Authority

I. Introduction

We are proposing to require registrants to provide certain climate-related information in their registration statements and annual reports, including certain information about climate-related financial risks and climate-related financial metrics in their financial statements. The disclosure of this information would provide consistent, comparable, and reliable—and therefore decision-useful—information to investors to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.

The Commission has broad authority to promulgate disclosure requirements that are “necessary or appropriate in the public interest or for the protection of investors.” We have considered this statutory standard and determined that disclosure of information about climate-related risks and metrics would be in the public interest and would protect investors. In making this determination, we have also considered whether the proposed disclosures “will promote efficiency, competition, and capital formation.”

We are proposing to require disclosures about climate-related risks and metrics reflecting those risks because this information can have an impact on public companies' financial performance or position and may be material to investors in making investment or voting decisions. For this reason, many investors—including shareholders, investment advisers, and investment management companies—currently seek information about climate-related risks from companies to inform their investment decision-making. Furthermore, many companies have begun to provide some of this information in response to investor demand and in recognition of the potential financial effects of climate-related risks on their businesses.

We are concerned that the existing disclosures of climate-related risks do not adequately protect investors. For this reason, we believe that additional disclosure requirements may be necessary or appropriate to elicit climate-related disclosures and to improve the consistency, comparability, and reliability of climate-related disclosures. With respect to their existing climate-related disclosures (to the extent registrants are already disclosing such information), registrants often provide information outside of Commission filings and provide different information, in varying degrees of completeness, and in different documents and formats—meaning that the same information may not be available to investors across different companies. This could result in increased costs to investors in obtaining useful climate-related information and impair the ability to make investment or voting decisions in line with investors' risk preferences. Also, companies may not disclose certain information needed to understand their existing climate-related disclosures, such as the methodologies, data sources, assumptions, and other key parameters used to assess climate-related risks. To the extent companies primarily provide this information separate from their financial reporting, it may be difficult for investors to determine whether a company's financial disclosures are consistent with its climate-related disclosures. In addition, the information provided outside of Commission filings is not subject to the full range of liability and other investor protections that help elicit complete and accurate disclosure by public companies.

Investors need information about climate-related risks—and it is squarely within the Commission's authority to require such disclosure in the public interest and for the protection of investors—because climate-related risks have present financial consequences that investors in public

companies consider in making investment and voting decisions. Investors have noted that climate-related inputs have many uses in the capital allocation decision-making process including, but not limited to, insight into governance and risks management practices, integration into various valuation models, and credit research and assessments. Further, we understand investors often employ diversified strategies, and therefore do not necessarily consider risk and return of a particular security in isolation but also in terms of the security's effect on the portfolio as a whole, which requires comparable data across registrants.

While climate-related risks implicate broader concerns—and are subject to various other regulatory schemes—our objective is to advance the Commission's mission to protect investors, maintain fair, orderly and efficient markets, and promote capital formation, not to address climate-related issues more generally. In particular, the impact of climate-related risks on both individual businesses and the financial system as a whole are well documented. For example, the Financial Stability Oversight Council's (“FSOC's”) Report on Climate-Related Financial Risk 2021 found that businesses, financial institutions, investors, and households may experience direct financial effects from climate-related risks, and observed that the costs would likely be broadly felt as they are passed through supply chains and to customers and as they reduce firms' ability to service debt or produce returns for investors. As a result, these climate-related risks and their financial impact could negatively affect the economy as a whole and create systemic risk for the financial system. SEC-reporting companies and their investors are an essential component of this system.

Climate-related risks can affect a company's business and its financial performance and position in a number of ways. Severe and frequent natural disasters can damage assets, disrupt operations, and increase costs. Transitions to lower carbon products, practices, and services, triggered by changes in regulations, consumer preferences, availability of financing, technology and other market forces, can lead to changes in a company's business model. Governments around the world have made public commitments to transition to a lower carbon economy, and efforts towards meeting those greenhouse gas (“GHG”) reduction goals have financial effects that may materially impact registrants. In addition, banking regulators have recently launched initiatives to incorporate climate risk in their supervision of financial institutions. How a company assesses and plans for climate-related risks may have a significant impact on its future financial performance and investors' return on their investment in the company.

Consistent, comparable, and reliable disclosures on the material climate-related risks public companies face would serve both investors and capital markets. Investors would be able to use this information to make investment or voting decisions in line with their risk preferences. Capital allocation would become more efficient as investors are better able to price climate-related risks. In addition, more transparency and comparability in climate-related disclosures would foster competition. Many other jurisdictions and financial regulators around the globe have taken action or reached similar conclusions regarding the importance of climate-related disclosures and are also moving towards the adoption of climate-related disclosure standards.

This proposal builds on the Commission's previous rules and guidance on climate-related disclosures, which date back to the 1970s. In 2010, in response to increasing calls by the public and shareholders for public companies to disclose information regarding how climate change may affect their business and operations, the Commission published guidance (“2010 Guidance”) for registrants on how the Commission's existing disclosure rules may require disclosure of the impacts of climate change on a registrant's business or financial condition. Since that time, as climate-related impacts have increasingly been well-documented and awareness of climate-related risks to businesses and the economy has grown, investors have increased their demand for more detailed information about the effects of the climate on a registrant's business and for more information about how a registrant has addressed climate-related risks and opportunities when conducting its operations and developing its business strategy and financial plans. It is appropriate for us to consider such investor demand in exercising our authority and responsibility to design an effective and efficient disclosure regime under the federal securities laws.

In developing these proposals, we have considered the feedback we have received to date from a wide range of commenters, including comments from investors as to the information they need to make informed investment or voting decisions, as well as concerns expressed by registrants with regard to compliance burdens and liability risk. While our proposals include disclosure requirements designed to foster greater consistency, comparability, and reliability of available information, they also include a number of features designed to mitigate the burdens on registrants, such as phase-in periods for the proposed climate-related disclosure requirements, a safe harbor for certain emissions disclosures, and an exemption from certain emissions reporting requirements for smaller reporting companies. In addition, the existing safe harbors for forward-looking statements under the Securities Act and Exchange Act would be available for aspects of the proposed disclosures.

Although the various requirements we are proposing are supported by overlapping rationales, we emphasize that the different aspects of the proposal serve independent, albeit complementary, objectives. In addition, we have carefully considered how to craft this proposal to best advance investor protection and the public interest, consistent with the Commission's disclosure authority and regulatory mission, and we welcome comments on how we can further achieve that goal.

A. Background

The Commission first addressed the disclosure of material environmental issues in the early 1970s when it issued an interpretive release stating that registrants should consider disclosing in their SEC filings the financial impact of compliance with environmental laws. Throughout the 1970s, the Commission continued to explore the need for specific rules mandating disclosure of information relating to litigation and other business costs arising out of compliance with federal, state, and local laws that regulate the discharge of materials into the environment or otherwise relate to the protection of the environment. These topics were the subject of several rulemaking efforts, extensive litigation, and public hearings, all of which resulted in the rules that now specifically address disclosure of environmental issues.

After almost a decade of consideration, the Commission adopted rules in 1982 mandating disclosure of information relating to litigation and other business costs arising out of compliance with federal, state, and local laws that regulate the discharge of materials into the environment or otherwise relate to the protection of the environment. In addition to these specific disclosure requirements, the Commission's other disclosure rules requiring, for example, information about material risks and a description of the registrant's business, could give rise to an obligation to provide disclosure related to the effects of climate change.

In its 2010 Guidance, the Commission observed that, in response to investor demand for climate-related information, many companies were voluntarily reporting climate-related information outside their filings with the Commission. The Commission emphasized that “registrants should be aware that some of the information they may be reporting pursuant to these mechanisms also may be required to be disclosed in filings made with the Commission pursuant to existing disclosure requirements.” Specifically, the 2010 Guidance emphasized that climate change disclosure might, depending on the circumstances, be required in a company's Description of Business, Risk Factors, Legal Proceedings, and Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). The 2010 Guidance further identified certain climate-related issues that companies may need to consider in making their disclosures, including the direct and indirect impact of climate-related legislation or regulations, international agreements, indirect consequences of business trends including changing demand for goods, and the physical impacts of climate change.

The proposals set forth in this release would augment and supplement the disclosures already required in SEC filings. Accordingly, registrants should continue to evaluate the climate-related risks they face and assess whether disclosures related to those climate-related risks must be disclosed in their Description of Business, Risk Factors, Legal Proceedings, and MD&A as described in the 2010 Guidance. These disclosures should be based on the registrant's specific facts and circumstances. While climate risks impact many issuers across industries, the impacts of those risks on a particular registrant and how the registrant addresses those risks are fact-specific and may vary significantly by registrant. The disclosures required by our existing rules should reflect these company-specific risks.

B. The March 2021 Request for Public Input

On March 15, 2021, Acting Chair Allison Herren Lee requested public input on climate disclosure from investors, registrants, and other market participants. The Acting Chair solicited input on several issues, including how the Commission could best regulate disclosure concerning climate change in order to provide more consistent, comparable, and reliable information for investors, whether the Commission should require the disclosure of certain metrics and other climate-related information, the role that existing third-party climate-related disclosure frameworks should play in the Commission's regulation of such disclosure, and whether and how such disclosure should be subject to assurance.

The Commission received approximately 600 unique letters and over 5800 form letters in response to the Acting Chair's request for public input. We received letters from academics, accounting and audit firms, individuals, industry groups, investor groups, registrants, non-governmental organizations, professional climate advisors, law firms, professional investment advisors and investment management companies, standard-setters, state government officials, and US Senators and Members of the House of Representatives.

Many of these commenters, including investors with trillions of dollars of assets under management collectively, supported implementation of climate-related disclosure rules. A number of commenters stated that mandated disclosures are necessary because climate change poses significant financial risks to registrants and their investors. According to one of the commenters, 68 out of 77 industries are likely to be significantly affected by climate risk. Many commenters criticized the current disclosure practice, in which some issuers voluntarily provide climate disclosures based on a variety of different third-party frameworks, because it has not produced consistent, comparable, reliable information for investors and their advisors, who otherwise have difficulty obtaining that information.

Other commenters, however, questioned whether climate change posed a risk to companies or their investors. These commenters stated their belief that the assumptions underlying the assessment of the impact of climate change were too uncertain to permit companies to ascertain the real risks to their operations and financial condition caused by climate change. These commenters stated that they opposed implementation of climate-related disclosure rules, and argued that such rules would exceed the Commission's statutory authority. Some of these commenters also argued that such rules are not necessary because registrants are already required to disclose material climate risks, or that such rules would be more costly than the current “private ordering” of climate disclosures. Some commenters also argued that mandated climate disclosure rules could violate First Amendment rights.

As noted above, we have considered these comments and other feedback received from the public in formulating the current proposal. As part of its filing review process, the Commission staff also assessed the extent to which registrants currently disclose climate-related risks in their Commission filings. Since 2010, disclosures related to climate change have generally increased, but there is considerable variation in the content, detail, and location ( i.e., in reports filed with the Commission, in sustainability reports posted on registrant websites, or elsewhere) of climate-related disclosures. The staff has observed significant inconsistency in the depth and specificity of disclosures by registrants across industries and within the same industry. The staff has found significantly more extensive information in registrants' sustainability reports and other locations such as their websites as compared with their reports filed with the Commission. In addition, the disclosures in registrants' Forms 10-K frequently contain general, boilerplate discussions that provide limited information as to the registrants' assessment of their climate-related risks or their impact on the companies' business.

We are also mindful of the benefits to investors of requiring climate-related information in SEC filings. Providing more extensive climate-related disclosure in sustainability reports, while excluding such relevant information from Forms 10-K, may make it difficult for investors to analyze and compare how climate-related risks and impacts affect registrants' businesses and consolidated financial statements. The inclusion of climate-related disclosures in SEC filings should increase the consistency, comparability, and reliability of climate-related information for investors. The placement of climate-related information in different locations can make it difficult for investors to find comparable climate-related disclosures, whereas inclusion in a registrant's Form 10-K or registration statement should make it easier for investors to find and compare this information. Further, information that is filed with the Commission in Exchange Act periodic reports is subject to disclosure controls and procedures (“DCP”), which help to ensure that a registrant maintains appropriate processes for collecting and communicating the necessary information by which to formulate the climate-related disclosures. Moreover, information filed as part of a registrant's Form 10-K carries certain additional potential liability, which itself can cause registrants to prepare and review information filed in the Form 10-K more carefully than information presented outside SEC filings.

Having considered the public feedback and the staff's experience with climate-related disclosures, we believe that the current disclosure system is not eliciting consistent, comparable, and reliable information that enables investors both to assess accurately the potential impacts of climate-related risks on the nature of a registrant's business and to gauge how a registrant's board and management are assessing and addressing those impacts. The Commission has broad authority to promulgate disclosure rules that are in the public interest or for the protection of investors and that promote efficiency, competition, and capital formation. In light of the present and growing significance of climate-related risks to registrants and the inadequacies of current climate disclosures, we are proposing to revise our rules to include climate-related disclosure items and metrics to elicit investment decision-useful information that is necessary or appropriate to protect investors.

We also believe that enhanced climate disclosure requirements could increase confidence in the capital markets and help promote efficient valuation of securities and capital formation by requiring more consistent, comparable, and reliable disclosure about climate-related risks, including how those risks are likely to impact a registrant's business operations and financial performance. The proposed requirements may also result in benefits to registrants, given existing costs to registrants that have resulted from the inconsistent market response to investor demand for climate-related information. In this regard our proposal would provide registrants with a more standardized framework to communicate their assessments of climate-related risks as well as the measures they are taking to address those risks. At the same time, we are open to exploring ways in which registrants could be afforded flexibility in making the necessary disclosures while still providing appropriate consistency and comparability, and are seeking comment in that regard.

C. The Growing Investor Demand for Climate-Related Risk Disclosure and Related Information

1. Major Investor Climate-Related Initiatives

As the Commission recognized in 2010 and earlier, there has been significant investor demand for information about how climate conditions may impact their investments. That demand has been increasing in recent years. Several major institutional investors, which collectively have trillions of dollars in investments under management, have demanded climate-related information from the companies in which they invest because of their assessment of climate change as a risk to their portfolios, and to investments generally, and also to satisfy investor interest in investments that are considered “sustainable.” As a result, these investors have sought to include and consider climate risk as part of their investment selection process. These institutional investors have formed investor initiatives to collectively urge companies to provide better information about the impact that climate change has had or is likely to have on their businesses, and to urge governments and companies to take steps to reduce investors' exposure to climate risks. Among these initiatives:

• In 2019, more than 630 investors collectively managing more than $37 trillion signed the Global Investor Statement to Governments on Climate Change urging governments to require climate-related financial reporting;

• This investor initiative continued as the Investor Agenda's 2021 Global Investor Statement to Governments on the Climate Crisis, which was signed by 733 global institutional investors, including some of the largest investors, with more than US $52 trillion in assets under management in the aggregate. This Statement called for governments to implement a number of measures, including mandating climate risk disclosure.

• The UN Principles for Responsible Investment (“PRI”) has acquired over 4,000 signatories who, as of July 13, 2021, have, in the aggregate, assets under management exceeding $120 trillion as of July 13, 2021;

• The Net Zero Asset Managers Initiative, which was formed by an international group of asset managers, has 128 signatories that collectively manage $43 trillion in assets as of July 2021;

• The Climate Action 100+, an investor-led initiative, now comprises 617 global investors that together have more than $60 trillion in assets under management; and

• The Glasgow Financial Alliance for Net Zero (“GFANZ”), a coalition of over 450 financial firms from 45 countries, responsible for assets of over $130 trillion, that are committed to achieving net-zero emissions by 2050, reaching 2030 interim targets, covering all emission scopes and providing transparent climate-related reporting.

Each of these investor initiatives has emphasized the need for improved disclosure by companies regarding climate-related impacts. Each of these initiatives has advocated for mandatory climate risk disclosure requirements aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures (“TCFD”) so that disclosures are consistent, comparable, and reliable. The investor signatories of Climate Action 100+ emphasized that obtaining better disclosure of climate-related risks and companies' strategies to address their exposure to those risks is consistent with the exercise of their fiduciary duties to their respective clients.

At the same time, many companies have made commitments with respect to climate change, such as commitments to reduce greenhouse gas emissions or become “net zero” by a particular date. Companies may make these commitments to attract investors, to appeal to customers that prioritize sustainability, or to reduce their exposure to risks posed by an expected transition to a lower carbon economy. In response to these commitments, investors have demanded more detailed information about climate-related targets and companies' plans to achieve them in order to assess the credibility of those commitments and compare companies based on those commitments.

These initiatives demonstrate that investors are using information about climate risks now as part of their investment selection process and are seeking more informative disclosures about those risks. As an increasing number of investors incorporate this information, in particular GHG emissions, into their investment selection or voting decisions, this may in turn create transition risks for companies that are seeking to raise capital.

2. Third-Party Data, Voluntary Disclosure Frameworks, and International Disclosure Initiatives

Despite increasing investor demand for information about climate-related risks and strategies, many investors maintain that they cannot obtain the consistent, comparable, and material information that they need to properly inform their investment or voting decisions. In 2020, the Commission's Investor Advisory Committee (“IAC”) noted the fragmentation of information that has resulted from a rise in third-party data providers that have emerged to try to meet the informational demands of investors. The IAC recommended that the Commission take action to ensure investors have the material, comparable, consistent information about climate and other ESG matters that they need to make investment and voting decisions.

In addition, a diverse group of third parties has developed climate-related reporting frameworks seeking to meet investors' informational demands. These include the Global Reporting Initiative (“GRI”), CDP (formerly the Carbon Disclosure Project), Climate Disclosure Standards Board (“CDSB”), Value Reporting Foundation (formed through a merger of the Sustainability Accounting Standards Board (“SASB”) and the International Integrated Reporting Council (“IIRC”)), and the TCFD.

To some extent, the development of these disparate frameworks has led to an increase in the number of companies that are providing some climate-related disclosures. However, because they are voluntary, companies that choose to disclose under these frameworks may provide partial disclosures or they may choose not to participate every year. In addition, the form and content of the disclosures may vary significantly from company to company, or from period to period for the same company. The situation resulting from these multiple voluntary frameworks has failed to produce the consistent, comparable, and reliable information that investors need. Instead, the proliferation of third-party reporting frameworks has contributed to reporting fragmentation, which can hinder investors' ability to understand and compare registrants' climate-related disclosures. An analysis conducted by the World Business Council for Sustainable Development found that investors had difficulty using existing sustainability disclosures because they lack consistency and comparability. In addition, a 2020 study by the Yale Initiative on Sustainable Finance found that the proliferation of reporting frameworks may have made reporting more difficult for issuers. Moreover, given the voluntary nature of these third-party frameworks, there may not be sufficient incentives or external disciplines to ensure that companies are providing complete and robust disclosure under those frameworks.

The staff has reviewed more than a dozen studies of climate-related disclosures conducted by third parties, such as the CDP, KPMG, TCFD , and Ernst & Young, which assessed the adherence of the climate-related disclosures to various third-party frameworks, such as the TCFD. These studies have reinforced the staff's observations from their review of filings that there is significant variation across companies and industries with regard to the content of current climate disclosures. Further, much of this climate-related information, particularly GHG emissions and targets, appears outside of Commission filings, in sustainability reports, and on corporate websites. Other analyses of current climate reporting have found a lack of transparency and standardization with regard to the methodologies companies apply in disclosing climate-related information.

The increased fragmentation of climate reporting resulting from the proliferation of third-party reporting frameworks has motivated a number of recent international efforts to obtain more consistent, comparable, and reliable climate-related information for investors. For example:

• A consultation paper published by the IFRS Foundation Trustees in 2020 noted the broad range of voluntary sustainability reporting frameworks that have increased complexity and cost to preparers without improving the quality of the information available to investors;

• Based on the response to the IFRS Foundation consultation paper, the IFRS Foundation took steps toward the establishment of an International Sustainability Standards Board (“ISSB”) operating within the existing governance structure of the IFRS Foundation;

• In 2021, following two roundtables hosted by its Sustainable Finance Task Force, IOSCO issued a report that concluded that companies' current sustainability disclosures do not meet investors' needs, and the proliferation of voluntary disclosure frameworks has led to inconsistency in application of the frameworks and, in some cases “cherry picking” of information that might not present an accurate picture of companies' risks.

• A Technical Experts' Group of IOSCO worked with a Technical Readiness Working Group of the IFRS Foundation to assess and fine-tune a prototype climate-related financial disclosure standard (“Prototype”) drafted by an alliance of prominent sustainability reporting organizations and designed as a potential model for standards that an ISSB might eventually develop;

• In November 2021, the IFRS Foundation announced the formation of the ISSB. The ISSB is expected to engage in standard setting to build on the Prototype, including developing climate-specific disclosure standards based on the recommendations of the TCFD.

• Several jurisdictions, including the European Union, are developing or revising their mandatory climate-related disclosure regimes to provide investors with more consistent, useful climate-related financial information, including associated assurance requirements and data tagging to facilitate the use of the information.

These international developments show an increasing global recognition of the need to improve companies' climate-related disclosures, which the proposed rules would help address, as well as the convergence of investors and issuers around the TCFD as a useful framework for communicating information about climate-related risks that companies may face.

D. Development of a Climate-Related Reporting Framework

In recent years, two significant developments have occurred that support and inform the Commission's proposed climate-related reporting rules. The first involves the TCFD, which has developed a climate-related reporting framework that has become widely accepted by both registrants and investors. The second involves the Greenhouse Gas Protocol (“GHG Protocol”), which has become a leading accounting and reporting standard for greenhouse gas emissions. Both the TCFD and the GHG Protocol have developed concepts and a vocabulary that are commonly used by companies when providing climate-related disclosures in their sustainability or related reports. As discussed in greater detail below, the Commission's proposed rules incorporate some of these concepts and vocabulary, which by now are familiar to many registrants and investors.

1. The Task Force on Climate-Related Financial Disclosure

Our proposed climate-related disclosure framework is modeled in part on the TCFD's recommendations. A goal of the proposed rules is to elicit climate-related disclosures that are consistent, comparable, and reliable while also attempting to limit the compliance burden associated with these disclosures. The TCFD framework has been widely accepted by issuers, investors, and other market participants, and, accordingly, we believe that proposing rules based on the TCFD framework may facilitate achieving this balance between eliciting better disclosure and limiting compliance costs.

In April 2015, the Group of 20 Finance Ministers directed the Financial Stability Board (“FSB”) to evaluate ways in which the financial sector could address climate-related concerns. The FSB concluded that better information was needed to facilitate informed investment decisions and to help investors and other market participants to better understand and take into account climate-related risks. The FSB established the TCFD, an industry-led task force charged with promoting better-informed investment, credit, and insurance underwriting decisions. Since then, the framework for climate-related disclosures developed by the TCFD has been refined and garnered global support as a reliable framework for climate-related financial reporting.

In 2017, the TCFD published disclosure recommendations that provide a framework by which to evaluate material climate-related risks and opportunities through an assessment of their projected short-, medium-, and long-term financial impacts on a registrant. The TCFD framework establishes eleven disclosure topics related to four core themes that provide a structure for the assessment, management, and disclosure of climate-related financial risks: Governance, strategy, risk management, and metrics and targets.

Support for the TCFD's recommendations by companies and other reporting frameworks has grown steadily since the TCFD's formation. As of October 2021 more than 2,600 organizations globally, with a total market capitalization of $25 trillion have expressed support for the TCFD. Further, 1,069 financial institutions, managing assets of $194 trillion, also support the TCFD. In recognition of the widespread adoption by companies of TCFD reporting, a number of countries, including the United Kingdom, New Zealand, and Switzerland, and the European Union that have proposed mandatory climate-risk disclosure requirements have indicated an intention to base disclosure requirements on the TCFD framework. Further, the TCFD's recommendations have been adopted by, and incorporated into, other voluntary climate disclosure frameworks such as the CDP, GRI, CDSB, and SASB frameworks. The TCFD also forms the framework for the Prototype that the IFRS Foundation provided to the ISSB as a potential starting point for its standard setting initiative. The G7 Finance Ministers and Central Bank Governors have also endorsed the TCFD. As a result, although the reporting landscape is crowded with voluntary standards that seek different information in different formats, the TCFD framework has been widely endorsed by U.S. companies and regulators and standard-setters around the world.

2. The Greenhouse Gas Protocol

Quantitative greenhouse gas (“GHG”) emissions data can enable investors to assess a registrant's exposure to climate-related risks, including regulatory, technological, and market risks driven by a transition to a lower-GHG intensive economy. This data also could help investors to assess the progress of registrants with public commitments to reduce GHG emissions, which would be important in assessing potential future capital outlays that might be required to meet such commitments. For these reasons, many investors and other commenters recommended that we require disclosure of a registrant's GHG emissions. Many commenters also recommended that we base any GHG emissions disclosure requirement on the GHG Protocol. These commenters indicated that the GHG Protocol has become the most widely-used global greenhouse gas accounting standard. For example, the Environmental Protection Agency (“EPA”) Center for Corporate Climate Leadership references the GHG Protocol's standards and guidance as resources for companies that seek to calculate their GHG emissions.

The GHG Protocol was created through a partnership between the World Resources Institute and the World Business Council for Sustainable Development, which agreed in 1997 to collaborate with businesses and NGOs to create a standardized GHG accounting methodology. The GHG Protocol has been updated periodically since its original publication and has been broadly incorporated into sustainability reporting frameworks, including the TCFD, Value Reporting Foundation, GRI, CDP, CDSB, and the IFRS Foundation's Prototype.

The GHG Protocol's Corporate Accounting and Reporting Standard provides uniform methods to measure and report the seven greenhouse gasses covered by the Kyoto Protocol—carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride, and nitrogen trifluoride. The GHG Protocol introduced the concept of “scopes” of emissions to help delineate those emissions that are directly attributable to the reporting entity and those that are indirectly attributable to the company's activities. Under the GHG Protocol, Scope 1 emissions are direct GHG emissions that occur from sources owned or controlled by the company. These might include emissions from company-owned or controlled machinery or vehicles, or methane emissions from petroleum operations. Scope 2 emissions are those emissions primarily resulting from the generation of electricity purchased and consumed by the company. Because these emissions derive from the activities of another party (the power provider), they are considered indirect emissions. Scope 3 emissions are all other indirect emissions not accounted for in Scope 2 emissions. These emissions are a consequence of the company's activities but are generated from sources that are neither owned nor controlled by the company. These might include emissions associated with the production and transportation of goods a registrant purchases from third parties, employee commuting or business travel, and the processing or use of the registrant's products by third parties.

We have based our proposed GHG emissions disclosure requirement primarily on the GHG Protocol's concept of scopes and related methodology. By basing this requirement on an established GHG emissions reporting framework, we believe the compliance burden would be mitigated, especially for those registrants that are already disclosing or estimating their GHG emissions pursuant to the GHG Protocol.

E. Summary of the Proposed Rules

We are proposing to add a new subpart to Regulation S-K, 17 CFR 229.1500-1507 (“Subpart 1500 of Regulation S-K”) that would require a registrant to disclose certain climate-related information, including information about its climate-related risks that are reasonably likely to have material impacts on its business or consolidated financial statements, and GHG emissions metrics that could help investors assess those risks. A registrant may also include disclosure about its climate-related opportunities. The proposed new subpart to Regulation S-K would include an attestation requirement for accelerated filers and large accelerated filers regarding certain proposed GHG emissions metrics disclosures.

We are also proposing to add a new article to Regulation S-X, 17 CFR 210.14-01 and 02 (“Article 14 of Regulation S-X”) that would require certain climate-related financial statement metrics and related disclosure to be included in a note to a registrant's audited financial statements. The proposed financial statement metrics would consist of disaggregated climate-related impacts on existing financial statement line items. As part of the registrant's financial statements, the financial statement metrics would be subject to audit by an independent registered public accounting firm, and come within the scope of the registrant's internal control over financial reporting (“ICFR”).

1. Content of the Proposed Disclosures

The proposed climate-related disclosure framework is modeled in part on the TCFD's recommendations, and also draws upon the GHG Protocol. In particular, the proposed rules would require a registrant to disclose information about:

• The oversight and governance of climate-related risks by the registrant's board and management;

• How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term;

• How any identified climate-related risks have affected or are likely to affect the registrant's strategy, business model, and outlook;

• The registrant's processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the registrant's overall risk management system or processes;

• The impact of climate-related events (severe weather events and other natural conditions as well as physical risks identified by the registrant) and transition activities (including transition risks identified by the registrant) on the line items of a registrant's consolidated financial statements and related expenditures, and disclosure of financial estimates and assumptions impacted by such climate-related events and transition activities.

• Scopes 1 and 2 GHG emissions metrics, separately disclosed, expressed:

○ Both by disaggregated constituent greenhouse gases and in the aggregate, and

○ In absolute and intensity terms;

• Scope 3 GHG emissions and intensity, if material, or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions; and

• The registrant's climate-related targets or goals, and transition plan, if any.

When responding to any of the proposed rules' provisions concerning governance, strategy, and risk management, a registrant may also disclose information concerning any identified climate-related opportunities.

2. Presentation of the Proposed Disclosures

The proposed rules would require a registrant (both domestic and foreign private issuers):

• To provide the climate-related disclosure in its registration statements and Exchange Act annual reports;

• To provide the Regulation S-K mandated climate-related disclosure in a separate, appropriately captioned section of its registration statement or annual report, or alternatively to incorporate that information in the separate, appropriately captioned section by reference from another section, such as Risk Factors, Description of Business, or Management's Discussion and Analysis (“MD&A”);

• To provide the Regulation S-X mandated climate-related financial statement metrics and related disclosure in a note to the registrant's audited financial statements;

• To electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL; and

• To file rather than furnish the climate-related disclosure.

3. Attestation for Scope 1 and Scope 2 Emissions Disclosure

The proposed rules would require an accelerated filer or a large accelerated filer to include, in the relevant filing, an attestation report covering, at a minimum, the disclosure of its Scope 1 and Scope 2 emissions and to provide certain related disclosures about the service provider. As proposed, both accelerated filers and large accelerated filers would have time to transition to the minimum attestation requirements. The proposed transition periods would provide existing accelerated filers and large accelerated filers one fiscal year to transition to providing limited assurance and two additional fiscal years to transition to providing reasonable assurance, starting with the respective compliance dates for Scopes 1 and 2 disclosure described below. The proposed rules would provide minimum attestation report requirements, minimum standards for acceptable attestation frameworks, and would require an attestation service provider to meet certain minimum qualifications. The proposed rules would not require an attestation service provider to be a registered public accounting firm.

4. Phase-In Periods and Accommodations for the Proposed Disclosures

The proposed rules would include:

• A phase-in for all registrants, with the compliance date dependent on the registrant's filer status;
• An additional phase-in period for Scope 3 emissions disclosure;
• A safe harbor for Scope 3 emissions disclosure;

• An exemption from the Scope 3 emissions disclosure requirement for a registrant meeting the definition of a smaller reporting company (“SRC”); and

• A provision permitting a registrant, if actual reported data is not reasonably available, to use a reasonable estimate of its GHG emissions for its fourth fiscal quarter, together with actual, determined GHG emissions data for the first three fiscal quarters, as long as the registrant promptly discloses in a subsequent filing any material difference between the estimate used and the actual, determined GHG emissions data for the fourth fiscal quarter.

The proposed rules would be phased in for all registrants, with the compliance date dependent upon the status of the registrant as a large accelerated filer, accelerated or non-accelerated filer, or SRC, and the content of the item of disclosure. For example, assuming that the effective date of the proposed rules occurs in December 2022 and that the registrant has a December 31st fiscal year-end, the compliance date for the proposed disclosures in annual reports, other than the Scope 3 disclosure, would be:

• For large accelerated filers, fiscal year 2023 (filed in 2024);
• For accelerated and non-accelerated filers, fiscal year 2024 (filed in 2025); and

• For SRCs, fiscal year 2025 (filed in 2026).

Registrants subject to the proposed Scope 3 disclosure requirements would have one additional year to comply with those disclosure requirements.

We welcome feedback and encourage interested parties to submit comments on any or all aspects of the proposed rules. When commenting, it would be most helpful if you include the reasoning behind your position or recommendation.

II. Discussion

A. Overview of the Climate-Related Disclosure Framework

1. Proposed TCFD-Based Disclosure Framework

We have modeled the proposed disclosure rules in part on the TCFD disclosure framework. Building on the TCFD framework should enable companies to leverage the framework with which many investors and issuers are already familiar, which should help to mitigate both the compliance burden for issuers and any burdens faced by investors in analyzing and comparing the new proposed disclosures.

Many commenters that supported climate disclosure rules recommended that we consider the TCFD framework in developing those rules. Numerous commenters stated that the Commission should base its climate-related disclosure rules on the TCFD framework either as a standalone framework, or in conjunction with industry-specific metrics drawn from the SASB or other third-party frameworks. A broad range of commenters, including both issuers and investors, supported basing new climate-related disclosure rules on the TCFD framework.

Commenters provided several reasons for their support of the TCFD framework. First, commenters indicated that, because of the widespread adoption of the framework, issuers and investors have experience making and using TCFD disclosures. As a result, according to commenters, aligning SEC rules with the TCFD could reduce the burden on issuers and increase the consistency and comparability of climate disclosures. Second, commenters stated that the information that the TCFD disclosures elicit is useful for investors to understand companies' exposure to and management of climate-related risks. Third, various jurisdictions around the world have announced their intention to align their domestic disclosure rules with the TCFD. Commenters stated that by aligning with the TCFD framework, the Commission could potentially facilitate higher levels of consistency and comparability of disclosures globally.

The consistency and breadth of these comments comport with our understanding that the TCFD framework has been widely accepted by issuers, investors, and other market participants and reinforce our view that the framework would provide an appropriate foundation for the proposed amendments. Basing the Commission's climate-related disclosure rules on a globally recognized framework should help elicit climate-related disclosures that are consistent, comparable, and reliable while also limiting the compliance burden for registrants that are already providing climate-related disclosures based on this framework.

Similar to the TCFD framework, the proposed climate-related provisions under Regulation S-K would require disclosure of a registrant's: Governance of climate-related risks; any material climate-related impacts on its strategy, business model, and outlook; climate-related risk management; GHG emissions metrics; and climate-related targets and goals, if any.

The proposed climate-related provisions under Regulation S-X would require a registrant to disclose in a note to its financial statements certain disaggregated climate-related financial statement metrics that are mainly derived from existing financial statement line items. The proposed rules would require disclosure falling under the following three categories of information: Financial impact metrics; expenditure metrics; and financial estimates and assumptions. Similar to the TCFD's recommendation regarding financial impacts, the proposed financial statement metrics have the objective of increasing transparency about how climate-related risks impact a registrant's financial statements. The TCFD framework identifies two broad categories of actual and potential financial impacts driven by climate-related risks and opportunities: Financial performance (income statement focused) and financial position (balance sheet focused), and includes suggested metrics such as the amount of capital expenditure deployed toward climate-related risks and opportunities, which is similar to our proposed financial statement metrics.

2. Location of the Climate-Related Disclosure

Many commenters stated that the Commission should amend Regulation S-K or Regulation S-X to include climate-related disclosure requirements. Other commenters recommended that the Commission adopt a new stand-alone regulation for climate-related disclosure. We are proposing to include the climate-related disclosure rules in Regulation S-K and Regulation S-X because the required disclosure is fundamental to investors' understanding the nature of a registrant's business and its operating prospects and financial performance, and therefore, should be presented together with other disclosure about the registrant's business and its financial condition.

Specifically, we are proposing to require a registrant to include climate-related disclosure in Securities Act or Exchange Act registration statements and Exchange Act annual reports in a separately captioned “Climate-Related Disclosure” section and in the financial statements. Requiring climate-related disclosure to be presented in this manner would facilitate review of the climate-related disclosure by investors alongside other relevant company financial and non-financial information.

A registrant would be able to incorporate by reference disclosure from other parts of the registration statement or annual report ( e.g., Risk Factors, MD&A, or the financial statements) or, in most cases, from other filed or submitted reports into the Climate-Related Disclosure item if it is responsive to the topics specified in Items 1500-1506 of Regulation S-K and if the registrant satisfies the incorporation by reference requirements under the Commission's rules and forms. Allowing incorporation by reference for the Regulation S-K climate-related disclosure would be consistent with the treatment of other types of business disclosure under our rules and would provide some flexibility for registrants while reducing redundancy in disclosure.

Many commenters stated that the Commission should require registrants to discuss and analyze their quantitative climate data in a manner similar to that required for MD&A. These commenters stressed the importance of placing climate-related metrics in the context of other company financial and non-financial information to enable investors to see how those metrics intersect with business operations and industrial processes. Other commenters supported a requirement to discuss and analyze the climate-related metrics, but stated that such discussion should be part of the existing MD&A disclosures. We agree with the commenters supporting a narrative discussion and analysis of the climate-related metrics as means to present these disclosures in context and explain how they relate to the registrant's strategy and management of its climate-related risks. In this way, such a discussion will serve a similar function to the MD&A but will focus on climate-related risk specifically. Our proposed approach, which requires the climate-related disclosure to be included in a specific section but allows registrants to incorporate from disclosure elsewhere (consistent with applicable incorporation by reference requirements), provides some flexibility to the proposed climate-related disclosure scheme while ensuring the disclosure is consistent and comparable across registrants.

Request for Comment

1. Should we add a new subpart to Regulation S-K and a new article to Regulation S-X that would require a registrant to disclose certain climate-related information, as proposed? Would including the climate-related disclosure in Regulation S-K and Regulation S-X facilitate the presentation of climate information as part of a registrant's regular business reporting? Should we instead place the climate-related disclosure requirements in a new regulation or report? Are there certain proposed provisions, such as GHG emissions disclosure requirements, that would be more appropriate under Regulation S-X than Regulation S-K?

2. If adopted, how will investors utilize the disclosures contemplated in this release to assess climate-related risks? How will investors use the information to assess the physical effects and related financial impacts from climate-related events? How will investors use the information to assess risks associated with a transition to a lower carbon economy?

3. Should we model the Commission's climate-related disclosure framework in part on the framework recommended by the TCFD, as proposed? Would alignment with the TCFD help elicit climate-related disclosures that are consistent, comparable, and reliable for investors? Would alignment with the TCFD framework help mitigate the reporting burden for issuers and facilitate understanding of climate-related information by investors because the framework is widely used by companies in the United States and around the world? Are there aspects of the TCFD framework that we should not adopt? Should we instead adopt rules that are based on a different third-party framework? If so, which framework? Should we base the rules on something other than an existing third-party framework?

4. Do our current reporting requirements yield adequate and sufficient information regarding climate-related risks to allow investors to make informed decisions? In lieu of, or in addition to the proposed amendments, should we provide updated guidance on how our existing rules may elicit better disclosure about climate-related risks?

5. Should we require a registrant to present the climate-related disclosure in an appropriately captioned, separate part of the registration statement or annual report, as proposed? Should this disclosure instead be presented as part of the registrant's MD&A?

6. Should we permit a registrant to incorporate by reference some of the climate-related disclosure from other parts of the registration statement or annual report, as proposed? Should we permit a registrant to incorporate by reference climate-related disclosure that appears in a sustainability report if the registrant includes the incorporated by referenced disclosure as an exhibit to the registration statement or annual report? Are there some climate-related disclosure items, such as GHG emissions data, that we should not permit a registrant to incorporate by reference? Would requiring a registrant to include all of the proposed climate-related disclosures in a separate, appropriately captioned section, while precluding a registrant from incorporating by reference some or all of the climate-related disclosures, promote comparability and ease of use of the climate-related information for investors?

7. Should we permit a registrant to provide certain of the proposed climate-related disclosures in Commission filings other than the annual report or registration statement? For example, should we permit a registrant to provide information about board and management oversight of climate-related risks in its proxy statement?

B. Disclosure of Climate-Related Risks

As many commenters have noted when seeking more detailed climate-related disclosures, climate events and contingencies can pose financial risks to issuers across industrial sectors. Physical risks may include harm to businesses and their assets arising from acute climate-related disasters such as wildfires, hurricanes, tornadoes, floods, and heatwaves. Companies and their investors may also face chronic risks and more gradual impacts from long-term temperature increases, drought, and sea level rise.

In addition to the physical risks associated with the climate, issuers and investors may also face risks associated with a potential transition to a less carbon intensive economy. These risks may arise from potential adoption of climate-related regulatory policies including those that may be necessary to achieve the national climate goals that may be or have been adopted in the United States and other countries; climate-related litigation; changing consumer, investor, and employee behavior and choices; changing demands of business partners; long-term shifts in market prices; technological challenges and opportunities, and other transitional impacts. Disclosure about a registrant's exposure to transition risks, as well as how the registrant is assessing and managing those risks, would help investors assess and plan for how the registrant would be financially impacted by a transition to a lower-carbon economy.

1. Definitions of Climate-Related Risks and Climate-Related Opportunities

A central focus of the Commission's proposed rules is the identification and disclosure of a registrant's material climate-related risks. The proposed rules would require a registrant to disclose any climate-related risks reasonably likely to have a material impact on the registrant's business or consolidated financial statements. A registrant may also disclose, as applicable, the actual and potential impacts of any climate-related opportunities it is pursuing. The proposed definitions are substantially similar to the TCFD's definitions of climate-related risks and climate-related opportunities. We have based our definitions on the TCFD's definitions because they provide a common terminology that allows registrants to disclose climate-related risks and opportunities in a consistent and comparable way. Grounding our definitions in a framework that is already widely accepted also could help limit the burden on issuers to identify and describe climate-related risks and improve the comparability and usefulness of the disclosures for investors.

As proposed, “climate-related risks” means the actual or potential negative impacts of climate-related conditions and events on a registrant's consolidated financial statements, business operations, or value chains, as a whole. “Value chain” would mean the upstream and downstream activities related to a registrant's operations. Under the proposed definition, upstream activities include activities by a party other than the registrant that relate to the initial stages of a registrant's production of a good or service ( e.g., materials sourcing, materials processing, and supplier activities). Downstream activities would be defined to include activities by a party other than the registrant that relate to processing materials into a finished product and delivering it or providing a service to the end user ( e.g., transportation and distribution, processing of sold products, use of sold products, end of life treatment of sold products, and investments). We have proposed including a registrant's value chain within the definition of climate-related risks to capture the full extent of a registrant's potential exposure to climate-related risks, which can extend beyond its own operations to those of its suppliers, distributors, and others engaged in upstream or downstream activities.

Climate-related conditions and events can present risks related to the physical impacts of the climate (“physical risks”) and risks related to a potential transition to a lower carbon economy (“transition risks”). As proposed, “physical risks” is defined to include both acute and chronic risks to a registrant's business operations or the operations of those with whom it does business. “Acute risks” is defined as event-driven risks related to shorter-term extreme weather events, such as hurricanes, floods, and tornadoes. “Chronic risks” is defined as those risks that the business may face as a result of longer term weather patterns and related effects, such as sustained higher temperatures, sea level rise, drought, and increased wildfires, as well as related effects such as decreased arability of farmland, decreased habitability of land, and decreased availability of fresh water. Many of these physical risks have already impacted and may continue to impact registrants across a wide range of economic sectors. The proposed rules would define transition risks to mean the actual or potential negative impacts on a registrant's consolidated financial statements, business operations, or value chains attributable to regulatory, technological, and market changes to address the mitigation of, or adaptation to, climate-related risks. Transition risks would include, but are not limited to, increased costs attributable to climate-related changes in law or policy, reduced market demand for carbon-intensive products leading to decreased sales, prices, or profits for such products, the devaluation or abandonment of assets, risk of legal liability and litigation defense costs, competitive pressures associated with the adoption of new technologies, reputational impacts (including those stemming from a registrant's customers or business counterparties) that might trigger changes to market behavior, changes in consumer preferences or behavior, or changes in a registrant's behavior. A registrant that has significant operations in a jurisdiction that has made a GHG emissions reduction commitment would likely be exposed to transition risks related to the implementation of the commitment.

The proposed rules would require a registrant to specify whether an identified climate-related risk is a physical or transition risk so that investors can better understand the nature of the risk and the registrant's actions or plan to mitigate or adapt to the risk. If a physical risk, the proposed rules would require a registrant to describe the nature of the risk, including whether it may be categorized as an acute or chronic risk.

The proposed rules would require a registrant to include in its description of an identified physical risk the location of the properties, processes, or operations subject to the physical risk. The proposed location disclosure would only be required for a physical risk that a registrant has determined has had or is likely to have a material impact on its business or consolidated financial statements. In such instances, a registrant would be required to provide the ZIP code for the location or, if the location is in a jurisdiction that does not use ZIP codes, a similar subnational postal zone or geographic location. Because physical risks can be concentrated in particular geographic areas, the proposed disclosure would allow investors to better assess the risk exposure of one or more registrants with properties or operations in a particular area. One commenter cited location information as a key component of how it, as an investor, assesses the climate risk facing a company, particularly for companies with fixed assets that may be disproportionately exposed to climate-related physical risks. Several other commenters recommended that we require the disclosure of certain climate data to be disaggregated by location using a point source's zip code for risk assessment. Disclosing the zip codes of its identified material climate-related risks, rather than a broader location designation, could help investors more accurately assess a registrant's specific risk exposure.

Some registrants might be exposed to water-related acute physical risks, such as flooding, which could impair a registrant's operations or devalue its property. If flooding presents a material physical risk, the proposed rules would require a registrant to disclose the percentage of buildings, plants, or properties (square meters or acres) that are located in flood hazard areas in addition to their location. This information could help investors evaluate the magnitude of a registrant's exposure to flooding, which, for example, could cause a registrant in the real estate sector to lose revenues from the rental or sale of coastal property or incur higher costs or a diminished ability to obtain property insurance, or a manufacturing registrant to incur increased expenses due to the need to replace water-damaged equipment or move an entire plant.

Additional disclosure would be required if a material risk concerns the location of assets in regions of high or extremely high water stress. For example, some registrants might be impacted by water-related chronic physical risks, such as increased temperatures and changes in weather patterns that result in water scarcity. Registrants that are heavily reliant on water for their operations, such as registrants in the energy sector, materials and buildings sector, or agriculture sector, could face regulatory restrictions on water use, increased expenses related to the acquisition and purchase of alternative sources of water, or curtailment of its operations due to a reduced water supply that diminishes its earning capacity. If the location of assets in regions of high or extremely high water stress presents a material risk, the proposed rules would require a registrant to disclose the amount of assets ( e.g., book value and as a percentage of total assets) located in such regions in addition to their location. The registrant would also be required to disclose the percentage of its total water usage from water withdrawn in those regions. These disclosures could help investors understand the magnitude of a registrant's material water-stress risks with a degree of specificity that might not be elicited under our current risk factor disclosure standards.

Any increased temperatures could also materially impact a registrant in other ways. For example, a registrant in the construction industry might be required to disclose the physical risk of increased heat waves that affect the ability of its personnel to safely work outdoors, which could result in a cessation or delay of operations, and a reduction in its current or future earnings. A registrant operating in wildfire-prone areas could be exposed to potential disruption of operations, destruction of property, and relocation of personnel in the event of heat-induced wildfires. A registrant in the real estate sector might similarly be required to disclose the likelihood that sea levels could rise faster than expected and reduce the value of its coastal properties.

The proposed rules would require a registrant to describe the nature of transition risks, including whether they relate to regulatory, technological, market (including changing consumer, business counterparty, and investor preferences), liability, reputational, or other transition-related factors, and how those factors impact the registrant. For example, an automobile manufacturer might describe how market factors, such as changing consumer and investor preferences for low-emission vehicles, have impacted or will likely impact its production choices, operational capabilities, and future expenditures. An energy producer might describe how regulatory and reputational factors have impacted or are likely to impact its operational activities, reserve valuations, and investments in renewable energy. An industrial manufacturer might describe how investments in innovative technologies, such as carbon capture and storage, have impacted or are likely to impact its consolidated financial statements, such as by increasing its capital expenditures.

Climate related conditions and any transition to a lower carbon economy may also present opportunities for companies and investors. The proposed rules would define “climate-related opportunities” to mean the actual or potential positive impacts of climate-related conditions and events on a registrant's consolidated financial statements, business operations, or value chains, as a whole. Efforts to mitigate or adapt to the effects of climate-related conditions and events can produce opportunities, such as cost savings associated with the increased use of renewable energy, increased resource efficiency, the development of new products, services, and methods, access to new markets caused by the transition to a lower carbon economy, and increased resilience along a registrant's supply or distribution network related to potential climate-related regulatory or market constraints. A registrant, at its option, may disclose information about any climate-related opportunities it may be pursuing when responding to the proposed disclosure requirements concerning governance, strategy, and risk management in connection with climate-related risks. We are proposing to treat this disclosure as optional to allay any anti-competitive concerns that might arise from a requirement to disclose a particular business opportunity. By defining “climate-related opportunities,” the proposed rules would promote consistency when such opportunities are disclosed, even if such disclosure is not required.

2. Proposed Time Horizons and the Materiality Determination

The proposed rules would require a registrant to disclose whether any climate-related risk is reasonably likely to have a material impact on a registrant, including its business or consolidated financial statements, which may manifest over the short, medium, and long term. Several commenters made a similar recommendation, stating that disclosure of climate-related risks and impacts across short, medium, and long-term time horizons is necessary to fully understand a registrant's susceptibility to material climate-related risks.

As proposed, a registrant would be required to describe how it defines short-, medium-, and long-term time horizons, including how it takes into account or reassesses the expected useful life of the registrant's assets and the time horizons for the registrant's planning processes and goals. We have not proposed a specific range of years to define short-, medium-, and long-term time horizons in order to allow flexibility for a registrant to select the time horizons that are most appropriate to its particular circumstances.

As defined by the Commission and consistent with Supreme Court precedent, a matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote. As the Commission has previously indicated, the materiality determination is largely fact specific and one that requires both quantitative and qualitative considerations. Moreover, as the Supreme Court has articulated, the materiality determination with regard to potential future events requires an assessment of both the probability of the event occurring and its potential magnitude, or significance to the registrant.

The materiality determination that a registrant would be required to make regarding climate-related risks under the proposed rules is similar to what is required when preparing the MD&A section in a registration statement or annual report. The Commission's rules require a registrant to disclose material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. As the Commission has stated, MD&A should include descriptions and amounts of matters that have had a material impact on reported operations as well as matters that are reasonably likely to have a material impact on future operations.

The proposed rule serves to emphasize that, when assessing the materiality of a particular risk, management should consider its magnitude and probability over the short, medium, and long term. In the context of climate, the magnitude and probability of such risks vary and can be significant over such time periods. For example, wildfires in California, which recently have become more frequent and more intense, may be a material risk for wineries, farmers, and other property owners. Some insurance companies have withdrawn from certain wildfire prone areas after concluding the risk is no longer insurable. For many investors, the availability of insurance and the potential exposure to damage, loss, and legal liability from wildfires may be a determining factor in their investment decision-making. Moreover, registrants must bear in mind that the materiality determination is made with regard to the information that a reasonable investor considers important to an investment or voting decision.

To help ensure that management considers the dynamic nature of climate-related risks, we are proposing to require a registrant to discuss its assessment of the materiality of climate-related risks over the short, medium, and long term. We recognize that determining the likely future impacts on a registrant's business may be difficult for some registrants. Commenters have noted that the science of climate modelling has progressed in recent years and enabled the development of various software tools and that climate consulting firms are available to assist registrants in making this determination. We also note that, under our existing rules, registrants long have had to disclose forward-looking information, including pursuant to MD&A requirements. To the extent that the proposed climate-related disclosures constitute forward-looking statements, as discussed below, the forward-looking statement safe harbors pursuant to the Private Securities Litigation Reform Act (“PSLRA”) would apply, assuming the conditions specified in those safe harbor provisions are met. We note, however, that there are important limitations to the PSLRA safe harbor. For example, we are proposing that climate-related disclosures would be required in registration statements, including those for initial public offerings, and forward-looking statements made in connection with an initial public offering are excluded from the protections afforded by the PSLRA. In addition, the PSLRA does not limit the Commission's ability to bring enforcement actions.

Request for Comment

8. Should we require a registrant to disclose any climate-related risks that are reasonably likely to have a material impact on the registrant, including on its business or consolidated financial statements, which may manifest over the short, medium, and long term, as proposed? If so, should we specify a particular time period, or minimum or maximum range of years, for “short,” “medium,” and “long term?” For example, should we define short term as 1 year, 1-3 years, or 1-5 years? Should we define medium term as 5-10 years, 5-15 years, or 5-20 years? Should we define long-term as 10-20 years, 20-30 years, or 30-50 years? Are there other possible years or ranges of years that we should consider as the definitions of short, medium, and long term? What, if any, are the benefits to leaving those terms undefined? What, if any, are the concerns to leaving those terms undefined? Would the proposed provision requiring a registrant to specify what it means by the short, medium, and long term mitigate any such concerns?

9. Should we define “climate-related risks” to mean the actual or potential negative impacts of climate-related conditions and events on a registrant's consolidated financial statements, business operations, or value chains, as proposed? Should we define climate-related risks to include both physical and transition risks, as proposed? Should we define physical risks to include both acute and chronic risks and define each of those risks, as proposed? Should we define transition risks, as proposed? Are there any aspects of the definitions of climate-related risks, physical risks, acute risks, chronic risks, and transition risks that we should revise? Are there other distinctions among types of climate-related risks that we should use in our definitions? Are there any risks that we should add to the definition of transition risk? How should we address risks that may involve both physical and transition risks?

10. We define transition risks to include legal liability, litigation, or reputational risks. Should we provide more examples about these types of risks? Should we require more specific disclosures about how a registrant assesses and manages material legal liability, litigation, or reputational risks that may arise from a registrant's business operations, climate mitigation efforts, or transition activities?

11. Some chronic risks might give rise to acute risks, e.g., drought (a chronic risk) that increases acute risks, such as wildfires, or increased temperatures (a chronic risk) that increases acute risks, such as severe storms. Should we require a registrant to discuss how the acute and chronic risks they face may affect one another?

12. For the location of its business operations, properties or processes subject to an identified material physical risk, should we require a registrant to provide the ZIP code of the location or, if located in a jurisdiction that does not use ZIP codes, a similar subnational postal zone or geographic location, as proposed? Is there another location identifier that we should use for all registrants, such as the county, province, municipality or other subnational jurisdiction? Would requiring granular location information, such as ZIP codes, present concerns about competitive harm or the physical security of assets? If so, how can we mitigate those concerns? Are there exceptions or exemptions to a granular location disclosure requirement that we should consider?

13. If a registrant determines that the flooding of its buildings, plants, or properties is a material risk, should we require it to disclose the percentage of those assets that are in flood hazard areas in addition to their location, as proposed? Would such disclosure help investors evaluate the registrant's exposure to physical risks related to floods? Should we require this disclosure from all registrants, including those that do not currently consider exposure to flooding to be a material physical risk? Should we require this disclosure from all registrants operating in certain industrial sectors and, if so, which sectors? Should we define “flood hazard area” or provide examples of such areas? If we should define the term, should we define it similar to a related definition by the Federal Emergency Management Agency (“FEMA”) as an area having flood, mudflow or flood-related erosion hazards, as depicted on a flood hazard boundary map or a flood insurance rate map? Should we require a registrant to disclose how it has defined “flood hazard area” or whether it has used particular maps or software tools when determining whether its buildings, plants, or properties are located in flood hazard areas? Should we recommend that certain maps be used to promote comparability? Should we require disclosure of whether a registrant's assets are located in zones that are subject to other physical risks, such as in locations subject to wildfire risk?

14. If a material risk concerns the location of assets in regions of high or extremely high water stress, should we require a registrant to quantify the assets ( e.g., book value and as a percentage of total assets) in those regions in addition to their location, as proposed? Should we also require such a registrant to disclose the percentage of its total water usage from water withdrawn in high or extremely high water stressed regions, as proposed? If so, should we include a definition of a “high water stressed region” similar to the definition provided by the World Resource Institute as a region where 40-80 percent of the water available to agricultural, domestic, and industrial users is withdrawn annually? Should we similarly define an “extremely high water stressed area” as a region where more than 80 percent of the water available to agricultural, domestic, and industrial users is withdrawn annually? Are there other definitions of high or extremely high water stressed areas we should use for purposes of this disclosure? Would these items of information help investors assess a registrant's exposure to climate-related risks impacting water availability? Should we require the disclosure of these items of information from all registrants, including those that do not currently consider having assets in high water-stressed areas a material physical risk? Should we require these disclosures from all registrants operating in certain industrial sectors and, if so, which sectors?

15. Are there other specific metrics that would provide investors with a better understanding of the physical and transition risks facing registrants? How would investors benefit from the disclosure of any additional metrics that would not necessarily be disclosed or disclosed in a consistent manner by the proposed climate risk disclosures? What, if any, additional burdens would registrants face if they were required to disclose additional climate risk metrics?

16. Are there other areas that should be included as examples in the definitions of acute or chronic risks? If so, for each example, please explain how the particular climate-related risk could materially impact a registrant's operations or financial condition.

17. Should we include the negative impacts on a registrant's value chain in the definition of climate-related risks, as proposed? Should we define “value chain” to mean the upstream and downstream activities related to a registrant's operations, as proposed? Are there any upstream or downstream activities included in the proposed definition of value chain that we should exclude or revise? Are there any upstream or downstream activities that we should add to the definition of value chain? Are there any upstream or downstream activities currently proposed that should not be included?

18. Should we define climate-related opportunities as proposed? Should we permit a registrant, at its option, to disclose information about any climate-related opportunities that it is pursuing, such as the actual or potential impacts of those opportunities on the registrant, including its business or consolidated financial statements, as proposed? Should we specifically require a registrant to provide disclosure about any climate-related opportunities that have materially impacted or are reasonably likely to impact materially the registrant, including its business or consolidated financial statements? Is there a risk that the disclosure of climate-related opportunities could be misleading and lead to “greenwashing”? If so, how should this risk be addressed?

C. Disclosure Regarding Climate-Related Impacts on Strategy, Business Model, and Outlook

1. Disclosure of Material Impacts

Once a registrant has described the climate-related risks reasonably likely to have a material impact on the registrant's business or consolidated financial statements as manifested over the short, medium, and long term as required by proposed Item 1502(a), proposed Item 1502(b) would require the registrant to describe the actual and potential impacts of those risks on its strategy, business model, and outlook. Several commenters stated that many registrants have included largely boilerplate discussions about climate-related risks and failed to provide a meaningful analysis of the impacts of those risks on their businesses. The TCFD's most recent assessment of public companies' voluntary climate reports also noted that a minority of companies disclosed the impacts of climate-related risks and opportunities on their businesses in alignment with the TCFD framework. Because information about how climate-related risks have impacted or are likely to impact a registrant's strategy, business model, and outlook can be important for purposes of making an investment or voting decision about the registrant, we are proposing the provisions below to elicit robust and company-specific disclosure on this topic.

As proposed, a registrant would be required to disclose impacts on its:

• Business operations, including the types and locations of its operations;
• Products or services;
• Suppliers and other parties in its value chain;
• Activities to mitigate or adapt to climate-related risks, including adoption of new technologies or processes;
• Expenditure for research and development; and

• Any other significant changes or impacts.

A registrant would also be required to disclose the time horizon for each described impact ( i.e., as manifested in the short, medium, or long term, as defined by the registrant when determining its material climate-related risks).

The proposed rules would require a registrant to discuss how it has considered the identified impacts as part of its business strategy, financial planning, and capital allocation. A registrant would be required to provide both current and forward-looking disclosures that facilitate an understanding of whether the implications of the identified climate-related risks have been integrated into the registrant's business model or strategy, including how resources are being used to mitigate climate-related risks. The discussion must also include how any of the metrics referenced in proposed Rule 14-02 of Regulation S-X and Item 1504 of Regulation S-K or any of the targets referenced in proposed Item 1506 relate to the registrant's business model or business strategy.

For example, a registrant that operates in a jurisdiction that has imposed or is likely to impose limits on GHG emissions in support of the Paris Agreement might set a long-term target of net zero GHG emissions from its operations in 2050, a medium-term target of reducing its emissions by 30 percent by 2030, and a short-term target of maintaining its emissions at its 2020 rate through 2023. This registrant could face material transition risks due to the estimated costs of the operational changes expected to be implemented to achieve these targets. The registrant would be required to disclose these transition risks and their impacts on its strategy, business model, and outlook.

Some of the described impacts would likely be common across industries and may involve reducing a registrant's Scopes 1 and 2 GHG emissions and incurring increased expenses in the short term related to, for example, acquiring new technology to curb its operational emissions and increasing the amount of electricity purchased from renewable sources. Other described impacts of material transition risks, however, would likely vary by industry. For example, an oil company might determine that a likely change in demand for fossil fuel-based products would require it to modify its business model or alter its product mix to emphasize advanced diesel gas and biofuels in order to maintain or increase its earning capacity, thereby requiring disclosure under the proposed rules. An electric utilities company might disclose an increase in the amount of electricity generated from less carbon-intensive sources, such as wind turbines, nuclear, hydroelectric, or solar power to meet current or likely regulatory constraints.

A registrant would also be required to disclose the material impacts of physical risks on its strategy, business model, and outlook. For example, an agricultural producer or distributor might disclose the likely impacts of drought on its own product mix or that of its suppliers, including increased expenses for additional water or due to the procurement of alternative product sources. Similarly, a mining company that operates in areas susceptible to extreme rise in temperatures might disclose the likely impacts that this temperature rise has on its workforce and on its production schedule, including a reduction in output and future earning capacity. A real estate company that owns coastal property might disclose the likely impacts of rising sea levels on such property, including the potential diminution in value of, and a potential change in its strategy and outlook regarding, such properties.

The proposed rules would require a registrant to provide a narrative discussion of whether and how any of its identified climate-related risks described in response to proposed Item 1502(a) have affected or are reasonably likely to affect the registrant's consolidated financial statements. The discussion should include any of the financial statement metrics disclosed pursuant to proposed Regulation S-X Rule 14-02. As previously noted, many commenters recommended that we require registrants to discuss and analyze their quantitative climate data in a manner similar to that required for MD&A. Proposed 17 CFR 229.1502(d) (Item 1502(d) of Regulation S-K) is intended to provide climate-related disclosure that is similar to MD&A, although, as previously noted, a registrant may provide such disclosure as part of its MD&A.

For example, an automobile manufacturer might discuss an increase in operating costs or capital expenditures due to the need to revamp its assembly lines to build lower emission vehicles to comply with new regulatory guidelines or to meet changing consumer demand. An oil company might discuss a change in the valuation of its proven reserves because of an anticipated reduced demand for fossil fuels. A freight company might discuss impairment charges or early write-offs for older equipment it might need to replace due to anticipated changes in regulation or policy favoring lower emissions equipment. While a registrant may currently have an obligation to make some of these disclosures pursuant to Regulation S-X, the disclosed impacts in the financial statements may not be in disaggregated form and may lack explanation. Proposed Item 1502(d) would require the disclosure in the form of a narrative analysis akin to MD&A that would be more easily accessible for investors.

Moreover, it is likely that any disclosed impacts in the financial statements would be assessed for the fiscal years presented in the financial statements with a focus on near short-term impacts. Because proposed Item 1502 would require a registrant to identify material climate-related impacts that may manifest in the short, medium, and long term, a registrant's narrative discussion of the likely climate-related impacts on its consolidated financial statements should cover more than just short-term impacts. For example, if a registrant has a transition plan that includes the development of lower carbon products and processes, that registrant might disclose that it expects to incur higher initial capital costs to implement its strategy, but anticipates increased revenues or reduced expenses over the longer term. An automobile manufacturer that transitions from the production of internal combustion engine vehicles to the production of electric vehicles might disclose that it expects to incur costs in the short term to change its manufacturing processes, but over the longer term, it expects to realize increased sales, protect its market share against transition risks, including reputational risks, and potentially avoid regulatory fines or other costs as consumer and regulatory demands change.

2. Disclosure of Carbon Offsets or Renewable Energy Credits if Used

If, as part of its net emissions reduction strategy, a registrant uses carbon offsets or renewable energy credits or certificates (“RECs”), the proposed rules would require it to disclose the role that carbon offsets or RECs play in the registrant's climate-related business 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. We are proposing to define a REC, consistent with the EPA's commonly used definition, to mean a credit or certificate representing each purchased megawatt-hour (1 MWh or 1000 kilowatt-hours) of renewable electricity generated and delivered to a registrant's power grid. While both carbon offsets and RECs represent commonly used GHG emissions mitigation options for companies, they are used for somewhat different purposes.

Some registrants might plan to use carbon offsets or RECs as their primary means of meeting their GHG reduction goals, including those formulated in response to government law or policy or customer or investor demands. Other registrants, including those that set Science Based Targets pursuant to the Science Based Targets Initiative, might develop strategies to reduce their emissions to the extent possible through operational changes—such as modifications to their product offerings or the development of solar or other renewable energy sources. They then might plan to use carbon offsets or RECs to offset the remainder of their emissions that they cannot reduce through operational changes or to meet their GHG reduction goals while they transition to lower carbon operations.

Understanding the role that carbon offsets or RECs play in a registrant's climate-related business strategy can help investors gain useful information about the registrant's strategy, including the potential risks and financial impacts. A registrant that relies on carbon offsets or RECs to meet its goals might incur lower expenses in the short term but could expect to continue to incur the expense of purchasing offsets or RECs over the long term. It also could bear the risk of increased costs of offsets or RECs if increased demand for offsets or RECs creates scarcity and higher costs to acquire them over time. Alternatively, the value of an offset may decrease substantially and suddenly if, for example, the offset represents protected forest land that burns in a wildfire and no longer represents a reduction in GHG emissions. In that case, the registrant may need to write off the offset and purchase a replacement. In other cases, increased demand for, or scarcity of, offsets and RECs may benefit a registrant that produces or generates offsets or RECs to the extent their prices increase. Accordingly, under the proposed rules, a registrant that purchases offsets or RECs to meet its goals as it makes the transition to lower carbon products would need to reflect this additional set of short and long-term costs and risks in its Item 1502 disclosure, including the risk that the availability or value of offsets or RECs might be curtailed by regulation or changes in the market.

3. Disclosure of a Maintained Internal Carbon Price

Some registrants may use an internal carbon price when assessing climate-related factors. Under the proposed definition, an internal carbon price is an estimated cost of carbon emissions used internally within an organization. Internal carbon pricing may be used by a registrant, among other purposes, as a planning tool to help identify climate-related risks and opportunities, as an incentive to drive energy efficiencies to reduce costs, to quantify the potential costs the company would incur should a carbon price be put into effect, and to guide capital investment decisions. If a registrant uses an internal carbon price, the proposed rules would require it to disclose:

• The price in units of the registrant's reporting currency per metric ton of carbon dioxide equivalent (“CO₂ e”);

• The total price, including how the total price is estimated to change over time, if applicable;

• The boundaries for measurement of overall CO₂ e on which the total price is based (if different from the GHG emission organizational boundary required pursuant to 17 CFR 229.1504(e)(2); and

• The rationale for selecting the internal carbon price applied.

These proposed items of disclosure would help investors understand the rationale and underlying assumptions for a registrant's internal carbon price and help them assess whether the registrant's use of an internal carbon price as a planning tool is reasonable and effective.

A registrant would also be required to describe how it uses its disclosed internal carbon price to evaluate and manage climate-related risks. If a registrant uses more than one internal carbon price, the proposed rules would require it to provide disclosures for each internal carbon price, and to disclose its reasons for using different prices. For example, a registrant might disclose that it uses different internal carbon prices when considering different climate-related scenarios to help it develop an appropriate business strategy over the short-, medium-, and long-term.

Commenters that addressed the topic of carbon price generally supported requiring its disclosure in some form, such as: (i) Establishing a broad-based carbon price; (ii) requiring companies to maintain and disclose an internal carbon price; (iii) requiring disclosure of any internal carbon price already used by a company; or (iv) requiring disclosure of carbon prices used in the context of scenario analysis. One commenter referred to disclosure of a company's use of internal carbon pricing as one of several “foundational climate disclosures” that should be required in any Commission rule. Another commenter also underscored the importance of this information, stating that “the thorough quantification of climate risk has been hampered by the lack of carbon pricing.” We agree with commenters that supported the disclosure of carbon pricing as a key data point for evaluating how a registrant is planning for and managing climate-related risks. However, the proposed rules would not require registrants to maintain an internal carbon price or to mandate a particular carbon pricing methodology. We are aware that many registrants may not currently track this information and recognize that a robust carbon market on which to base such a price may not exist in many contexts. Accordingly, the proposed disclosures would be required only if the registrant otherwise maintains an internal carbon price. For similar reasons, we have not proposed requiring a specific methodology for setting an internal carbon price.

Registrants may choose to use an internal carbon price when quantifying, analyzing, and assessing the financial impacts of climate-related risks and climate-related opportunities. For example, an internal carbon price helps monetize emissions by converting emissions data from CO₂ e into a value in the registrant's reporting currency. A registrant may determine that monetization is useful when assessing the costs and benefits of its possible climate-related strategies, as it effectively puts a price on the emission impacts. Disclosure of an internal carbon price, when used by a registrant, would provide investors with material information regarding how the registrant developed a particular business strategy to mitigate or adapt to identified climate-related risks and would help quantify for investors at least part of the transition risks faced by a registrant. We believe that this proposed disclosure requirement would help investors assess whether a registrant's internal carbon pricing practice is reasonable and whether its overall evaluation and planning regarding climate-related factors is sound.

A registrant's disclosure of any internal carbon price necessarily would include assumptions about future events. The carbon price applied should not be viewed as a promise or guarantee with regard to the future costs to the registrant of GHG emissions. Moreover, to the extent that certain information regarding a registrant's internal carbon pricing would constitute forward-looking statements, the PSLRA safe harbors would apply to such statements, assuming all other statutory requirements for those safe harbors are satisfied.

4. Disclosure of Scenario Analysis, if Used

We are proposing to require a registrant to describe the resilience of its business strategy in light of potential future changes in climate-related risks. A registrant also would be required to describe any analytical tools, such as scenario analysis, that the registrant uses to assess the impact of climate-related risks on its business and consolidated financial statements, or to support the resilience of its strategy and business model in light of foreseeable climate-related risks. Scenario analysis is a process for identifying and assessing a potential range of outcomes of future events under conditions of uncertainty. The proposed definition of scenario analysis both states that (i) when applied to climate-related assessments, scenario analysis is a tool used to consider how, under various possible future climate scenarios, climate-related risks may impact a registrant's operations, business strategy, and consolidated financial statements over time; and that (ii) registrants might use scenario analysis to test the resilience of their strategies under future climate scenarios, including scenarios that assume different global temperature increases, such as, for example, 3 °C, 2 °C, and 1.5 °C above pre-industrial levels.

Many commenters recommended that we require a registrant to conduct scenario analysis and disclose the results of such analysis. One commenter stated that scenario analysis was useful because it allows companies to test their business strategy against a spectrum of hypothetical future climate scenarios and develop a better informed view of implications for their enterprise value and value chains. The same commenter further indicated that disclosure of the scenarios used by a company was necessary to inform investors about the reliability, reasonableness, and resiliency of the company's plans to address climate-related risks and opportunities.

Another commenter stated that the Commission should require disclosure of a registrant's climate scenario analysis by no later than 2025, and recommended that companies engage in scenario analysis involving a base case, worse case, better case, and “Black Swan” scenarios related to possible climate transition pathways. Alternatively, the commenter suggested that a company take into account three scenarios: A smooth economic transition to +1.5 °C, which would form the basis of the company's net-zero strategy; a disorderly and, therefore, more costly and disruptive transition to +1.5 °C; and a higher temperature scenario outcome of +3 °C of warming, which would be associated with extreme physical effects and unprecedented economic costs and disruption. This commenter further stated that robust disclosure of a company's scenario analysis was necessary so that investors can understand how longer-term “climate drivers” have been incorporated into its corporate strategy and financial disclosures.

Another commenter expressed the view that, although many companies purport to use scenario analysis in the climate context, their reporting regarding such use has been generally deficient. That commenter stated that the assumptions underlying the selected scenarios often are undisclosed and that the analysis tends to be limited and not usefully comparable. The TCFD's most recent assessment of public companies' voluntary climate reporting similarly found that only a small percentage of the surveyed companies disclosed the resilience of their strategies using scenario analysis as recommended by the TCFD.

Some commenters recommended providing certain accommodations in connection with a scenario analysis requirement, such as creating a safe harbor for scenario analysis disclosure or permitting scenario analysis to be furnished in a separate report that would not be subject to the same liability as Commission filings. Other commenters stated that they opposed a scenario analysis requirement because of the lack of a common methodology for scenario analysis; a belief that the underlying methodology would be too difficult for investors to understand; the need for further development of scenario analysis as a discipline; or a belief that the focus of climate-related disclosure should be on historical data, and not on forward-looking information.

We agree with those commenters who stated that information concerning scenario analysis could help investors evaluate the resilience of the registrant's business strategy in the face of various climate scenarios that could impose potentially different climate-related risks. We are not, however, proposing to mandate that registrants conduct scenario analysis. We recognize that not every registrant conducts scenario analysis and that, in certain instances, it may be costly or difficult for some registrants to conduct such scenario analysis. Instead, the proposed rules would require that if a registrant uses scenario analysis or any analytical tools to assess the impact of climate-related risks on its business and consolidated financial statements, and to support the resilience of its strategy and business model, the registrant must disclose certain information about such analysis. We believe this approach strikes an appropriate balance between the various positions expressed by commenters by requiring registrants to share any scenario analysis that they are otherwise conducting for their business operations while avoiding imposing a potentially difficult or burdensome requirement on those registrants that have not yet undertaken to conduct such analysis.

If a registrant uses scenario analysis, the proposed amendments would require disclosure of the scenarios considered ( e.g., an increase of no greater than 3°, 2°, or 1.5 °C above pre-industrial levels), including parameters, assumptions, and analytical choices, and the projected principal financial impacts on the registrant's business strategy under each scenario. The disclosure should include both quantitative and qualitative information. Disclosure of the parameters, assumptions, and analytical choices involved in the described scenarios would help investors better understand the various considered scenarios and help them evaluate whether the registrant has a plan to manage the climate-related risks posed by each scenario.

Because a registrant's scenario analysis disclosure would necessarily include predictions and other forward-looking statements based on assumptions concerning future events, we believe that the PSLRA forward-looking safe harbors would apply to much of the disclosure concerning scenario analysis provided the other statutory conditions for application of the safe harbor are met.

We note that there are a number of publicly-available climate-related scenarios that could form the basis of a registrant's scenario analysis. The TCFD has categorized these scenarios as transition scenarios and physical climate scenarios. If a registrant uses scenario analysis to assess the resilience of its business strategy to climate-related risks, investors may benefit from the use of scientifically based, widely accepted scenarios, such as those developed by the IPCC, International Energy Agency (“IEA”), or Network of Central Banks and Supervisors for Greening the Financial System (“NGFS”). Investors may also benefit by the use of more than one climate scenario, including one that assumes a disorderly transition ( i.e., one that assumes that climate policies are delayed or divergent across countries and industrial sectors, resulting in higher transition risks to companies). These could enhance the reliability and usefulness of the scenario analysis for investors.

Request for Comment

19. Should we require a registrant to describe the actual and potential impacts of its material climate-related risks on its strategy, business model, and outlook, as proposed? Should we require a registrant to disclose impacts from climate-related risks on, or any resulting significant changes made to, its business operations, including the types and locations of its operations, as proposed?

20. Should we require a registrant to disclose climate-related impacts on, or any resulting significant changes made to, its products or services, supply chain or value chain, activities to mitigate or adapt to climate-related risks, including adoption of new technologies or processes, expenditure for research and development, and any other significant changes or impacts, as proposed? Are there any other aspects of a registrant's business operations, strategy, or business model that we should specify as being subject to this disclosure requirement to the extent they may be impacted by climate-related factors?

21. Should we require a registrant to specify the time horizon applied when assessing its climate-related impacts ( i.e., in the short, medium, or long term), as proposed?

22. Should we require a registrant to discuss whether and how it considers any of the described impacts as part of its business strategy, financial planning, and capital allocation, as proposed? Should we require a registrant to provide both current and forward-looking disclosures to facilitate an understanding of whether the implications of the identified climate-related risks have been integrated into the registrant's business model or strategy, as proposed? Would any of the proposed disclosures present competitive concerns for registrants? If so, how can we mitigate such concerns?

23. Should we require the disclosures to include how the registrant is using resources to mitigate climate-related risks, as proposed? Should the required discussion also include how any of the metrics or targets referenced in the proposed climate-related disclosure subpart of Regulation S-K or Article 14 of Regulation S-X relate to the registrant's business model or business strategy, as proposed? Should we require additional disclosures if a registrant leverages climate-related financing instruments, such as green bonds or other forms of “sustainable finance” such as “sustainability-linked bonds,” “transition bonds,” or other financial instruments linked to climate change as part of its strategy to address climate-related risks and opportunities? For example, should we require disclosure of the climate-related projects that the registrant plans to use the green bond proceeds to fund? Should we require disclosure of key performance metrics tied to such financing instruments?

24. If a registrant has used carbon offsets or RECs, should we require the registrant to disclose the role that the offsets or RECs play in its overall strategy to reduce its net carbon emissions, as proposed? Should the proposed definitions of carbon offsets and RECs be clarified or expanded in any way? Are there specific considerations about the use of carbon offsets or RECs that we should require to be disclosed in a registrant's discussion regarding how climate-related factors have impacted its strategy, business model, and outlook?

25. Should we require a registrant to provide a narrative discussion of whether and how any of its identified climate-related risks have affected or are reasonably likely to affect its consolidated financial statements, as proposed? Should the discussion include any of the financial statement metrics in proposed 17 CFR 210.14-02 (14-02 of Regulation S-X) that demonstrate that the identified climate-related risks have had a material impact on reported operations, as proposed? Should the discussion include a tabular representation of such metrics?

26. Should we require registrants to disclose information about an internal carbon price if they maintain one, as proposed? If so, should we require that the registrant disclose:

• The price in units of the registrant's reporting currency per metric ton of CO₂ e;

• The total price;

• The boundaries for measurement of overall CO₂ e on which the total price is based if different from the GHG emission organizational boundary required pursuant to 17 CFR 210.14-03(d)(4); and

• The rationale for selecting the internal or shadow carbon price applied, as proposed?

Should we also require registrants to describe the methodology used to calculate its internal carbon price?

27. Should we also require a registrant to disclose how it uses the described internal carbon price to evaluate and manage climate-related risks, as proposed? Should we further require a registrant that uses more than one internal carbon price to provide the above disclosures for each internal carbon price, and disclose its reasons for using different prices, as proposed? Are there other aspects regarding the use of an internal carbon price that we should require to be disclosed? Would disclosure regarding any internal carbon price maintained by a registrant elicit important or material information for investors? Would requiring the disclosure of the registrant's use of an internal carbon price raise competitive harm concerns that would act as a disincentive from the use of an internal carbon price? If so, should the Commission provide an accommodation that would mitigate those concerns? For example, are there exceptions or exemptions to an internal carbon price disclosure requirement that we should consider?

28. To the extent that disclosure that incorporates or is based on an internal carbon price constitutes forward-looking information, the PSLRA safe harbors would apply. Should we adopt a separate safe harbor for internal carbon price disclosure? If so, what disclosures should such a safe harbor cover and what should the conditions be for such a safe harbor?

29. Should we require all registrants to disclose an internal carbon price and prescribe a methodology for determining that price? If so, what corresponding disclosure requirements should we include in connection with such mandated carbon price? What methodology, if any, should we prescribe for calculating a mandatory internal or shadow carbon price? Would a different metric better elicit disclosure that would monetize emissions?

30. Should we require a registrant to disclose analytical tools, such as scenario analysis, that it uses to assess the impact of climate-related risks on its business and consolidated financial statements, and to support the resilience of its strategy and business model, as proposed? What other analytical tools do registrants use for these purposes, and should we require disclosure of these other tools? Are there other situations in which some registrants should be required to conduct and provide disclosure of scenario analysis? Alternatively, should we require all registrants to provide scenario analysis disclosure? If a registrant does provide scenario analysis disclosure, should we require it to follow certain publicly available scenario models, such as those published by the IPCC, the IEA, or NGFS and, if so, which scenarios? Should we require a registrant providing scenario analysis disclosure to include the scenarios considered ( e.g., an increase of global temperature of no greater than 3°, 2°, or 1.5 °C above pre-industrial levels), the parameters, assumptions, and analytical choices, and the projected principal financial impacts on the registrant's business strategy under each scenario, as proposed? Are there any other aspects of scenario analysis that we should require registrants to disclose? For example, should we require a registrant using scenario analysis to consider a scenario that assumes a disorderly transition? Is there a need for us to provide additional guidance regarding scenario analysis? Are there any aspects of scenario analysis in our proposed required disclosure that we should exclude? Should we also require a registrant that does not use scenario analysis to disclose that it has not used this analytical tool? Should we also require a registrant to disclose its reasons for not using scenario analysis? Will requiring disclosure of scenario analysis if and when a registrant performs scenario analysis discourage registrants from conducting scenario analysis? If so, and to the extent scenario analysis is a useful tool for building strategic resilience, how could our regulations prevent such consequences?

31. Would the PSLRA forward-looking statement safe harbors provide adequate protection for the proposed scenario analysis disclosure? Should we instead adopt a separate safe harbor for scenario analysis disclosure? If so, what disclosures should such a safe harbor cover that would not be covered by the PSLRA safe harbors and what should the conditions be for such a safe harbor?

32. Should we adopt a provision similar to 17 CFR 229.305(d) that would apply the PSLRA forward-looking statement safe harbor to forward-looking statements made in response to specified climate-related disclosure items, such as proposed Item 1502 and Item 1505 (concerning targets and goals) of Regulation S-K? If so, which proposed items should we specifically include in the safe harbor?

33. As proposed, a registrant may provide disclosure regarding any climate-related opportunities when responding to any of the provisions under proposed 17 CFR 229.1502 (Item 1502). Should we require disclosure of climate-related opportunities under any or all of the proposed Item 1502 provisions?

D. Governance Disclosure

Similar to the TCFD framework, the proposed rules would require a registrant to disclose, as applicable, certain information concerning the board's oversight of climate-related risks, and management's role in assessing and managing those risks. Many commenters asserted that climate-related issues should be subject to the same level of board oversight as other financially material matters. Most of these commenters supported robust disclosure of a board's and management's governance of climate-related risks and opportunities, consistent with the TCFD framework.

Our proposed disclosure requirements are based on specific recommendations of the TCFD. We agree with commenters that a comprehensive understanding of a board's oversight, and management's governance, of climate-related risks is necessary to aid investors in evaluating the extent to which a registrant is adequately addressing the material climate-related risks it faces, and whether those risks could reasonably affect the value of their investment. We also note that, despite the importance of governance disclosure, according to the TCFD, only a small percentage of issuers that voluntarily provided climate-related information presented governance disclosure aligned with the TCFD's recommendations. While the proposed rules are intended to provide investors with additional insight into a board's and management's governance of climate-related risks, they are similar to the Commission's existing rules under Regulation S-K that call for disclosure about corporate governance in that they are intended to provide investors with relevant information about a registrant's board, management, and principal committees.

1. Board Oversight

The proposed rules would require a registrant to disclose a number of board governance items, as applicable. The first item would require a registrant to identify any board members or board committees responsible for the oversight of climate-related risks. The responsible board committee might be an existing committee, such as the audit committee or risk committee, or a separate committee established to focus on climate-related risks. The next proposed item would require disclosure of whether any member of a registrant's board of directors has expertise in climate-related risks, with disclosure required in sufficient detail to fully describe the nature of the expertise.

Another proposed item would require a description of the processes and frequency by which the board or board committee discusses climate-related risks. The registrant would have to disclose how the board is informed about climate-related risks, and how frequently the board considers such risks. These proposed disclosure items could provide investors with insight into how a registrant's board considers climate-related risks and any relevant qualifications of board members.

The proposed rule also would require disclosure about whether and how the board or board committee considers climate-related risks as part of its business strategy, risk management, and financial oversight. This disclosure could enable an investor to understand whether and how the board or board committee considers climate-related risks when reviewing and guiding business strategy and major plans of action, when setting and monitoring implementation of risk management policies and performance objectives, when reviewing and approving annual budgets, and when overseeing major expenditures, acquisitions, and divestitures. In this way, the proposed disclosure requirement could help investors assess the degree to which a board's consideration of climate-related risks has been integrated into a registrant's strategic business and financial planning and its overall level of preparation to maintain its shareholder value.

Finally, the proposed rule would require disclosure about whether and how the board sets climate-related targets or goals and how it oversees progress against those targets or goals, including the establishment of any interim targets or goals. Such a target might be, for example, to achieve net-zero carbon emissions for all or a large percentage of its operations by 2050 or to reduce the carbon intensity of its products by a certain percentage by 2030 in order to mitigate transition risk. This proposed requirement would help investors evaluate whether and how a board is preparing to mitigate or adapt to any material transition risks, and whether it is providing oversight for the registrant's potential transition to a lower carbon economy. If applicable, a registrant can elect also to discuss the board's oversight of climate-related opportunities.

2. Management Oversight

Similar to the proposed required disclosures on board oversight, the proposed rules would require a registrant to disclose a number of items, as applicable, about management's role in assessing and managing any climate-related risks. For example, a registrant would be required to disclose, as applicable, whether certain management positions or committees are responsible for assessing and managing climate-related risks and, if so, to identify such positions or committees and disclose the relevant expertise of the position holders or members in such detail as necessary to fully describe the nature of the expertise. This proposed requirement would give investors additional information to assess the extent to which management addresses climate-related risks, which could help them to make better informed investment or voting decisions.

Similar to the proposed board oversight provision described above, another proposed item would require disclosure about the processes by which the responsible managers or management committees are informed about and monitor climate-related risks. Such a discussion might include, for example, whether there are specific positions or committees responsible for monitoring and assessing specific climate-related risks, the extent to which management relies on in-house staff with the relevant expertise to evaluate climate-related risks and implement related plans of action, and the extent to which management relies on third-party climate consultants for these same purposes.

The final proposed management governance item would require disclosure about whether the responsible positions or committees report to the board or board committee on climate-related risks and how frequently this occurs. These proposed disclosure items could help investors evaluate whether management has adequately implemented processes to identify, assess, and manage climate-related risks. If applicable, a registrant may elect also to describe management's role in assessing and managing climate-related opportunities.

Several commenters recommended that we require a registrant to disclose whether it has connected a portion of its executive remuneration with the achievement of climate-related targets or goals. Other commenters expressed the view that such a requirement is unnecessary, because a registrant could implement other measures to motivate progress towards climate-related targets or connect executive remuneration with climate-related achievements as a discretionary matter for the registrant. We are not proposing a compensation-related disclosure requirement at this time, because we believe that our existing rules requiring a compensation discussion and analysis should already provide a framework for disclosure of any connection between executive remuneration and achieving progress in addressing climate-related risks.

Request for Comment

34. Should we require a registrant to describe, as applicable, the board's oversight of climate-related risks, as proposed? Should the required disclosure include whether any board member has expertise in climate-related risks and, if so, a description of the nature of the expertise, as proposed? Should we also require a registrant to identify the board members or board committee responsible for the oversight of climate-related risks, as proposed? Do our current rules, which require a registrant to provide the business experience of its board members, elicit adequate disclosure about a board member's or executive officer's expertise relevant to the oversight of climate-related risks?

35. Should we require a registrant to disclose the processes and frequency by which the board or board committee discusses climate-related risks, as proposed?

36. Should we require a registrant to disclose whether and how the board or board committee considers climate-related risks as part of its business strategy, risk management, and financial oversight, as proposed? Would the proposed disclosure raise competitive harm concerns? If so, how could we address those concerns while requiring additional information for investors about how a registrant's board oversees climate-related risks?

37. Should we require a registrant to disclose whether and how the board sets climate-related targets or goals, as proposed? Should the required disclosure include how the board oversees progress against those targets or goals, including whether it establishes any interim targets or goals, as proposed? Would the proposed disclosure raise competitive harm concerns? If so, how could we address those concerns while requiring additional information for investors about how a registrant's board oversees the setting of any climate-related targets or goals?

38. Should we require a registrant to describe, as applicable, management's role in assessing and managing climate-related risks, as proposed? Should the required disclosure include whether certain management positions or committees are responsible for assessing and managing climate-related risks and, if so, the identity of such positions or committees, and the relevant expertise of the position holders or members in such detail as necessary to fully describe the nature of the expertise, as proposed? Should we require a registrant to identify the executive officer(s) occupying such position(s)? Or do our current rules, which require a registrant to provide the business experience of its executive officers, elicit adequate disclosure about management's expertise relevant to the oversight of climate-related risks?

39. Should we require a registrant to describe the processes by which the management positions or committees responsible for climate-related risks are informed about and monitor climate-related risks, as proposed? Should we also require a registrant to disclose whether and how frequently such positions or committees report to the board or a committee of the board on climate-related risks, as proposed?

40. Should we specifically require a registrant to disclose any connection between executive remuneration and the achievement of climate-related targets and goals? Is there a need for such a requirement in addition to the executive compensation disclosure required by 17 CFR 229.402(b)?

41. As proposed, a registrant may disclose the board's oversight of, and management's role in assessing and managing, climate-related opportunities. Should we require a registrant to disclose these items?

E. Risk Management Disclosure

1. Disclosure of Processes for Identifying, Assessing, and Managing Climate-Related Risks

The proposed rules would require a registrant to describe any processes the registrant has for identifying, assessing, and managing climate-related risks. Risk disclosure is a long-standing disclosure concept under our regulations. Several commenters recommended that we adopt decision-useful disclosure requirements concerning a registrant's climate-related risk management practices. More granular information regarding any climate-related risk management could allow investors to better understand how a registrant identifies, evaluates, and addresses climate-related risks that may materially impact its business. Such information could also permit investors to ascertain whether a registrant has made the assessment of climate-related risks part of its regular risk management processes. Despite the importance of climate-related risk management information, only a minority of registrants currently include such information in their voluntary climate reports.

When describing the processes for identifying and assessing climate-related risks, the registrant would be required to disclose, as applicable:

• How it determines the relative significance of climate-related risks compared to other risks;
• How it considers existing or likely regulatory requirements or policies, such as GHG emissions limits, when identifying climate-related risks;
• How it considers shifts in customer or counterparty preferences, technological changes, or changes in market prices in assessing potential transition risks; and

• How it determines the materiality of climate-related risks, including how it assesses the potential size and scope of any identified climate-related risk.

When describing any processes for managing climate-related risks, a registrant would be required to disclose, as applicable:

• How it decides whether to mitigate, accept, or adapt to a particular risk;
• How it prioritizes addressing climate-related risks; and

• How it determines how to mitigate a high priority risk.

Together, these proposed disclosures would help investors evaluate whether a registrant has implemented adequate processes for identifying, assessing, and managing climate-related risks so that they may make better informed investment or voting decisions. As part of this risk management description, if a registrant uses insurance or other financial products to manage its exposure to climate-related risks, it may need to describe its use of these products.

The proposed rules would also require a registrant to disclose whether and how climate-related risks are integrated into the registrant's overall risk management system or processes. If a separate board or management committee is responsible for assessing and managing climate-related risks, a registrant would be required to disclose how that committee interacts with the registrant's board or management committee governing risks. These proposed disclosures would help investors assess whether the registrant has centralized the processes for managing climate-related risks, which may indicate to investors how the board and management may respond to such risks as they unfold.

2. Transition Plan Disclosure

Adoption of a transition plan to mitigate or adapt to climate-related risks may be an important part of a registrant's climate-related risk management strategy, particularly if it operates in a jurisdiction that has made commitments under the Paris Agreement to reduce its GHG emissions. Many commenters recommended that we require disclosure regarding a registrant's transition plan, stating that such disclosure would help investors evaluate whether a registrant has an effective strategy to achieve its short-, medium-, or long-term climate-related targets or goals.

The proposed rules would define a “transition plan” to mean a registrant's strategy and implementation plan to reduce climate-related risks. A transition plan may include a plan to reduce its GHG emissions in line with a registrant's commitments or commitments of jurisdictions within which it has significant operations. Transition plans may also be important to registrants and their shareholders to the extent transition risk arises from changes in customer or business counterparty preferences, technological change, or changes in market prices. If a registrant has adopted a transition plan, the proposed rules would require it to describe its plan, including the relevant metrics and targets used to identify and manage physical and transition risks. This information could help investors understand how a registrant intends to address identified climate-related risks and any transition to a lower carbon economy while managing and assessing its business operations and financial condition. Because transition planning inherently requires judgments and predictions about the future, forward-looking statements made as part of a registrant's discussion of its transition plan would be eligible for the PSLRA forward-looking statement safe harbors provided all applicable conditions are met.

If a registrant has adopted a transition plan as part of its climate-related risk management strategy, the proposed rules would require the registrant to discuss, as applicable, how it plans to mitigate or adapt to any physical risks identified in the filing, including but not limited to those concerning exposure to sea level rise, extreme weather events, wildfires, drought, and severe heat. For example, a company with significant operations in areas vulnerable to sea level rise might plan to relocate its vulnerable operations as part of any transition plan. A company operating in areas subject to severe storms might have a transition plan that includes reinforcing its physical facilities to better withstand such weather events, or a plan to relocate those facilities. An agricultural producer that operates in areas subject to increasing water stress might discuss its plans to adjust its business strategy or operations, for example by developing or switching to drought-resistant crops, developing technologies to optimize the use of available water, or acquiring land in other areas.

The proposed rules would also require a registrant that has adopted a transition plan as part of its climate-related risk management strategy to discuss, as applicable, how it plans to mitigate or adapt to any identified transition risks, including the following:

• Laws, regulations, or policies that:

○ Restrict GHG emissions or products with high GHG footprints, including emissions caps; or

○ Require the protection of high conservation value land or natural assets;

• Imposition of a carbon price; and

• Changing demands or preferences of consumers, investors, employees, and business counterparties.

While each of these transition risks may not be applicable to each registrant and its particular transition plan, the above examples are intended to guide registrants in providing meaningful disclosure about its risk management strategies that is not generic or boilerplate. In this regard, it is important for investors to understand how a registrant plans to mitigate or adapt to any identified transition risks in its transition plan given the potential associated costs and burdens and their impact on the registrant's business.

The proposed rules would require a registrant that has adopted a transition plan as part of its climate-related management strategy to update its disclosure about its transition plan each fiscal year by describing the actions taken during the year to achieve the plan's targets or goals. This is intended to provide investors with information that can help them better understand the registrant's effectiveness in implementing any transition plan and the potential risks and costs associated with what it still needs to accomplish.

A registrant that has adopted a transition plan as part of its climate-related risk management strategy may also describe how it plans to achieve any identified climate-related opportunities, such as:

• The production of products that facilitate the transition to a lower carbon economy, such as low emission modes of transportation and supporting infrastructure;
• The generation or use of renewable power;
• The production or use of low waste, recycled, or other consumer products that require less carbon intensive production methods;
• The setting of conservation goals and targets that would help reduce GHG emissions; and

• The provision of goods or services related to any transition to a lower carbon economy.

For example, an energy company might discuss how, due to actual or potential regulatory constraints, it intends to take advantage of climate-related opportunities by increasing the amount of electricity purchased that is produced using renewable energy sources, reducing its medium and long-range fossil fuel exploration and production, increasing the percentage of its products consisting of biofuels and other lower emissions fuels, or investing in carbon capture and storage technologies. A transportation company might discuss how, to mitigate reputational risk, it plans to realize any climate-related opportunities presented by switching its existing fleet to one composed of low- or no-emission vehicles by a certain date.

Request for Comment

42. Should we require a registrant to describe its processes for identifying, assessing, and managing climate-related risks, as proposed?

43. When describing the processes for identifying and assessing climate-related risks, should we require a registrant to disclose, as applicable, as proposed:

• How the registrant determines the relative significance of climate-related risks compared to other risks?
• How it considers existing or likely regulatory requirements or policies, such as emissions limits, when identifying climate-related risks?
• How it considers shifts in customer or counterparty preferences, technological changes, or changes in market prices in assessing potential transition risks?
• How the registrant determines the materiality of climate-related risks, including how it assesses the potential size and scope of an identified climate-related risk? Are there other items relevant to a registrant's identification and assessment of climate-related risks that we should require it to disclose instead of or in addition to the proposed disclosure items?

44. When describing the processes for managing climate-related risks, should we require a registrant to disclose, as applicable, as proposed:

• How it decides whether to mitigate, accept, or adapt to a particular risk?
• How it prioritizes climate-related risks?
• How it determines to mitigate a high priority risk?

Are there other items relevant to a registrant's management of climate-related risks that we should require it to disclose instead of or in addition to the proposed disclosure items?

45. Should we require a registrant to disclose whether and how the processes described in response to proposed 17 CFR 229.1503(a) are integrated into the registrant's overall risk management system or processes, as proposed? Should we specify any particular aspect of this arrangement that a registrant should disclose, such as any interaction between, and corresponding roles of, the board or any management committee responsible for assessing climate-related risks, if there is a separate and distinct committee of the board or management, and the registrant's committee in charge, generally, of risk assessment and management?

46. If a registrant has adopted a transition plan, should we require the registrant to describe the plan, including the relevant metrics and targets used to identify and manage physical and transition risks, as proposed? Would this proposed disclosure requirement raise any competitive harm concerns and, if so, how can we mitigate such concerns? Would any of the proposed disclosure requirements for a registrant's transition plan act as a disincentive to the adoption of such a plan by the registrant?

47. If a registrant has adopted a transition plan, should we require it, when describing the plan, to disclose, as applicable, how the registrant plans to mitigate or adapt to any identified physical risks, including but not limited to those concerning energy, land, or water use and management, as proposed? Are there any other aspects or considerations related to the mitigation or adaption to physical risks that we should specifically require to be disclosed in the description of a registrant's transition plan?

48. If a registrant has adopted a transition plan, should we require it to disclose, if applicable, how it plans to mitigate or adapt to any identified transition risks, including the following, as proposed:

• Laws, regulations, or policies that:

○ Restrict GHG emissions or products with high GHG footprints, including emissions caps; or

○ Require the protection of high conservation value land or natural assets?

• Imposition of a carbon price?
• Changing demands or preferences of consumers, investors, employees, and business counterparts?

Are there any other transition risks that we should specifically identify for disclosure, if applicable, in the transition plan description? Are there any identified transition risks that we should exclude from the plan description?

49. If a registrant has adopted a transition plan, when describing the plan, should we permit the registrant also to discuss how it plans to achieve any identified climate-related opportunities, including, as proposed:

• The production of products that facilitate the transition to a lower carbon economy, such as low emission modes of transportation and supporting infrastructure?
• The generation or use of renewable power?
• The production or use of low waste, recycled, or environmentally friendly consumer products that require less carbon intensive production methods?
• The setting of conservation goals and targets that would help reduce GHG emissions?
• The provision of services related to any transition to a lower carbon economy?

Should we require a registrant to discuss how it plans to achieve any of the above, or any other, climate-related opportunities when describing its transition plan?

50. If a registrant has disclosed its transition plan in a Commission filing, should we require it to update its transition plan disclosure each fiscal year by describing the actions taken during the year to achieve the plan's targets or goals, as proposed? Should we require a registrant to provide such an update more frequently, and if so, how frequently? Would the proposed updating requirement act as a disincentive to the adoption of a transition plan by the registrant?

51. To the extent that disclosure about a registrant's transition plan constitutes forward-looking information, the PSLRA safe harbors would apply. Should we adopt a separate safe harbor for transition plan disclosure? If so, what disclosures should such a safe harbor cover and what should the conditions be for such a safe harbor?

F. Financial Statement Metrics

1. Overview

If a registrant is required to file the disclosure required by subpart 229.1500 in a form that also requires audited financial statements, under our proposal it would be required to disclose in a note to its financial statements certain disaggregated climate-related financial statement metrics that are mainly derived from existing financial statement line items. In particular, the proposed rules would require disclosure falling under the following three categories of information:

• Financial Impact Metrics;
• Expenditure Metrics; and
• Financial Estimates and Assumptions.

The proposed financial statement metrics disclosures would involve estimation uncertainties that are driven by the application of judgments and assumptions, similar to other financial statement disclosures ( e.g., estimated loss contingencies, fair value measurement of certain assets, etc.). Accordingly, for each type of financial statement metric, the proposed rules would require the registrant to disclose contextual information to enable a reader to understand how it derived the metric, including a description of significant inputs and assumptions used, and if applicable, policy decisions made by the registrant to calculate the specified metrics.

A number of existing accounting standards could elicit climate-related disclosure in the financial statements, as highlighted by the FASB in a Staff Educational Paper and by the IFRS in a similar document. Nevertheless, we believe the proposed rules would benefit registrants by specifying when to provide such disclosures. Furthermore, the proposed rules may increase the consistency and comparability of such disclosures by prescribing accounting principles for preparing the proposed climate-related financial statement metrics disclosures, including, among other things, provisions that would specify the basis of calculation for such metrics and their presentation.

To avoid potential confusion, maintain consistency with the rest of the financial statements, and aid comparability, registrants would be required to calculate the proposed financial statement metrics using financial information that is consistent with the scope of the rest of the registrant's consolidated financial statements included in the filing. Therefore, registrants would have to include in any such calculation financial information from consolidated subsidiaries.

For the avoidance of doubt, and to further promote consistency in the preparation of the financial statements, the proposed basis of calculation requirements would also specify that a registrant would be required to apply the same set of accounting principles that it is required to apply in preparation of the rest of its consolidated financial statements included in the filing, whenever applicable. Although 17 CFR 210.4-01(a)(1) already states that financial statements filed with the Commission that are not prepared in accordance with GAAP will be presumed misleading or inaccurate unless the Commission has otherwise provided, clarifying the application of this concept in the proposed rules may be helpful, given the possible confusion that may arise between the current body of GAAP and the proposed requirements.

The proposed rules would also require disclosure to be provided for the registrant's most recently completed fiscal year and for the historical fiscal year(s) included in the registrant's consolidated financial statements in the applicable filing. For example, a registrant that is required to include balance sheets as of the end of its two most recent fiscal years and income statements and cash flow statements at the end of its three most recent fiscal years would be required to disclose two years of the climate-related financial statement metrics that correspond to balance sheet line items and three years of the climate-related financial statement metrics that correspond to income statement or cash flow statement line items. If the registrant is an emerging growth company (“EGC”) or SRC, only two years would be required.

A registrant, however, would not need to provide a corresponding historical metric for a fiscal year preceding its current reporting fiscal year if it is eligible to take advantage of the accommodation in 17 CFR 230.409 (“Rule 409”) or 17 CFR 240.12b-21 (“Rule 12b-21”). For example, if a registrant has not previously presented such metric for such fiscal year and the historical information necessary to calculate or estimate such metric is not reasonably available to the registrant without unreasonable effort or expense, the registrant may be able to rely on Rule 409 or Rule 12b-21 to exclude a corresponding historical metric. Requiring disclosure of current and, when known or reasonably available, historical periods, should allow investors to analyze trends in the climate-related impacts on the consolidated financial statements and to better evaluate the narrative trend disclosure provided pursuant to proposed Subpart 1500 of Regulation S-K.

Request for Comment

52. Should we require a registrant to provide contextual information, including a description of significant inputs and assumptions used, and if applicable, policy decisions made by the registrant to calculate the specified metrics, as proposed? Should we revise the proposed requirement to provide contextual information to require specific information instead? We provide some examples of contextual information disclosure in Sections II.F.2 and II.F.3 below. Would providing additional examples or guidance assist registrants in preparing this disclosure?

53. The proposed rules would specify the basis of calculation for the climate-related financial statement metrics. Is it clear how to apply these accounting principles when calculating the proposed climate-related financial statement metrics, or should we provide additional guidance? Should we require a registrant to report these metrics with reference to its consolidated financial statements, as proposed? If not, how should registrants report these metrics? If we were to establish accounting principles ( e.g., the basis for reporting these metrics) in a manner that differs from the principles applicable to the rest of the consolidated financial statements, would the application of those principles to the proposed metrics make climate-related disclosures less clear, helpful, or comparable for investors?

54. Should we also require such metrics to be calculated at a reportable segment level when a registrant has more than one reportable segment (as defined by the FASB ASC Topic 280 Segment Reporting )? In addition, should we require such metrics to be presented by geographic areas that are consistent with the registrant's reporting pursuant to FASB ASC Topic 280-10-50-41? How would investors use such information?

55. The proposed rules would require disclosure for the registrant's most recently completed fiscal year and for the corresponding historical fiscal years included in the registrant's consolidated financial statements in the filing. Should disclosure of the climate-related financial statement metrics be required for the fiscal years presented in the registrant's financial statements, as proposed? Instead, should we require the financial statement metrics to be calculated only for the most recently completed fiscal year presented in the relevant filing? Would requiring historical disclosure provide important or material information to investors, such as information allowing them to analyze trends? Are there other approaches we should consider?

56. Should information for all periods in the consolidated financial statements be required for registrants that are filing an initial registration statement or providing climate-related financial statement metrics disclosure for historical periods prior to the effective date or compliance date of the rules? Would the existing accommodation in Rules 409 and 12b-21 be sufficient to address any potential difficulties in providing the proposed disclosures in such situations?

57. Should we provide additional guidance as to when a registrant may exclude a historical metric for a fiscal year preceding the current fiscal year?

58. In several instances, the proposed rules specifically point to existing GAAP and, in this release, we provide guidance with respect to the application of existing GAAP. Are there other existing GAAP requirements that we should reference? Are there instances where it would be preferable to require an approach based on TCFD guidance or some other framework, rather than requiring the application of existing GAAP?

2. Financial Impact Metrics

As discussed above, proposed Item 1502(d) of Regulation S-K would require a registrant to provide a narrative discussion of whether and how any of its identified climate-related risks have affected or are reasonably likely to affect the registrant's consolidated financial statements. The term “climate-related risks” would be defined, in part, as the actual or potential negative impacts of climate-related conditions and events on a registrant's consolidated financial statements. “Climate-related risks” would also be defined to include physical risks, such as extreme weather events, and transition risks. To complement this proposed requirement in Regulation S-K to provide narrative disclosure about impacts on a registrant's consolidated financial statements, we are proposing to amend Regulation S-X to require a registrant to include disaggregated information about the impact of climate-related conditions and events, and transition activities, on the consolidated financial statements included in the relevant filing, unless such impact is below a specified threshold.

We are proposing to require disclosure of the impacts from severe weather events and other natural conditions and transition activities, which should capture a broad spectrum of these two types of climate-related risks (physical risks and transition risks). In addition, the proposed rules would require disclosure of the impacts of any climate-related risks identified pursuant to proposed Item 1502(a)—both physical risks (“identified physical risks”) and transition risks (“identified transition risks”)—on any of the financial statement metrics. Among the examples of severe weather events and other natural conditions that we have highlighted in the proposed rule are those that the Commission identified more than a decade ago in the 2010 Guidance as potentially affecting a registrant's operations and results. In addition, although not specifically mentioned in the 2010 Guidance, we are including wildfires as an example because it is well recognized as another type of natural event that can have significant impacts on a registrant's financial statements. Providing examples of severe weather events, other natural conditions, and transition activities in the proposed rule would aid in the comparability of the resulting disclosure while assisting issuers in making the disclosures.

Specifically, we are proposing that impacts on any relevant line item in the registrant's consolidated financial statements during the fiscal years presented arising from severe weather events and natural conditions, and the identified physical risks (collectively, “climate-related events”), would trigger the proposed disclosure requirement discussed below. Specific examples of such severe weather events and natural conditions may include the following:

• Flooding;
• Drought;
• Wildfires;
• Extreme temperatures; and

• Sea level rise.

As discussed, above, there has been increased recognition of the current and potential effects, both positive and negative, of these events and the associated physical risks on a registrant's business as well as its financial performance and position. For example, as mentioned above, the 2010 Guidance discusses the potential impacts on a registrant's business and financial performance from climate-related events, including, for example, severe weather events, that could negatively impact a registrant's supply chain or distribution chain and lead to higher input costs or delayed product deliveries. The 2010 Guidance also points to credit risks for banks driven by borrowers with assets located in high risk coastal areas. More recently, the FSOC's Report on Climate-Related Financial Risk 2021 discusses significant costs from the types of events included in proposed Rule 14-02(c). The TCFD, in a recent publication, also discusses the potential financial impacts of such climate-related events. Furthermore, the TCFD provides examples of disclosures already being made by some companies (including registrants) of the financial statement impact of the climate-related events discussed above in their standalone sustainability (or equivalent) reports.

Generally, climate-related events such as severe weather events and other natural conditions, and climate-related risks more generally, are linked to negative impacts on a registrant's financial performance and position. There could be situations, however, where such events result in positive impacts. For example, if a registrant's business is to conduct post-disaster cleanup and reconstruction, the occurrence of such severe weather events would generate additional revenues for the registrant.

In addition to the physical risks associated with climate change, registrants and investors also face climate-related transition risks. As government leaders across the globe have made public commitments to transition to a lower carbon economy, investors have sought information about the impact such a transition may have on registrants. In addition to public commitments, these impacts may be prompted by regulatory, technological, market (including changing consumer, business counterparty, and investor preferences), liability, reputational, or other transition-related factors. For example, significant shifts in modes of production may occur in GHG intensive economic sectors, such as the transportation, electricity generation, and heavy manufacturing sectors. A registrant that is engaged in transition activities may experience business losses or, conversely, may benefit from such transition activities. In response, some companies are already providing disclosure of the impact of transition-related activities on their financial statements and some have publicly made commitments related to this transition. In light of these transition risks, the proposed rules would also require a registrant to disclose the financial impact of the impact of any identified transition risks and any efforts to reduce GHG emissions or otherwise mitigate exposure to transition risks (collectively, “transition activities”) on any relevant line items in the registrant's consolidated financial statements during the fiscal years presented.

A registrant may also disclose the impact of any opportunities arising from severe weather events and other natural conditions, any impact of efforts to pursue climate-related opportunities associated with transition activities, and the impact of any other climate-related opportunities, including those identified by the registrant pursuant to proposed Item 1502(a), on any of the financial statement metrics. If a registrant makes a policy decision to disclose the impact of a climate-related opportunity on the proposed financial statement metrics, it must do so consistently ( e.g., for each fiscal year presented in the consolidated financial statements, for each financial statement line item, for all relevant opportunities identified by the registrant) and must follow the same presentation and disclosure threshold requirements applicable to the required disclosures related to financial impact metrics and expenditure metrics, as discussed below.

The financial impact metric disclosure requirements in proposed Rules 14-02(c), (d), and (i) would require a registrant to disclose the financial impacts of severe weather events, other natural conditions, transition activities, and identified climate-related risks on the consolidated financial statements included in the relevant filing unless the aggregated impact of the severe weather events, other natural conditions, transition activities, and identified climate-related risks is less than one percent of the total line item for the relevant fiscal year. The proposed threshold would provide a bright-line standard for registrants and should reduce the risk of underreporting such information. The proposed quantitative threshold could also promote comparability and consistency among a registrant's filings over time and among different registrants compared to a principles-based approach. The Commission has used similar one percent thresholds in other contexts. More generally, in addition to the approach in Article 5 of Regulation S-X discussed below, other rules such as 17 CFR 229.103 and 17 CFR 229.404 use quantitative disclosure thresholds to facilitate comparability, consistency, and clarity in determining when information must be disclosed.

A registrant would be required to determine the impacts of the severe weather events, other natural conditions, transition activities, and identified climate-related risks described above on each consolidated financial statement line item. Within each category ( i.e., climate-related events or transition activities), impacts would, at a minimum, be required to be disclosed on an aggregated, line-by-line basis for all negative impacts and, separately, on an aggregated, line-by-line basis for all positive impacts. However, for purposes of determining whether the disclosure threshold has been met, a registrant would be required to aggregate the absolute value of the positive and negative impacts on a line-by-line basis, which we believe would better reflect the significance of the impact of the climate-related events and transition activities on a registrant's financial performance and position.

For example, when evaluating the line-by-line impact, a registrant may determine that its cost of revenue is impacted by Events A, B, and C, and Transition Activity D in the following manner:

• Cost of revenue was impacted negatively by Events A and B by $300,000, driven by increased input costs impacted by severe weather events that strained the registrant's main supplier;
• Cost of revenue was impacted positively by Event C by $70,000, driven by technology that improved the registrant's ability to manage the impact of severe heat on certain raw materials, which resulted in more efficient production; and

• Cost of revenue was impacted positively by Transition Activity D, which reduced production costs for certain products by $90,000 through advanced technology that improved energy efficiency during the production process.

For purposes of determining whether the impacts from the example above would trigger the disclosure threshold requirements, the registrant would perform the analysis illustrated in the following table:

Although some of the impacts ( e.g., impact of Event C, impact of Transition Activity D) do not individually meet the one percent threshold, the absolute value of the aggregated impacts from the events and transition activities on the line item in the above example is $460,000 and thus exceeds one percent of the corresponding line-item threshold; therefore, disclosure for that specific line item would be required. The registrant's disclosure of such impacts may be provided, for example, as illustrated in the following table (excluding disclosure of contextual information):

Note X. Climate-related financial metrics:

In this example, contextual information may include disclosure such as the registrant's election to include the impact from opportunities in its disclosure analysis and calculation, the specific events that were aggregated for purposes of determining the impact on the cost of revenue and, if applicable, a discussion of the estimation methodology used to disaggregate the amount of impact on the cost of revenue between the climate-related events, transition activities, and other factors.

To provide additional clarity, the proposed rule would include the following examples of disclosures that may be required to reflect the impact of the severe weather events and other natural conditions on each line item of the registrant's consolidated financial statements ( e.g., line items of the consolidated income statement, balance sheet, or cash flow statement):

• Changes to revenue or costs from disruptions to business operations or supply chains;
• Impairment charges and changes to the carrying amount of assets (such as inventory, intangibles, and property, plant and equipment) due to the assets being exposed to severe weather, flooding, drought, wildfires, extreme temperatures, and sea level rise;
• Changes to loss contingencies or reserves (such as environmental reserves or loan loss allowances) due to impact from severe weather events; and

• Changes to total expected insured losses due to flooding or wildfire patterns.

With respect to the financial impacts of transition activities, the proposed rule would include the following examples of potential impacts:

• Changes to revenue or cost due to new emissions pricing or regulations resulting in the loss of a sales contract;
• Changes to operating, investing, or financing cash flow from changes in upstream costs, such as transportation of raw materials;
• Changes to the carrying amount of assets (such as intangibles and property, plant, and equipment), for example, due to a reduction of the asset's useful life or a change in the asset's salvage value by being exposed to transition activities; and

• Changes to interest expense driven by financing instruments such as climate-linked bonds issued where the interest rate increases if certain climate-related targets are not met.

Many commenters stated that climate-related financial disclosure is material and should be reflected separately in the financial statements. For example, one commenter stated that it is critical to investors and others in assessing a company's risk profile, estimating its risk-adjusted returns, and completing other relevant financial analyses to include information on how climate-related risks and climate-related opportunities may affect companies' income statements, cash flow statements, and balance sheets.

Other commenters, however, generally expressed the view that if such disclosures are material, they would already be required by existing financial statement disclosure requirements. For example, some of these commenters stated that they opposed new climate-specific disclosure rules because, in their view, the traditional concept of materiality already requires the disclosure of climate-related impacts that materially affect the issuer's financial condition and results of operations.

Although we agree that registrants are currently required to disclose material financial impacts on the financial statements, the proposed climate-related financial statement metrics should provide additional transparency into the impact of climate-related events on information reported in the financial statements that would be relevant to investors when making investment or voting decisions. Such disclosure would also provide investors with additional insights into the nature of a registrant's business, the implementation of the registrant's targets and goals, and material trends in climate-related impacts. Furthermore, separately stating the financial statement impacts from the climate-related events and transition activities could improve comparability across both the registrant's year-to-year disclosures and the disclosures of different registrants.

We further note that the proposed requirement to separately disclose the financial impacts of the climate-related events and transition activities may be necessary not only because climate-related risks may have significant impacts on individual registrants, but also because the risks presented by the climate-related events and transition activities may be correlated across different, similarly situated registrants. Climate-related risks present the potential for a high correlation and therefore concentration of risk within a portfolio. Separate disclosure of climate-related risks could help to provide investors with information to help them more effectively evaluate their portfolio risk. In this regard, we note that an analogous approach to disaggregated, or separately stated, disclosure has been taken in other contexts within the financial statements and elsewhere. For example, in segment reporting, a registrant must present within its consolidated financial statements a separate presentation of certain financial statement line items for each segment. The Commission has noted the importance of disaggregated disclosure in the segment reporting context, stating that it “has long been aware of the importance of meaningful segment information to reasoned investment decision-making.”

The importance of disaggregated disclosure in a registrant's financial statements is also supported by the concepts set forth in FASB ASC Topic 606 Revenue from Contracts with Customers and IFRS 15 Revenue from Contracts with Customers, which require, among other things, disclosure of disaggregated revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. As noted earlier, the Commission also requires disaggregation of certain financial statement line items in Article 5 of Regulation S-X. Specifically, Article 5 requires separate disclosures of specific balance sheet and income statement line items when practicable or when certain percentage thresholds are met, depending on the nature of the information. Those conditions on when separate disclosure is required are analogous to the proposed condition that financial impacts result from the climate-related events and transition activities.

Request for Comment

59. Should we require registrants to disclose the financial impact metrics, as proposed? Would presenting climate-specific financial information on a separate basis based on climate-related events (severe weather events and other natural conditions and identified physical risks) and transition activities (including identified transition risks) elicit decision-useful or material information for investors? Are there different metrics that would result in disclosure of more useful information about the impact of climate-related risks and climate-related opportunities on the registrant's financial performance and position?

60. Would the impact from climate-related events and transition activities yield decision-useful information for investors? Would the climate-related events (including the examples provided) and transition activities result in impacts that are easier to quantify or disaggregate than climate-related risks more generally? Would a registrant be able to quantify and provide the proposed disclosure when the impact may be the result of a mixture of factors ( e.g., a factory shutdown due to an employee strike that occurs simultaneously with a severe weather event)? If there are situations where disaggregation would not be practicable, should we require a registrant to disclose that it was unable to make the required determination and why, or to make a reasonable estimate and provide disclosure about the assumptions and information that resulted in the estimate?

61. Alternatively, should we not require disclosure of the impacts of identified climate-related risks and only require disclosure of impacts from severe weather events and other natural conditions? Should we require a registrant to disclose the impact on its consolidated financial statements of only certain examples of severe weather events and other natural conditions? If so, should we specify which severe weather events and other natural conditions the registrant must include? Would requiring disclosure of the impact of a smaller subset of climate-related risks be easier for a registrant to quantify without sacrificing information that would be material to investors?

62. Should impact from climate-related opportunities be required, instead of optional, as proposed? We are proposing to require a registrant that elects to disclose the impact of an opportunity to do so consistently ( e.g., for each fiscal year presented in the consolidated financial statements, for each financial statement line item, and for all relevant opportunities identified by the registrant). Are there any other requirements that we should include to enhance consistency? Should we only require consistency between the first fiscal period in which opportunities were disclosed and subsequent periods?

63. Is it clear which climate-related events would be covered by “severe weather events and other natural conditions”? If not, should we provide additional guidance or examples about what events would be covered? Should we clarify that what is considered “severe weather” in one region may differ from another region? For example, high levels of rainfall may be considered “severe weather” in a typically arid region.

64. Are the proposed requirements for calculating and presenting the financial impact metrics clear? Should the analysis be performed and disclosed in a manner other than on a line-by-line basis referring to the line items of the registrant's consolidated financial statements?

65. We are proposing to allow a registrant to aggregate the absolute value of negative and positive impacts of all climate-related events and, separately, transition activities on a financial statement line item. Should we instead require separate quantitative disclosure of the impact of each climate-related event or transition activity? Should we require separate disclosure of the impact of climate-related opportunities that a registrant chooses to disclose?

66. The proposed financial impact metrics would not require disclosure if the absolute value of the total impact is less than one percent of the total line item for the relevant fiscal year. Is the proposed threshold appropriate? Should we use a different percentage threshold ( e.g., three percent, five percent) or use a dollar threshold ( e.g., less than or greater than $1 million)? Should we use a combination of a percentage threshold and a dollar threshold? Should we only require disclosure when the financial impact exceeds the threshold, as proposed, or should we also require a determination of whether an impact that falls below the proposed quantitative threshold would be material and should be disclosed?

67. For purposes of determining whether the disclosure threshold has been met, should impacts on a line item from climate-related events and transition activities be permitted to offset (netting of positive and negative impacts), instead of aggregating on an absolute value basis as proposed? Should we prescribe how to analyze positive and negative impacts on a line item resulting from the same climate-related event or the same transition activity ( e.g., whether or not netting is permitted at an event or activity level)? Should we permit registrants to determine whether or not to offset as a policy decision (netting of the positive and negative impact within an event or activity) and provide relevant contextual information? Should we require the disclosure threshold to be calculated separately for the climate-related events and transition activities, rather than requiring all of the impacts to be aggregated as proposed?

68. Instead of including a quantitative threshold, as proposed, should we require disaggregated disclosure of any impact of climate-related risks on a particular line item of the registrant's consolidated financial statements? Alternatively, should we just use a materiality standard?

69. Should we require a registrant to disclose changes to the cost of capital resulting from the climate-related events? If so, should we require a registrant to disclose its weighted average cost of capital or any internal cost of capital metrics? Would such disclosure elicit decision-useful or material information for investors?

70. We have not proposed defining the term “upstream costs” as used in the proposed examples for the financial impact metrics and elsewhere. Should we define that term or any others? If so, how should we define them?

71. Are the proposed examples in the financial impact metrics helpful for understanding the types of disclosure that would be required? Should we provide different or additional examples or guidance?

3. Expenditure Metrics

The proposed expenditure metrics would refer to the positive and negative impacts associated with the same climate-related events, transition activities, and identified climate-related risks as the proposed financial impact metrics. As proposed, the expenditure metrics would require a registrant to separately aggregate amounts of (i) expenditure expensed and (ii) capitalized costs incurred during the fiscal years presented. For each of those categories, a registrant would be required to disclose separately the amount incurred during the fiscal years presented (i) toward positive and negative impacts associated with the climate-related events ( i.e., severe weather events and other natural conditions and identified physical risks) and (ii) toward transition activities, specifically, to reduce GHG emissions or otherwise mitigate exposure to transition risks (including identified transition risks). The registrant may also choose to disclose the impact of efforts to pursue climate-related opportunities associated with transition activities. As discussed above, if a registrant elects to disclose the impact of an opportunity, it must do so consistently and must follow the same presentation and disclosure threshold requirements applicable to the required disclosures of expenditure metrics associated with transition risks. The amount of expenditure disclosed pursuant to the proposed metrics would be a portion, if not all, of the registrant's total recorded expenditure (expensed or capitalized), as calculated pursuant to the accounting principles applicable to the registrant's financial statements.

The proposed expenditure metrics would be subject to the same disclosure threshold as the financial impact metrics, which we believe would promote comparability, consistency, and clarity in determining when information must be disclosed. For purposes of calculating the disclosure threshold for the expenditure metrics, a registrant would be permitted to separately determine the amount of expenditure expensed and the amount of expenditure capitalized; however, a registrant would be required to aggregate expenditure related to climate-related events and transition activities within the categories of expenditure ( i.e., amount capitalized and amount expensed). This approach should better reflect the significance of climate-related expenditure compared to a calculation approach that would allow for a disclosure threshold to be measured at the individual event or activity level, which may result in more limited disclosures.

For example, assume a registrant capitalized $200,000 of expenditure incurred related to Event D and capitalized another $100,000 of expenditure incurred related to Activity E. The registrant also expensed $25,000 of expenditure incurred related to Event F (which is an identified transition risk disclosed by the registrant). The registrant would determine whether the impacts would trigger the disclosure requirements based on the proposed thresholds, as illustrated below:

In the above example, the expenditure incurred toward Event D was $200,000 (capitalized) and the expenditure incurred toward Activity E and Event F were $100,000 (capitalized) and $25,000 (expensed). The amount of capitalized costs equaled the proposed one percent threshold, and thus the disclosure would be required for that category of expenditure. No disclosure would be required for the expenditure incurred that was expensed (related to Event F in this example), because it was below the one percent threshold. The registrant's resulting disclosure of such expenditure (capitalized or expensed) may be provided, for example, as illustrated in the following table (excluding disclosure of contextual information):

Note X. Climate-related financial metrics:

In this example, contextual information may include disclosure such as the specific climate-related events and transition activities that were aggregated for purposes of determining the impacts on the capitalized or expensed expenditure amounts and, if applicable, policy decisions made by a registrant to determine the amount of climate-related events or transition activities that are categorized as expenditure capitalized versus expenditure expensed or whether impact from pursuing any climate-related opportunities are included in the analysis. Contextual information may also include a discussion of the composition of the total expenditure expensed and total expenditure capitalized, which were used to calculate whether the disclosure threshold was met, and, if applicable, a discussion of the estimation methodology used to disaggregate the amount of impact between the climate-related events, transition activities, and other factors, including if an event or an activity impacted both capitalized and expensed costs.

The proposed rules would clarify that a registrant may be required to disclose the amount of expenditure expensed or capitalized costs, as applicable, incurred for the climate-related events to increase the resilience of assets or operations, retire or shorten the estimated useful lives of impacted assets, relocate assets or operations at risk, or otherwise reduce the future impact of severe weather events and other natural conditions on business operations. The proposed rules would also clarify that a registrant may be required to disclose the amount of expenditure expensed or capitalized costs, as applicable, incurred for climate-related transition activities related to research and development of new technologies, purchase of assets, infrastructure, or products that are intended to reduce GHG emissions, increase energy efficiency, offset emissions (purchase of energy credits), or improve other resource efficiency.

Several commenters recommended taking a similar approach, stating that we should require disclosure of climate-related capital expenditure ( i.e., capitalized assets), or both climate-related expenses and capitalized assets. Consistent with these comments, and for similar reasons to those stated above with respect to the financial impact metrics, separate disclosure of total expense and total capitalized costs incurred toward the climate-related events and transition activities should provide important information to help investors make better informed investment or voting decisions. Moreover, the financial impacts of expenditure typically appear in different places within the financial statements ( e.g., in an asset line item(s) on the balance sheet or in an expense line item(s) in the income statement). The proposed approach is intended to address this dispersed presentation by requiring registrants to first identify the relevant climate-related expenditures and then compile those impacts in one location. Similar to the proposed financial impact metrics, such an approach should provide insight into, and context for understanding, the nature of a registrant's business, including any disclosed strategy for addressing and managing the specified risks—particularly in the context of transition planning.

Request for Comment

72. Should we require registrants to disclose the expenditure metrics, as proposed? Would presenting the expenditure metrics separately in one location provide decision-useful information to investors? Is there a different type of metric that would result in more useful disclosure of the expense or capitalized costs incurred toward climate-related events and transition activities or toward climate-related risks more generally?

73. Would the disclosure required by the expenditure metrics overlap with the disclosure required by the financial impact metrics? If so, should we require the disclosure to be provided pursuant to only one of these types of metrics?

74. Should the same climate-related events (including severe weather events and other natural conditions and identified physical risks) and transition activities (including identified transition risks) that we are proposing to use for the financial impact metrics apply to the expenditure metrics, as proposed? Alternatively, should we not require a registrant to disclose expenditure incurred towards identified climate-related risks and only require disclosure of expenditure relating to severe weather events and other natural conditions? Should we require a registrant to disclose the expenditure incurred toward only certain examples of severe weather events and other natural conditions? If so, should we specify which severe weather events and other natural conditions the registrant must include? Would requiring disclosure of the expenditure relating to a smaller subset of climate-related risks be easier for a registrant to quantify without sacrificing information that would be material to investors?

75. Should the proposed rules instead require a registrant to disclose the aggregate amounts of expensed and capitalized costs incurred toward any climate-related risks? Should expenditures incurred towards climate-related opportunities be optional based on a registrant's election to disclose such opportunities, as proposed?

76. Should we apply the same disclosure threshold to the expenditure metrics and the financial impact metrics? Is the proposed threshold for expenditure metrics appropriate? Should we use a different percentage threshold ( e.g., three percent, five percent) or use a dollar threshold ( e.g., less than or greater than $1 million)? Should we use a combination of a percentage threshold and a dollar threshold? Should we only require disclosure when the amount of climate-related expenditure exceeds the threshold, as proposed, or should we also require a determination of whether an amount of expenditure that falls below the proposed quantitative threshold would be material and should be disclosed? Should we require separate aggregation of the amount of expense and capitalized costs for purposes of the threshold, as proposed? Should we require separate aggregation of expenditure relating to the climate-related events and transition activities, as proposed?

77. Instead of including a quantitative threshold, as proposed, should we require disaggregated disclosure of any amount of expense and capitalized costs incurred toward the climate-related events and transition activities, during the periods presented? Alternatively, should we just use a materiality standard?

78. Are the proposed requirements for calculating and presenting the expenditure metrics clear? Should the analysis be performed and disclosed in a different manner, other than separately based on capitalized costs and amount of expenditure expensed and separately based on the climate-related events and transition activities? Should disclosure of expenditure incurred be required for both the amount of capitalized costs and the amount of expenditure expensed if only one of the two types of expenditure meets the disclosure threshold? Should we require separate disclosure of expenditure incurred toward each climate-related event and transition activity?

79. The proposed rule does not specifically address expensed or capitalized costs that are partially incurred towards the climate-related events and transition activities ( e.g., the expenditure relates to research and development expenses that are meant to address both the risks associated with the climate-related events and other risks). Should we prescribe a particular approach to disclosure in such situations? Should we require a registrant to provide a reasonable estimate of the amount of expense or capitalized costs incurred toward the climate-related events and transition activities and to provide disclosure about the assumptions and information that resulted in the estimate?

80. Are the proposed terms and examples used in the expenditure metrics helpful for understanding the types of disclosures that would be required? Should we provide different or additional examples?

4. Financial Estimates and Assumptions

The proposed rules would require a registrant to disclose whether the estimates and assumptions used to produce the consolidated financial statements were impacted by exposures to risks and uncertainties associated with, or known impacts from, climate-related events (including identified physical risks and severe weather events and other natural conditions), such as flooding, drought, wildfires, extreme temperatures, sea level rise. If so, the registrant would be required to provide a qualitative description of how such events have impacted the development of the estimates and assumptions used by the registrant in the preparation of such financial statements. Similar to the other proposed financial statement metrics, the proposed rules would include a provision that would require separate disclosure focused on transition activities (including identified transition risks). Further, if a registrant elects to disclose the impact of an opportunity on its financial estimates and assumptions, it must do so consistently and must follow the same presentation and disclosure requirements applicable to the required disclosures herein.

If the estimates and assumptions a registrant used to produce the consolidated financial statements were impacted by risks and uncertainties associated with, or known impacts from, a potential transition to a lower carbon economy or any climate-related targets it has disclosed, the registrant would be required to provide a qualitative description of how the development of the estimates and assumptions were impacted by such a potential transition or the registrant's disclosed climate-related targets.

Estimates and assumptions are currently required for accounting and financial reporting purposes ( e.g., projected financial information used in impairment calculations, estimated loss contingencies, estimated credit risks, commodity price assumptions, etc.). The proposed disclosures could provide decision-useful information and transparency to investors about the impact of the climate-related events and transition activities, including disclosed targets and goals, on such estimates and assumptions. Moreover, in addition to providing insight into impacts on the registrant's financial statements, such disclosure could allow investors to evaluate the reasonableness of the registrant's estimates and assumptions, which are used to prepare the registrant's financial statements. Although current accounting standards require registrants to consider how climate-related matters may intersect with and affect the financial statements, including their impact on estimates and assumptions, the nature of the climate-related events and transition activities discussed in the proposed rules, which may manifest over a longer time horizon, necessitate targeted disclosure requirements to elicit decision-useful information for investors in a consistent manner. We also note that some registrants have already provided disclosure along the lines of the proposed requirements, which lends support to the feasibility of making such disclosures.

By way of example, the proposed climate-related events and impacts relating to a transition away from greenhouse gas producing products and activities could affect a registrant's asset values and may result in asset impairments. The effect on asset values and the resulting impairments could, in turn, affect a registrant's assumptions when calculating depreciation expenses or asset retirement obligations associated with the retirement of tangible, long-lived assets. Providing related disclosure could help an investor understand if a registrant would be responsible for removing equipment or cleaning up hazardous materials sooner than originally planned due to a severe weather event. Similarly, a registrant's climate-related targets and related commitments, such as a commitment to achieve net-zero emissions by 2040, may impact certain accounting estimates and assumptions. For example, if a registrant announced a commitment that would require decommissioning an asset by a target year, then the registrant's depreciation expense should reflect alignment with that commitment. If the registrant believes it can execute a strategy that would allow it to meet the commitment and continue to operate the asset past the target date, then the proposed disclosure requirement could facilitate an investor's understanding and own assessment of the feasibility of that strategy. Other financial statement estimates and assumptions that may require disclosure pursuant to the proposed rules may include those related to the estimated salvage value of certain assets, estimated useful life of certain assets, projected financial information used in impairment calculations, estimated loss contingencies, estimated reserves (such as environmental reserve or loan loss allowances), estimated credit risks, fair value measurement of certain assets, and commodity price assumptions.

Several commenters stated that it was important to provide investors with an understanding of how climate-related events and activities are considered when a registrant develops the assumptions and estimates used to prepare its financial statements. In particular, one commenter stated that investors may face “substantial risk” if disclosure on the impact of “decarbonization” on the estimates and assumptions underlying asset valuations is not disclosed. Another commenter stated that “current corporate disclosure is not sufficient, is not readily available in existing financial disclosures, and does not allow investors to make comparable assessments of how companies are evaluating and responding to climate-related risks and opportunities.”

Request for Comment

81. Should we require disclosure of financial estimates and assumptions impacted by the climate-related events and transition activities (including disclosed targets), as proposed? How would investors use this information?

82. Should we instead require disclosure of only significant or material estimates and assumptions that were impacted by the climate-related events and transition activities? Alternatively, should we require disclosure of only estimates and assumptions that were materially impacted by the climate-related events and transition activities?

83. Should we instead require disclosure of financial estimates and assumptions impacts by a subset of climate-related events and transition activities, such as not requiring disclosure related to identified climate-related risks or only requiring disclosure with respect to a subset of severe weather events and natural conditions? If so, how should the subset be defined?

84. Should we instead utilize terminology and thresholds consistent with the critical accounting estimate disclosure requirement in 17 CFR 229.303(b)(3), such as “estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant”? If so, should we only require disclosures of whether and how the climate-related events and transition activities impacted such critical accounting estimates? Should we require only a qualitative description of how the estimates and assumptions were impacted by the climate-related events and transition activities, as proposed? Should we require quantitative disclosures as well? If so, should we require such disclosure only if practicable or subject to another qualifier?

85. Should the disclosure of financial estimates and assumptions impacted by climate-related opportunities be optional, as proposed?

86. For the proposed financial statement metrics, should we require a registrant to disclose material changes in estimates, assumptions, or methodology among fiscal years and the reasons for those changes? If so, should we require the material changes disclosure to occur on a quarterly, or some other, basis? Should we require disclosure beyond a discussion of the material changes in assumptions or methodology and the reasons for those changes? Do existing required disclosures already elicit such information? What other approaches should we consider?

5. Inclusion of Climate-Related Metrics in the Financial Statements

The proposed financial statement metrics would be required in the financial statements, and therefore would be (i) included in the scope of any required audit of the financial statements in the relevant disclosure filing, (ii) subject to audit by an independent registered public accounting firm, and (iii) within the scope of the registrant's ICFR.

As discussed above, the proposed disclosures share many characteristics with other complex financial statement disclosures. The financial statement metrics present financial data that is derived from the registrant's consolidated balance sheets, income statements, and statements of cash flows, and would be presented in a similar way to existing financial statement disclosures. Requiring certain climate-related information to be included in a note to the financial statements, and therefore subject to audit and within the scope of ICFR, should enhance the reliability of the proposed financial statement metrics.

Request for Comment

87. We are proposing to require the financial statement metrics to be disclosed in a note to the registrant's audited financial statements. Should we require or permit the proposed financial statement metrics to be disclosed in a schedule to the financial statements? If so, should the metrics be disclosed in a schedule to the financial statements, similar to the schedules required under Article 12 of Regulation S-X, which would subject the disclosure to audit and ICFR requirements? Should we instead require the metrics to be disclosed as supplemental financial information, similar to the disclosure requirements under FASB ASC Topic 932-235-50-2 for registrants that have significant oil- and gas-producing activities? If so, should such supplemental schedule be subject to assurance or ICFR requirements?

88. Instead of requiring the financial statement metrics to be disclosed in a note to the registrant's audited financial statements, should we require a new financial statement for such metrics? For example, should a “consolidated climate statement” be created in addition to the consolidated balance sheets, statements of comprehensive income, cash flows, and other traditional financial statements? Would including the proposed metrics in a new financial statement provide more clarity to investors given that the metrics are intended to follow the structure of the existing financial statements (including the line items)? What complications or unintended consequences may arise in practice if such a climate statement is created?

89. Should we require the disclosure to be provided outside of the financial statements? Should we require all of the disclosure to be provided in the proposed separately captioned item in the specified forms?

90. Should we require any additional metrics or disclosure to be included in the financial statements and subject to the auditing and ICFR requirements as described above? For example, should any of the disclosures we are proposing to require outside of the financial statements (such as GHG emissions metrics) be included in the financial statements? If so, should such metrics be disclosed in a note or a schedule to the financial statements? If in a schedule, should such schedule be similar to the schedules required under Article 12 of Regulation S-X and subject to audit and ICFR requirements? Should we instead require the metrics to be disclosed as supplemental financial information in a supplemental schedule? If so, should such supplemental schedule be subject to assurance or ICFR requirements?

91. Under the proposed rules, PCAOB auditing standards would be applicable to the financial statement metrics that are included in the audited financial statements, consistent with the rest of the audited financial statements. What, if any, additional guidance or revisions to such standards would be needed in order to apply PCAOB auditing standards to the proposed financial statement metrics? For example, would guidance on how to apply existing requirements, such as materiality, risk assessment, or reporting, be needed? Would revisions to the auditing standards be necessary? What additional guidance or revisions would be helpful to auditors, preparers, audit committee members, investors, and other relevant participants in the audit and financial reporting process?

92. Would it be clear that the climate-related financial statement metrics would be included in the scope of the audit when the registrant files financial statements prepared in accordance with IFRS as issued by the IASB? Would it be clear that the proposed rules would not alter the basis of presentation of the financial statements as referred to in an auditor's report? Should we amend Form 20-F, other forms, or our rules to clarify the scope of the audit or the basis of presentation in this context? For example, should we amend Form 20-F to state specifically that the scope of the audit must include any notes prepared pursuant to Article 14 of Regulation S-X? What are the costs for accounting firms to provide assurance with respect to the financial statement metrics? Would those costs decrease over time?

G. GHG Emissions Metrics Disclosure

1. GHG Emissions Disclosure Requirement

a. Overview

In addition to the other proposed climate-related disclosures, the proposed rules would require a registrant to disclose its GHG emissions for its most recently completed fiscal year. As institutional investors and other commenters have indicated, GHG emissions information is important to investment decisions for various reasons, including because GHG emissions data is quantifiable and comparable across industries and can be particularly useful in conducting a transition risk analysis; it can be used to evaluate the progress in meeting net-zero commitments and assessing any associated risks; and it may be relevant to investment or voting decisions because GHG emissions could impact the company's access to financing, as well as its ability to reduce its carbon footprint in the face of regulatory, policy, and market constraints. Thus, while the justifications for the proposed GHG emissions disclosures overlap in some respects with the justifications for the other proposed climate-related disclosure rules, the GHG emissions requirements are intended to address separate challenges and are supported by the particular justifications discussed in detail in the following sections.

The proposed rules would establish certain requirements regarding the measurement and reporting of GHG emissions that would promote the comparability of such disclosure. We have based the proposed GHG emissions disclosure rules on the concept of scopes, which are themselves based on the concepts of direct and indirect emissions, developed by the GHG Protocol. We also have proposed definitions of Scope 1, Scope 2, and Scope 3 emissions that are substantially similar to the corresponding definitions provided by the GHG Protocol. Commenters indicated that the GHG Protocol has become the leading accounting and reporting standard for GHG emissions. By sharing certain basic concepts and a common vocabulary with the GHG Protocol, the proposed rules should help limit the compliance burden for those registrants that are already disclosing their GHG emissions pursuant to the GHG Protocol. Similarly, to the extent that registrants elect to follow GHG Protocol standards and methodologies, investors already familiar with the GHG Protocol may also benefit.

The proposed rules would define “greenhouse gases” as carbon dioxide (“CO₂ ”); methane (“CH₄ ”); nitrous oxide (“N₂ O”); nitrogen trifluoride (“NF₃ ”); hydrofluorocarbons (“HFCs”); perfluorocarbons (“PFCs”); and sulfur hexafluoride (“SF₆ ”). The greenhouse gases included in the proposed definition reflect the gases that are currently commonly referenced by international, scientific, and regulatory authorities as having significant climate impacts. In addition to being consistent with the GHG Protocol, the list of constituent greenhouse gases would be consistent with the gases identified by widely used frameworks, such as the Kyoto Protocol, the UN Framework Convention on Climate Change, the U.S. Energy Information Administration, and the EPA.

The proposed rules would define GHG emissions to mean direct and indirect emissions of greenhouse gases. Pursuant to the proposed definition of GHG emissions, direct emissions are GHG emissions from sources that are owned or controlled by a registrant, whereas indirect emissions are GHG emissions that result from the activities of the registrant, but occur at sources not owned or controlled by the registrant. Similar to the GHG Protocol, the proposed rules would define:

• Scope 1 emissions as direct GHG emissions from operations that are owned or controlled by a registrant;

• Scope 2 emissions as indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a registrant; and

• Scope 3 emissions as all indirect GHG emissions not otherwise included in a registrant's Scope 2 emissions, which occur in the upstream and downstream activities of a registrant's value chain. Upstream emissions include emissions attributable to goods and services that the registrant acquires, the transportation of goods (for example, to the registrant), and employee business travel and commuting. Downstream emissions include the use of the registrant's products, transportation of products (for example, to the registrant's customers), end of life treatment of sold products, and investments made by the registrant.

As previously noted, the EPA uses the concept of scopes, and refers to the GHG Protocol, when providing guidance to companies regarding their GHG emissions inventories. Because GHG emissions data compiled for the EPA's own GHG emissions reporting program would be consistent with the GHG Protocol's standards, and thus with the proposed rules, a registrant may use that data in partial fulfillment of its GHG emissions disclosure obligations pursuant to the proposed rules.

The proposed rules would require a registrant to disclose its total Scope 1 emissions separately from its total Scope 2 emissions after calculating them from all sources that are included in the registrant's organizational and operational boundaries. A registrant would also be required to disclose separately its total Scope 3 emissions for the fiscal year if those emissions are material, or if it has set a GHG emissions reduction target or goal that includes its Scope 3 emissions. For each of its Scopes 1, 2, and 3 emissions, the proposed rules would require a registrant to disclose the emissions both disaggregated by each constituent greenhouse gas ( e.g., by carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂ O), nitrogen trifluoride (NF₃), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF₆ )) and in the aggregate. By requiring the disclosure of GHG emissions both disaggregated by the constituent greenhouse gases and in the aggregate, investors could gain decision-useful information regarding the relative risks to the registrant posed by each constituent greenhouse gas in addition to the risks posed by its total GHG emissions by scope. For example, if a government targets reduction of a specific greenhouse gas, knowing that a registrant has significant emissions of such gas would provide insight into potential impacts on the registrant's business. Because measuring the constituent greenhouse gases is a necessary step in calculating a registrant's total GHG emissions per scope, the proposed disaggregation by each constituent greenhouse gas should not create significant additional burdens.

Consistent with the GHG Protocol, the proposed rules would require a registrant to express each scope of its GHG emissions in terms of carbon dioxide equivalent (“CO₂ e”). CO₂ e is the common unit of measurement used by the GHG Protocol to indicate the global warming potential (“GWP”) of each greenhouse gas, expressed in terms of the GWP of one unit of carbon dioxide (CO₂ ). Requiring a standard unit of measurement for GHG emissions, rather than different units of measurement for the different greenhouse gases, should simplify the disclosure for investors and enhance its comparability across registrants with different types of GHG emissions.

For all scopes of GHG emissions, the proposed rules would require a registrant to disclose GHG emissions data in gross terms, excluding any use of purchased or generated offsets. Because the value of offsets can vary depending on restrictions that are or may be imposed by regulation or market conditions, disclosing GHG emissions data in this manner would allow investors to assess the full magnitude of climate-related risk posed by a registrant's GHG emissions and the registrant's plans for managing such risk. This proposed approach also is consistent with the approach taken by the GHG Protocol.

Commenters generally supported requiring disclosure of a registrant's Scope 1 and Scope 2 emissions, with many also supporting disclosure of Scope 3 emissions. A common reason asserted by commenters for requiring GHG emissions disclosure is that quantitative data, such as GHG emissions data, is useful for assessing a registrant's exposure to climate-related risks and accordingly its ability to transition to a lower carbon economy. Investors that are currently using GHG emissions data do so because the data provides insight into a registrant's exposure to climate-related risks, and transition risks in particular—risks that have implications for a registrant's financial condition and results of operations. An increasing number of investors have identified GHG emissions as material to their investment decision-making and are either purchasing this information from third-party providers or engaging with companies to obtain the information directly. In each situation, there is a lack of consistency, comparability, and reliability in those data that our proposal seeks to address.

Some of these commenters supported requiring disclosure of Scope 1 emissions at the individual greenhouse gas level. Although commenters noted an increase in the voluntary reporting of climate-related disclosure, several also stated that significant gaps remain in the disclosure, particularly regarding Scope 3 emissions, which, for certain industries, can comprise a majority of GHG emissions.

Many commenters recommended basing any GHG emissions disclosure requirement on the GHG Protocol. Several of these commenters stated that the GHG Protocol's framework for reporting GHG emissions, delineated as Scopes 1, 2, and 3 emissions, has become the globally-accepted standard used by numerous companies for reporting their GHG emissions. Commenters also indicated that a mandatory standard for reporting GHG emissions based on the GHG Protocol would help in producing consistent, comparable, and reliable climate-related information for investors. Some commenters also stated that mandating GHG emissions pursuant to a standardized approach, such as the GHG Protocol, would help mitigate instances of greenwashing.

Some commenters indicated that the Commission should mandate disclosure of only Scopes 1 and 2 emissions. Other commenters suggested limiting the mandatory disclosure of Scope 3 emissions to registrants in certain industries, larger registrants, or when a registrant's Scope 3 emissions comprise 40 percent of its total emissions. These commenters pointed to difficulties in obtaining the necessary data from third parties and methodological uncertainties as reasons for limiting or not requiring disclosure of Scope 3 emissions. Other commenters and research support a requirement for disclosure of Scope 3 emissions that is independent of an individual company's materiality assessment.

A few commenters stated that the Commission should require the disclosure of only Scope 1 emissions. One commenter stated that this approach would be consistent with the Greenhouse Gas Reporting Program overseen by the EPA, which they stated requires the tracking of facility-level Scope 1 emissions from “large greenhouse gas emitters.” Another commenter opposed a requirement to disclose any GHG emissions, asserting that GHG emissions do not serve as adequate indicators for the actual risks faced by a registrant.

We agree with the many commenters that indicated that GHG emissions disclosure could provide important information for investors to help them evaluate the climate-related risks faced by registrants and to understand better how registrants are planning to mitigate or adapt to those risks. The proposed GHG emissions disclosures could be important to an investor's understanding of other disclosures that would be required by the proposed rules, such as disclosure of the likely impacts of climate-related risks as well as any targets and goals disclosure.

We propose requiring disclosure of registrants' Scopes 1 and 2 emissions because, as several institutional investor commenters stated, investors need and many investors currently use this information to make investment or voting decisions. One of those commenters stated that GHG emissions information serves as the starting point for transition risk analysis because it is quantifiable and comparable across companies and industries. The commenter, an institutional investor, indicated that it uses GHG emissions data to rank companies within industries based on their GHG emissions intensity to better assess transition risk exposure of companies in its portfolio and make informed investment decisions. This commenter also indicated that Scopes 1 and 2 emissions information is more broadly available than Scope 3 emissions data because of the challenges of collecting the latter data.

As previously mentioned, several large institutional investors and financial institutions, which collectively have trillions of dollars in assets under management, have formed initiatives and made commitments to achieve a net-zero economy by 2050, with interim targets set for 2030. These initiatives further support the notion that investors currently need and use GHG emissions data to make informed investment decisions. These investors and financial institutions are working to reduce the GHG emissions of companies in their portfolios or of their counterparties and need GHG emissions data to evaluate the progress made regarding their net-zero commitments and to assess any associated potential asset devaluation or loan default risks. A company's GHG emissions footprint also may be relevant to investment or voting decisions because it could impact the company's access to financing or signal potential changes in its financial planning as governments, financial institutions, and other investors make demands to reduce GHG emissions.

We also agree with commenters that basing the Commission's proposed GHG emissions disclosure rules on concepts used in the GHG Protocol could help provide investors with consistent, comparable, and reliable information about a registrant's GHG emissions. In this regard, we note that several studies have found that GHG emissions data prepared pursuant to the GHG Protocol have become the most commonly referenced measurements of a company's exposure to climate-related risks.

However, we are not proposing to adopt all of the features of the GHG Protocol into the Commission's proposed climate-related disclosure rules. As explained in greater detail below, in one significant respect the proposed rules differ from the approach taken by the GHG Protocol regarding the methodology that a registrant would be required to use when calculating its GHG emissions. This difference better suits the U.S. financial reporting regime and the needs of investors. We recognize that the methodologies pertaining to the measurement of GHG emissions, particularly Scope 3 emissions, are evolving. While we expect that many registrants would choose to follow the standards and guidance provided by the GHG Protocol when calculating their GHG emissions, the proposed rules would not require registrants to do so. Allowing for some flexibility in the choice of GHG emissions methodologies would permit registrants to adapt to new approaches, such as those pertaining to their specific industry, as they emerge.

b. The Treatment of Scopes 1 and 2 Emissions Compared to Scope 3 Emissions

We are proposing to require all registrants to disclose their Scopes 1 and 2 emissions. Those types of emissions result directly or indirectly from facilities owned or activities controlled by a registrant. The relevant data for calculating Scopes 1 and 2 emissions should be reasonably available to registrants, and the relevant methodologies are fairly well-developed. Registrants with large stationary sources of emissions already report Scope 1 emissions data to the EPA, and the EPA provides detailed methodologies for a range of industries with significant Scope 1 emissions. The EPA also provides detailed guidance for the calculation of Scope 2 emissions, which, although classified as “indirect emissions,” are generated by direct activities of the registrant in using purchased energy.

Unlike Scopes 1 and 2 emissions, Scope 3 emissions typically result from the activities of third parties in a registrant's value chain and thus collecting the appropriate data and calculating these emissions would potentially be more difficult than for Scopes 1 and 2 emissions. At the same time, in many cases Scope 3 emissions disclosure may be necessary to present investors a complete picture of the climate-related risks—particularly transition risks—that a registrant faces and how GHG emissions from sources in its value chain, which are not included in its Scopes 1 and 2 emissions, may materially impact a registrant's business operations and associated financial performance. Scope 3 emissions can augment the information provided in Scopes 1 and 2 emissions and help to reflect the total emissions associated with a registrant's operations, including inputs from upstream activities, such as those of its suppliers, and outputs from downstream activities, such as those involving the distribution, use, and disposal of a registrant's products or services.

Scope 3 emissions are indirect, but registrants can and do take steps to limit Scope 3 emissions and the attendant risks. Although a registrant may not own or control the operational activities in its value chain that produce Scope 3 emissions, it nevertheless may influence those activities, for example, by working with its suppliers and downstream distributors to take steps to reduce those entities' Scopes 1 and 2 emissions (and thus help reduce the registrant's Scope 3 emissions) and any attendant risks. As such, a registrant may be able to mitigate the challenges of collecting the data required for Scope 3 disclosure. Such data may reveal changes in a registrant's Scope 3 emissions over time that could be informative for investors in discerning how the registrant is managing transition risks. For example, a registrant could seek to reduce the potential impacts on its business of its upstream emissions by choosing to purchase from more GHG emission-efficient suppliers or by working with existing suppliers to reduce emissions. A registrant could also seek to reduce the potential impacts on its business of downstream emissions by producing products that are more energy efficient or involve less GHG emissions when consumers use them, or by contracting with distributors that use shorter transportation routes. Being able to compare Scope 3 emissions over time could thus be a valuable tool for investors in tracking a registrant's progress in mitigating transition and other climate-related risks.

To balance the importance of Scope 3 emissions with the potential relative difficulty in data collection and measurement, the proposed rules would require disclosure of Scope 3 emissions only if those emissions are material, or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions. As explained in greater detail below, this latter proposed disclosure requirement could assist investors in tracking the progress of the registrant toward reaching the target or goal so that investors can better understand potential associated costs.

Consistent with the Commission's definition of “material” and Supreme Court precedent, a registrant would be required to disclose its Scope 3 emissions if there is a substantial likelihood that a reasonable investor would consider them important when making an investment or voting decision. In articulating this materiality standard, the Supreme Court recognized that “[d]oubts as to the critical nature” of the relevant information “will be commonplace.” But “particularly in view of the prophylactic purpose” of the securities laws,” and “the fact that the content” of the disclosure “is within management's control, it is appropriate that these doubts be resolved in favor of those the statute is designed to protect,” namely investors.

When recommending that the Commission require the disclosure of Scope 3 emissions, some commenters indicated that Scope 3 emissions represent the relatively large source of overall GHG emissions for many companies. Given their relative magnitude, we agree that, for many registrants, Scope 3 emissions may be material to help investors assess the registrants' exposure to climate-related risks, particularly transition risks, and whether they have developed a strategy to reduce their carbon footprint in the face of regulatory, policy, and market constraints.

Scope 3 emissions information may be material in a number of situations to help investors gain a more complete picture of the transition risks to which a registrant may be exposed. In certain industries, a transition to lower-emission products or processes may already be underway, triggered by existing laws or regulations, changes in weather, policy initiatives, a shift in consumer preferences, technological changes, or other market forces, such that financial risks are reasonably foreseeable for registrants in those industries based on the emissions in their value chain. For example, some registrants may need to allocate capital to invest in lower emissions equipment. Investors thus need and use information about the full GHG emissions footprint and intensity of a registrant to determine and compare how exposed a registrant is to the financial risks associated with any transition to lower-emission products.

For example, in the automobile industry, the vast majority of car manufacturers' GHG emissions footprint comes from tailpipe emissions of cars driven by customers, as compared to the emissions from manufacturing the cars. There is already a transition underway to reduce tailpipe emissions through the adoption of stricter fuel efficiency regulations and by governmental initiatives that encourage the manufacture and demand for electric vehicles. Demand for electric vehicles is increasing in the United States and globally, and leading automobile manufacturers have announced plans to increase the manufacture of electric vehicles, with many setting commitments to manufacture all-electric fleets or achieve net-zero emissions. This transition raises financial risks for automobile manufacturers, which can be gauged, in part, by their Scope 3 emissions. Investors can use Scope 3 emissions data concerning a car manufacturer's suppliers and the use of its sold products to assess whether a particular manufacturer is taking steps to mitigate or adapt to the risks posed by a transition to lower emission vehicles.

Changes in requirements by financial institutions and institutional investors can present similar financial risks for companies. As many financial institutions and investors begin to set their own GHG emissions reduction goals, they may consider the total GHG emissions footprint of companies that they finance or invest in to build portfolios to meet their goals. Financial institutions and investors may focus on Scopes 1 and 2 emissions for companies in some industries, particularly for industries in which Scopes 1 and 2 represent the majority of companies' total GHG emissions footprint. For other industries, however, Scope 3 emissions represent a relatively significant portion of companies' total GHG footprint, and therefore may reflect a more complete picture of companies' exposure to transition risks than Scopes 1 and 2 emissions alone. For oil and gas product manufacturers, for example, Scope 3 emissions are likely to be material and thus necessary to an understanding of a registrant's climate-related risks.

When assessing the materiality of Scope 3 emissions, registrants should consider whether Scope 3 emissions make up a relatively significant portion of their overall GHG emissions. While we are not proposing a quantitative threshold for determining materiality, we note that some companies rely on, or support reliance on, a quantitative threshold such as 40 percent when assessing the materiality of Scope 3 emissions. However, even when Scope 3 emissions do not represent a relatively significant portion of overall GHG emissions, a quantitative analysis alone would not suffice for purposes of determining whether Scope 3 emissions are material. Consistent with the concept of materiality in the securities laws, this determination would ultimately need to take into account the total mix of information available to investors, including an assessment of qualitative factors. Accordingly, Scope 3 emissions may make up a relatively small portion of a registrant's overall GHG emissions but still be material where Scope 3 represents a significant risk, is subject to significant regulatory focus, or “if there is a substantial likelihood that a reasonable [investor] would consider it important.” Moreover, if a materiality analysis requires a determination of future impacts, i.e., a transition risk yet to be realized, then both the probability of an event occurring and its magnitude should be considered. Even if the probability of an adverse consequence is relatively low, if the magnitude of loss or liability is high, then the information in question may still be material.

If a registrant determines that its Scope 3 emissions are not material, and therefore not subject to disclosure, it may be useful to investors to understand the basis for that determination. Further, if a registrant determines that certain categories of Scope 3 emissions are material, registrants should consider disclosing why other categories are not material. If, however, Scope 3 emissions are material, then understanding the extent of a registrant's exposure to Scope 3 emissions, and the choices it makes regarding them, would be important for investors when making investment or voting decisions.

Several commenters stated that disclosure of a registrant's Scope 3 emissions is essential to making an informed investment decision because Scope 3 emissions can indicate a registrant's exposure to climate-related transition risks. For example, if policy changes lead to mandatory emissions reductions or carbon pricing, a registrant with high Scope 3 emissions could experience higher costs in sourcing key inputs. Similarly, if consumer preferences change to favor products that are less carbon intensive, a registrant could see a significant change in demand for its products. Registrants that do not account for these risks, or make suboptimal choices regarding them, could become less profitable in the future than registrants that acknowledge these risks and successfully mitigate them. Thus, Scope 3 emissions disclosure could help convey to investors the potential financial risks facing a company related to any transition to a lower carbon economy. With Scope 3 information disclosed, investors would be able to assess, in conjunction with reported financial information, how GHG emissions impact the registrant's operations as well as its overall business strategy so that they can make more informed investment or voting decisions.

Disclosure of Scope 3 emissions could also highlight instances where a registrant attempts to reduce its total Scopes 1 and 2 emissions by outsourcing carbon intensive activities. For example, a registrant could contract out certain high-emissions production activities so that its own Scope 1 or 2 emissions are lower than a similar company that has retained direct ownership and control over more of its production activities. Thus, Scope 3 emissions reporting could provide greater transparency and help preclude any efforts by registrants to obscure for investors the full magnitude of the climate-related risks associated with their GHG emissions.

The proposed rules would also require a registrant to disclose its Scope 3 emissions if it has set a GHG emissions reduction target or goal that includes Scope 3 emissions. This disclosure requirement would enable investors to understand the scale and scope of actions the registrant may need to take to fulfill its commitment to reduce its Scope 3 emissions and the potential financial impact of that commitment on the registrant. It would also enable an investor to assess the registrant's strategy for meeting its Scope 3 emissions target or goal and its progress towards that target or goal, which may affect the registrant's business.

Scope 3 emissions disclosures would help investors to understand and assess the registrant's strategy. For example, Scope 3 emissions disclosures would allow an investor to better understand how feasible it would be for the registrant to achieve its targets through its current strategy, to track the registrant's progress over time, and to understand changes the registrant may make to its strategy, targets, or goals. Scope 3 emissions disclosures would thus be important to evaluating the financial effects of the registrant's target or goal. In addition, this disclosure could help prevent instances of greenwashing or other misleading claims concerning the potential impact of Scope 3 emissions on a registrant's business because investors, and the market would have access to a quantifiable, trackable metric.

A registrant's Scope 3 emissions disclosure, together with the proposed financial statement metrics, would also enable an investor to assess the efficiency and efficacy of the registrant's actions to achieve its target or goal ( e.g., by comparing the registrant's expenditures or other investments in lower carbon transition activities from year to year with any corresponding reduction in its Scope 3 emissions). If a registrant has a relatively ambitious Scope 3 emissions target, but discloses little investment in transition activities in its financial statements and little or no reduction in Scope 3 emissions from year to year, these disclosures could indicate to investors that the registrant may need to make a large expenditure or significant change to its business operations as it gets closer to its target date, or risk missing its target. Both potential outcomes could have financial ramifications for the registrant and, accordingly, investors.

The proposed disclosure requirement should also give investors the ability to evaluate whether a registrant's target or goal and its plan for achieving that target or goal could have an adverse impact on the registrant. For example, an investor might conclude that the financial costs of a registrant's plan would outweigh any benefits to the business, and factor that into how the registrant's securities fit into the investor's own investment portfolio given the investor's risk tolerance and other investment goals. Thus, the objective of this disclosure is not to drive targets, goals, plans, or conduct, but to provide investors with the tools to assess the implications of any targets, goals, or plans on the registrant in making investment or voting decisions.

This disclosure requirement could also enable investors to better compare firms. For example, two registrants may have the same total GHG emissions and have made the same commitments to reduce total GHG emissions from Scopes 1, 2, and 3 emissions combined. However, if the registrants have different proportions of emissions from Scope 1 and 2 versus Scope 3, investors might determine that there would be different costs and effects for these registrants from their disclosed plans to reduce their overall emissions.

Scope 3 emissions disclosures could also enable investors to better compare registrants' plans to achieve their Scope 3 emissions targets or goals. For example, registrants in the retail industry may have a relatively large portion of their Scope 3 emissions derived from customer travel to the registrant's stores and shipping products or goods to customers or stores. If a registrant in this industry has set Scope 3 emissions targets or goals, in order to meet those targets or goals it may choose to relocate its stores to be closer to public transportation. Another similarly situated registrant may elect to switch to using electric vehicles for shipping. A third similarly situated registrant might elect to take neither action, but instead assume Scope 3 emissions reductions based on customers' change in behavior. Investors could assess the likelihood of each of these three registrants meeting their Scope 3 emissions target or goal—as well as the likely financial and operational impact—which could depend on the amount and type of their Scope 3 emissions. Investors could also compare the potential impacts of these plans on the three different registrants. Without disclosures of the amount and type of Scope 3 emissions, investors would face difficulty assessing the likely impacts of a target or goal that includes Scope 3 emissions on registrants and comparing the relative impacts across registrants.

If required to disclose Scope 3 emissions, a registrant would be required to identify the categories of upstream and downstream activities that have been included in the calculation of its Scope 3 emissions. Consistent with the GHG Protocol, the proposed rules identify several categories of activities that can give rise to Scope 3 emissions. Upstream activities from which Scope 3 emissions might result include:

• A registrant's purchased goods and services;
• A registrant's capital goods;
• A registrant's fuel and energy related activities not included in Scope 1 or Scope 2 emissions;
• Transportation and distribution of purchased goods, raw materials, and other inputs;
• Waste generated in a registrant's operations;
• Business travel by a registrant's employees;
• Employee commuting by a registrant's employees; and

• A registrant's leased assets related principally to purchased or acquired goods or services.

Downstream activities from which Scope 3 emissions might result include:

• Transportation and distribution of a registrant's sold products, goods or other outputs;
• Processing by a third party of a registrant's sold products;
• Use by a third party of a registrant's sold products;
• End-of-life treatment by a third party of a registrant's sold products;
• A registrant's leased assets related principally to the sale or disposition of goods or services;
• A registrant's franchises; and

• Investments by a registrant.

The list of upstream and downstream activities set forth in proposed Item 1500(r) is non-exclusive. If any upstream or downstream activities were significant to the registrant when calculating its Scope 3 emissions, the proposed rules would require it to identify such categories and separately disclose Scope 3 emissions data for each of those categories together with a total of all Scope 3 emissions. For example, an energy company that produces oil and gas products may find that a significant category of activity resulting in Scope 3 emissions relates to the end use of its sold products. A manufacturer might find that a significant category of activities resulting in Scope 3 emissions relate to the emissions of its suppliers in the production of purchased goods or services, the processing of its sold products, or by the fuel consumed by its third-party transporters and distributors of those goods and services and of its sold products. In some cases, the category in which an emissions source belongs may be unclear, or the source might fit within more than one category. In those cases, registrants would need to use their best judgment as to the description of the emissions source and provide sufficient transparency as to the reasoning and methodology to facilitate investor understanding of the emissions category and source.

If required to disclose Scope 3 emissions, a registrant would also be required to describe the data sources used to calculate those emissions, including the use of any of the following:

• Emissions reported by parties in the registrant's value chain, and whether such reports were verified by the registrant or a third party, or unverified;

• Data concerning specific activities, as reported by parties in the registrant's value chain; and

• Data derived from economic studies, published databases, government statistics, industry associations, or other third-party sources outside of a registrant's value chain, including industry averages of emissions, activities, or economic data.

This information is intended to assist investors in assessing the reliability and accuracy of the registrant's Scope 3 emissions disclosure. For example, an investor might find emissions data related to the downstream transportation and distribution of a registrant's sold products more reliable if based on specific distances traveled by the registrant's transportation and distribution partners and company-specific emissions factors rather than estimates of distances traveled based on industry-average data and using national average emission factors. Although we recognize that a registrant may sometimes need to use industry- and national-average data when calculating its Scope 3 emissions, information about the data sources for its Scope 3 emissions would help investors better understand the risk exposure posed by the registrant's value chain in comparison with other registrants and make more informed investment decisions.

We acknowledge that a registrant's material Scope 3 emissions is a relatively new type of metric, based largely on third-party data, that we have not previously required. We are proposing the disclosure of this metric because we believe capital markets have begun to assign financial value to this type of metric, such that it can be material information for investors about financial risks facing a company. Scope 3 emissions disclosure is an integral part of both the TCFD framework and the GHG Protocol, which are widely accepted. It also has been widely recognized that, for some companies, disclosure of just Scopes 1 and 2 emissions could convey an incomplete, and potentially misleading, picture. We have attempted to calibrate our proposal to balance investors' demand for this information with the current limitations of the Scope 3 emissions data.

We also recognize, as discussed below, that the reporting of Scope 3 emissions may present more challenges than the reporting of Scopes 1 and 2 emissions. But in light of the fact that a GHG emissions reporting regime may be incomplete without the reporting of Scope 3 emissions, we are proposing to include them, with an appropriate transition period and safe harbor, at the outset. Although we have not proposed to exclude specific upstream or downstream activities from the scope of the proposed Scope 3 disclosure requirement, we have limited the proposed disclosure requirement to those value chain emissions that overall are material. We also have not proposed a bright-line quantitative threshold for the materiality determination as suggested by some commenters because whether Scope 3 emissions are material would depend on the particular facts and circumstances, making it difficult to establish a “one size fits all” standard.

Request for Comment

93. How would investors use GHG emissions disclosures to inform their investment and voting decisions? How would such disclosures provide insight into a registrant's financial condition, changes in financial condition, and results of operations? How would such disclosures help investors evaluate an issuer's climate risk-related exposure? Would such disclosures enable investors to better assess physical risks associated with climate-related events, transition risks, or both types of risks?

94. Should we require a registrant to disclose its GHG emissions both in the aggregate, per scope, and on a disaggregated basis for each type of greenhouse gas that is included in the Commission's proposed definition of “greenhouse gases,” as proposed? Should we instead require that a registrant disclose on a disaggregated basis only certain greenhouse gases, such as methane (CH₄₎ or hydrofluorocarbons (HFCs), or only those greenhouse gases that are the most significant to the registrant? Should we require disaggregated disclosure of one or more constituent greenhouse gases only if a registrant is obligated to separately report the individual gases pursuant to another reporting regime, such as the EPA's greenhouse gas reporting regime or any foreign reporting regime? If so, should we specify the reporting regime that would trigger this disclosure?

95. We have proposed defining “greenhouse gases” as a list of specific gases that aligns with the GHG Protocol and the list used by the EPA and other organizations. Should other gases be included in the definition? Should we expand the definition to include any other gases to the extent scientific data establishes a similar impact on climate change with reasonable certainty? Should we require a different standard to be met for other greenhouse gases to be included in the definition?

96. Should we require a registrant to express its emissions data in CO₂ e, as proposed? If not, is there another common unit of measurement that we should use? Is it important to designate a common unit of measurement for GHG emissions data, as proposed, or should we permit registrants to select and disclose their own unit of measurement?

97. Should we require a registrant to disclose its total Scope 1 emissions and total Scope 2 emissions separately for its most recently completed fiscal year, as proposed? Are there other approaches that we should consider?

98. Should we require a registrant to disclose its Scope 3 emissions for the fiscal year if material, as proposed? Should we instead require the disclosure of Scope 3 emissions for all registrants, regardless of materiality? Should we use a quantitative threshold, such as a percentage of total GHG emissions ( e.g., 25%, 40%, 50%) to require the disclosure of Scope 3 emissions? If so, is there any data supporting the use of a particular percentage threshold? Should we require registrants in particular industries, for which Scope 3 emissions are a high percentage of total GHG emissions, to disclose Scope 3 emissions?

99. Should we require a registrant that has made a GHG emissions reduction commitment that includes Scope 3 emissions to disclose its Scope 3 emissions, as proposed? Should we instead require registrants that have made any GHG emissions reduction commitments, even if those commitments do not extend to Scope 3, to disclose their Scope 3 emissions? Should we only require Scope 3 emissions disclosure if a registrant has made a GHG emissions reduction commitment that includes Scope 3 emissions?

100. Should Scope 3 emissions disclosure be voluntary? Should we require Scope 3 emissions disclosure in stages, e.g., requiring qualitative disclosure of a registrant's significant categories of upstream and downstream activities that generate Scope 3 emissions upon effectiveness of the proposed rules, and requiring quantitative disclosure of a registrant's Scope 3 emissions at a later date? If so, when should we require quantitative disclosure of a registrant's Scope 3 emissions?

101. Should we require a registrant to exclude any use of purchased or generated offsets when disclosing its Scope 1, Scope 2, and Scope 3 emissions, as proposed? Should we require a registrant to disclose both a total amount with, and a total amount without, the use of offsets for each scope of emissions?

102. Should we require a registrant to disclose its Scope 3 emissions for each separate significant category of upstream and downstream emissions as well as a total amount of Scope 3 emissions for the fiscal year, as proposed? Should we only require the disclosure of the total amount of Scope 3 emissions for the fiscal year? Should we require the separate disclosure of Scope 3 emissions only for certain categories of emissions and, if so, for which categories?

103. Should the proposed rules include a different standard for requiring identification of the categories of upstream and downstream emissions, such as if those categories of emissions are significant to total GHG emissions or total Scope 3 emissions? Are there any other categories of, or ways to categorize, upstream or downstream emissions that a registrant should consider as a source of Scope 3 emissions? For example, should we require a registrant to disclose Scope 3 emissions only for categories of upstream or downstream activities over which it has influence or indirect control, or for which it can quantify emissions with reasonable reliability? Are there any proposed categories of upstream or downstream emissions that we should exclude as sources of Scope 3 emissions?

104. Should we, as proposed, allow a registrant to provide their own categories of upstream or downstream activities? Are there additional categories, other than the examples we have identified, that may be significant to a registrant's Scope 3 emissions and that should be listed in the proposed rule? Are there any categories that we should preclude, e.g., because of lack of accepted methodologies or availability of data? Would it be useful to allow registrants to add categories that are particularly significant to them or their industry, such as Scope 3 emissions from land use change, which is not currently included in the Greenhouse Gas Protocol's Scope 3 categories? Should we specifically add an upstream emissions disclosure category for land use?

105. Should we require the calculation of a registrant's Scope 1, Scope 2, and/or Scope 3 emissions to be as of its fiscal year end, as proposed? Should we instead allow a registrant to provide its GHG emissions disclosures according to a different timeline than the timeline for its Exchange Act annual report? If so, what should that timeline be? For example, should we allow a registrant to calculate its Scope 1, Scope 2, and/or Scope 3 emissions for a 12-month period ending on the latest practicable date in its fiscal year that is no earlier than three months or, alternatively, six months prior to the end of its fiscal year? Would allowing for an earlier calculation date alleviate burdens on a registrant without compromising the value of the disclosure? Should we allow such an earlier calculation date only for a registrant's Scope 3 emissions? Would the fiscal year end calculations required for a registrant to determine if Scope 3 emissions are material eliminate the benefits of an earlier calculation date? Should we instead require a registrant to provide its GHG emissions disclosures for its most recently completed fiscal year one, two, or three months after the due date for its Exchange Act annual report in an amendment to that report?

106. Should we require a registrant that is required to disclose its Scope 3 emissions to describe the data sources used to calculate the Scope 3 emissions, as proposed? Should we require the proposed description to include the use of: (i) Emissions reported by parties in the registrant's value chain, and whether such reports were verified or unverified; (ii) data concerning specific activities, as reported by parties in the registrant's value chain; and (iii) data derived from economic studies, published databases, government statistics, industry associations, or other third-party sources outside of a registrant's value chain, including industry averages of emissions, activities, or economic data, as proposed? Are there other sources of data for Scope 3 emissions the use of which we should specifically require to be disclosed? For purposes of our disclosure requirement, should we exclude or prohibit the use of any of the proposed specified data sources when calculating Scope 3 emissions and, if so, which ones?

107. Should we require a registrant to provide location data for its disclosed sources of Scope 1, Scope 2, and Scope 3 emissions if feasible? If so, should the feasibility of providing location data depend on whether it is known or reasonably available pursuant to the Commission's existing rules (Securities Act Rule 409 and Exchange Act Rule 12b-21)? Would requiring location data, to the extent feasible, assist investors in understanding climate-related risks, and in particular, likely physical risks, associated with a registrant's emissions' sources? Would a requirement to disclose such location data be duplicative of any of the other disclosure requirements that we are proposing?

108. If we require a registrant to provide location data for its GHG emissions, how should that data be presented? Should the emissions data be grouped by zip code separately for each scope? Should the disclosure be presented in a cartographic data display, such as what is commonly known as a “heat map”? If we require a registrant to provide location data for its GHG emissions, should we also require additional disclosure about the source of the emissions?

c. GHG Intensity

In addition to requiring the disclosure of its GHG emissions in gross terms, the proposed rules would also require a registrant to disclose the sum of its Scopes 1 and 2 emissions in terms of GHG intensity. If required to disclose Scope 3 emissions, a registrant would also be required to separately disclose its Scope 3 emissions in terms of GHG intensity. GHG intensity disclosure should provide context to a registrant's emissions in relation to its business scale ( e.g., emissions per economic output). For example, car manufacturer A may generate more emissions in terms of CO₂ e than car manufacturer B; however, when analyzing an intensity metric (emissions per unit of production), it becomes apparent that car manufacturer A actually has a lower emission rate per car produced than car manufacturer B, which indicates a registrant's emission efficiency. Because emission efficiency can be a potential indicator of the likelihood of the registrant being impacted by transition risks, such GHG intensity disclosure could provide decision-useful information to investors. In addition, the proposed GHG intensity disclosure would provide a standardized method for presenting such measure of efficiency across registrants, which should facilitate comparability of the registrant's emissions efficiency over time.

The proposed rules would define “GHG intensity” (or “carbon intensity”) to mean a ratio that expresses the impact of GHG emissions per unit of economic value ( e.g., metric tons of CO₂ e per unit of total revenues, using the registrant's reporting currency) or per unit of production ( e.g., metric tons of CO₂ e per unit of product produced). For purposes of standardizing the disclosure and facilitating its comparability, we are proposing to require the disclosure of GHG intensity in terms of metric tons of CO₂ e per unit of total revenue and per unit of production for the fiscal year. Total revenue is one of the most commonly used and understood financial metrics when investors analyze a registrant's financial results and applies to most registrants (depending on the nature and maturity of the business) and therefore would be a good common denominator for the intensity calculation. The selected unit of production should be relevant to the registrant's industry to facilitate investor comparison of the GHG intensity of companies within an industry without regard to registrant size. Investors may find such a comparison to be useful to making informed investment decisions to the extent that a registrant within a particular industry that has a lower GHG intensity relative to its peers that face fewer climate-related risks.

If the registrant has no revenue for a fiscal year, it would be required to calculate its GHG intensity with another financial measure ( e.g., total assets), with an explanation of why the particular measure was used. Similarly, if the registrant does not have a unit of production, it would be required to calculate its GHG intensity with another measure of economic output, depending on the nature of its business ( e.g., data processing capacity, volume of products sold, or number of occupied rooms) with an explanation of why the particular measure was used.

A registrant could also voluntarily disclose other additional measures of GHG intensity, including non-financial measures such as economic output, provided it includes an explanation of the reasons why those particular GHG intensity measures were used and why the registrant believes such measures provide useful information to investors. In all cases, the registrant would be required to disclose the methodology and other information required pursuant to the proposed GHG emissions metrics instructions.

Request for Comment

109. Should we require a registrant to disclose the intensity of its GHG emissions for the fiscal year, with separate calculations for (i) the sum of Scope 1 and Scope 2 emissions and, if applicable (ii) its Scope 3 emissions (separately from Scopes 1 and 2), as proposed? Should we define GHG intensity, as proposed? Is there a different definition we should use for this purpose?

110. Should we require the disclosed GHG intensity to be expressed in terms of metric tons of CO₂ e per unit of total revenue, as proposed? Should we require a different financial measure of GHG intensity and, if so, which measure? For example, should GHG intensity be expressed in terms of metric tons of CO₂ e per unit of total assets?

111. Should we require the disclosed GHG intensity to be expressed in terms of metric tons of CO₂ e per unit of production, as proposed? Would such a requirement facilitate the comparability of the disclosure? Should we require a different economic output measure of GHG intensity and, if so, which measure? For example, should GHG intensity be expressed in terms of metric tons of CO₂ e per number of employees? Should we require the GHG intensity to be expressed per unit of production relevant to the registrant's business (rather than its industry)? Is further guidance needed on how to comply with the proposed requirement? Would requiring GHG intensity to be expressed in terms of metrics tons of CO₂ e per unit of production require disclosure of commercially sensitive or competitively harmful information?

112. Should we require a registrant with no revenue or unit of production for a fiscal year to disclose its GHG intensity based on, respectively, another financial measure or measure of economic output, as proposed? Should we require such a registrant to use a particular financial measure, such as total assets, or a particular measure of economic output, such as total number of employees? For registrants who may have minimal revenue, would the proposed calculation result in intensity disclosure that is confusing or not material? Should additional guidance be provided with respect to such instances?

113. Should we permit a registrant to disclose other measures of GHG intensity, in addition to the required measures, as long as the registrant explains why it uses the particular measure of GHG intensity and discloses the corresponding calculation methodology used, as proposed?

d. GHG Emissions Data for Historical Periods

The proposed rules would require disclosure to be provided for the registrant's most recently completed fiscal year and for the historical fiscal years included in the registrant's consolidated financial statements in the applicable filing, to the extent such historical GHG emissions data is reasonably available. Requiring historical GHG emissions data, to the extent available, would provide useful information for investors by enabling investors to track over time the registrant's exposure to climate-related impacts represented by the yearly emissions data, and to assess how it is managing the climate-related risks associated with those impacts. Requiring GHG emissions disclosure for current and, when reasonably available, historical periods should enable investors to analyze trends in the impacts of material climate-related risks and to evaluate the narrative disclosure provided pursuant to proposed Item 1502. Historical GHG emissions data also could be particularly useful when a registrant has announced a target or goal for reducing GHG emissions by a certain date by helping investors assess its progress in meeting that target or goal and the related impacts on the registrant.

Linking the required number of years of historical GHG emissions data to the historical periods required in the consolidated financial statements should benefit investors by requiring emissions data that is consistent with the financial statement metrics in the filing. This should help investors connect GHG emissions with the financial performance of a registrant in the same period, including the proposed financial statement metrics. Moreover, although we are not proposing to require the GHG emissions data to be included in the registrant's consolidated financial statements, we nevertheless believe that the GHG emissions data is relevant to, and would be read in conjunction with, information included in the consolidated financial statements. Just as data about a registrant's revenues and expenses on its income statement reflect its activities in financial terms for a given year, a registrant's emissions data reflect its carbon footprint activities for that year. For this reason, we have proposed requiring a registrant to provide its GHG emissions data for the same number of years as it is required to provide data on its income statement and cash flow statement, to the extent such emissions data is reasonably available. For example, a registrant that is required to include income statements and cash flow statements at the end of its three most recent fiscal years would be required to disclose three years of its Scope 1, Scope 2 and, if material to the registrant or if it has set a GHG emissions target or goal that includes its Scope 3 emissions, its Scope 3 emissions, expressed both in absolute terms and in terms of intensity. If the registrant is a SRC, only two years of Scopes 1 and 2 emissions metrics would be required.

A registrant, however, would not otherwise be required to provide a corresponding GHG emissions metric for a fiscal year preceding its current reporting fiscal year if, for example, it was not required to and has not previously presented such metric for such fiscal year and the historical information necessary to calculate or estimate such metric is not reasonably available to the registrant without unreasonable effort or expense.

Request for Comment

114. Should we require GHG emissions disclosure for the registrant's most recently completed fiscal year and for the appropriate, corresponding historical fiscal years included in the registrant's consolidated financial statements in the filing, to the extent such historical GHG emissions data is reasonably available, as proposed? Should we instead only require GHG emissions metrics for the most recently completed fiscal year presented in the relevant filing? Would requiring historical GHG emissions metrics provide important or material information to investors, such as information allowing them to analyze trends?

2. GHG Emissions Methodology and Related Instructions

The proposed rules would require a registrant to describe the methodology, significant inputs, and significant assumptions used to calculate its GHG emissions metrics. As proposed, the description of the registrant's methodology must include the registrant's organizational boundaries, operational boundaries, calculation approach, and any calculation tools used to calculate the registrant's GHG emissions. Organizational boundaries would be defined to mean the boundaries that determine the operations owned or controlled by a registrant for the purpose of calculating its GHG emissions. Operational boundaries would be defined to mean the boundaries that determine the direct and indirect emissions associated with the business operations owned or controlled by a registrant. This information should help investors understand the scope of a registrant's operations included in its GHG emissions metrics and how those metrics were measured. With this information, investors could more knowledgeably compare a registrant's GHG emissions metrics with the GHG emissions metrics of other registrants and make more informed investment decisions.

a. The Setting and Disclosure of Organizational Boundaries

The proposed rules would require a registrant to disclose its Scope 1 emissions and its Scope 2 emissions separately after calculating them from all sources that are included in the registrant's organizational and operational boundaries. An initial step for many registrants may be to set their organizational boundaries. Those boundaries determine the business operations owned or controlled by a registrant to be included in the calculation of its GHG emissions. Because both Scope 1 and Scope 2 emissions relate to the operations owned or controlled by a registrant, setting a registrant's organizational boundaries is an important part of determining its Scopes 1 and 2 emissions.

Several commenters stated that the GHG Protocol's standards and guidance would provide an appropriate framework for reporting GHG emissions if the Commission required disclosure of GHG emissions. A company following the GHG Protocol would base its organizational boundaries on either an equity share approach or a control approach. Our proposed approach, however, would require a registrant to set the organizational boundaries for its GHG emissions disclosure using the same scope of entities, operations, assets, and other holdings within its business organization as those included in, and based upon the same set of accounting principles applicable to, its consolidated financial statements.

For similar reasons to those noted above regarding the proposed time periods required for GHG emissions disclosure, we propose requiring the scope of consolidation and reporting to be consistent for financial data and GHG emissions data. This would be accomplished by applying existing GAAP. Requiring a consistent approach should help avoid potential investor confusion about the reporting scope used in determining a registrant's GHG emissions and the reporting scope used for the financial statement metrics, which are included in the financial statements. Applying existing GAAP could help limit the compliance burden for registrants as they would be able to use familiar concepts from financial reporting when preparing their required GHG emissions disclosures. Requiring registrants to follow the scope of reporting used in their financial statements should also enhance comparability across registrants when compared with the multiple options available under the GHG Protocol.

Thus, as proposed, the scope of reporting for a registrant's GHG emissions metrics would be consistent with the scope of reporting for the proposed financial statement metrics and other financial data included in its consolidated financial statements in order to provide investors a consistent view of the registrant's business across its financial and GHG emissions disclosures. For example, a registrant that prepares its financial statements pursuant to U.S. GAAP would apply relevant guidance from U.S. GAAP ( e.g., FASB ASC Topic 810 Consolidation and FASB ASC Topic 323 Investments—Equity Method and Joint Ventures ) when determining which entities would be subject to consolidation or which investments qualify for equity method accounting or proportionate consolidation. Therefore, under the proposed rules a registrant would be required to include all of the emissions from an entity that it consolidates. For an equity method investee or an operation that is proportionally consolidated, the registrant would be required to include its share of emissions based on its percentage ownership of such investee or operation. For a registrant that applies the equity method to an investee, the percentage of ownership interest used to record its share of earnings or losses in the investee must be the same for measuring its share of GHG emissions by the equity method investee. The proposed rules would permit a registrant to exclude emissions from investments that are not consolidated, are not proportionately consolidated, or that do not qualify for the equity method of accounting in the registrant's consolidated financial statements.

For example, a registrant might own or control several plants but have only a minority ownership in another plant over which it has no control. For the plants that are owned or controlled by the registrant, all of those plants' direct and indirect emissions should be included in its Scopes 1 and 2 emissions disclosure (regardless of ownership percentage that resulted in consolidation for financial statement purposes). If the registrant's proportional interest in the latter plant is reflected in its consolidated financial statements ( e.g., the investment qualifies for the equity method or a proportionate consolidation approach), when calculating its Scopes 1 and 2 emissions the registrant should include such proportional share (based on ownership interest) of that plant's emissions in the total of each of its Scopes 1 and 2 emissions.

A related provision under the proposed rules would require a registrant to use the same organizational boundaries when calculating its Scope 1 emissions and Scope 2 emissions since both sets of emissions relate to operations that a registrant owns or controls. If required to disclose its Scope 3 emissions, a registrant would also be required to apply the same organizational boundaries used when determining its Scopes 1 and 2 emissions as an initial step in identifying the sources of indirect emissions from activities in its value chain over which it lacks ownership and control and which must be included in the calculation of its Scope 3 emissions. Requiring a registrant to use the same organizational boundaries when calculating its Scopes 1, 2 and 3 emissions should help limit investor confusion over those operations or activities over which it has ownership or control (sources of its Scopes 1 and 2 emissions) and those activities in its value chain over which it lacks ownership or control (sources of its Scope 3 emissions). The proposed provision also would provide that, once a registrant has determined its organizational (and operational) boundaries, it must consistently use those boundaries when calculating its GHG emissions. This proposed provision should help investors track and compare a registrant's GHG emissions over time.

b. The Setting and Disclosure of Operational Boundaries

When describing the methodology, significant inputs, and significant assumptions used to calculate its GHG emissions metrics, a registrant is required to describe its operational boundaries. This would involve identifying emissions sources within its plants, offices, and other operational facilities that fall within its organizational boundaries, and then categorizing the emissions as either direct or indirect emissions. For example, a registrant might have direct emissions from one or more of the following sources that it owns or controls:

• Stationary equipment (from the combustion of fuels in boilers, furnaces, burners, turbines, heaters, and incinerators);
• Transportation (from the combustion of fuels in automobiles, trucks, buses, trains, airplanes, boats, ships, and other vessels);

• Manufacturing processes (from physical or chemical processes, such as CO₂ from the calcination process in cement manufacturing or from catalytic cracking in petrochemical processing, and PFC emissions from aluminum smelting); and

• Fugitive emission sources (equipment leaks from joints, seals, packing, gaskets, coal piles, wastewater treatment, pits, cooling towers, and gas processing facilities, and other unintentional releases).

Most registrants would likely have emission sources from stationary equipment and transportation devices. Registrants in certain industrial sectors, such as cement, aluminum, and other manufacturers, or oil and gas production and refining, are likely also to produce emissions from physical or chemical processes. Some registrants would likely have emissions from all four types of sources, particularly if they have their own power generation or waste treatment facilities.

The proposed rules would require a registrant to include its approach to categorizing its emissions and emissions sources when describing its methodology to determine its operational boundaries. A registrant could use the above non-exclusive list of emissions sources or other categories of emissions sources as long as it describes how it determined the emissions to include as direct emissions, for the purpose of calculating its Scope 1 emissions, and indirect emissions, for the purpose of calculating its Scope 2 emissions. For most registrants, purchased electricity would likely constitute a large percentage of their Scope 2 emissions. Although Scope 2 emissions are generated from a source external to a registrant, the electricity (or steam, heat, or cooling) is consumed by the registrant's operations that it owns or controls.

c. The Selection and Disclosure of a GHG Emissions Calculation Approach, Including Emission Factors

In addition to setting its organizational and operational boundaries, a registrant would need to select a GHG emissions calculation approach. While the direct measurement of GHG emissions from a source by monitoring concentration and flow rate is likely to yield the most accurate calculations, due to the expense of the direct monitoring of emissions, an acceptable and common method for calculating emissions involves the application of published emission factors to the total amount of purchased fuel consumed by a particular source. The proposed rules would define “emission factor” as a multiplication factor allowing actual GHG emissions to be calculated from available activity data or, if no activity data is available, economic data, to derive absolute GHG emissions. Emission factors are ratios that typically relate GHG emissions to a proxy measure of activity at an emissions source. Examples of activity data reflected in emission factors include kilowatt-hours of electricity used, quantity of fuel used, output of a process, hours of operation of equipment, distance travelled, and floor area of a building. If no activity data is available, a registrant may use an emission factor based on economic data. For example, when calculating Scope 3 emissions from purchased goods or services, a registrant could determine the economic value of the goods or services purchased and multiply it by an industry average emission factor (expressed as average emissions per monetary value of goods or services).

The EPA has published a set of emission factors based on the particular type of source ( e.g., stationary combustion, mobile combustion, refrigerants, and electrical grid, among others) and type of fuel consumed ( e.g., natural gas, coal or coke, crude oil, and kerosene, among many others). The GHG Protocol's own set of GHG emission calculation tools are based in part on the EPA's emission factors. Whatever set of emission factors a registrant chooses to use, it must identify the emission factors and its source.

After a registrant has selected a calculation approach ( i.e., direct measurement or application of emissions factors), the registrant would determine what data must be collected and how to conduct the relevant calculations, including whether to use any publicly-available calculation tools. In this regard, we note that there are a number of publicly-available calculation tools a registrant may elect to utilize in determining its GHG emissions. Finally, a registrant would gather and report GHG emissions up to the corporate level.

For example, when determining its Scope 1 emissions for a particular plant, a registrant might add up the amount of natural gas consumed by furnaces and other stationary equipment during its most recently completed fiscal year and then apply the CO₂ emission factor for natural gas to that total amount to derive the amount of GHG emissions expressed in CO₂ e. The registrant would repeat this process for each type of fuel consumed and for each type of source. If a registrant owns a fleet of trucks, it might total the amount of diesel fuel or other type of gasoline consumed for the fiscal year and apply the appropriate CO₂ emission factor for that vehicle and type of fuel. A registrant that uses refrigerants also might apply the appropriate emission factor for the particular type of refrigerant to the total amount of that refrigerant used during the fiscal year. As part of the roll-up process for a registrant with multiple entities and emission sources, once it has determined the amount of CO₂ e for each type of direct emissions source and for each facility within its organizational and operational boundaries, the registrant would then add them together to derive the total amount of Scope 1 emissions for the fiscal year.

A registrant would undergo a similar process when calculating its Scope 2 emissions for its most recently completed fiscal year. There are two common methods for calculating Scope 2 emissions for purchased electricity: The market-based method and the location-based method. Pursuant to the market-based method, a registrant would calculate its Scope 2 emissions based on emission factors and other data provided by the generator of electricity from which the registrant has contracted to purchase the electricity and which are included in the contractual instruments. Pursuant to the location-based method, a registrant would calculate its Scope 2 emissions based on average energy generation emission factors for grids located in defined geographic locations, including local, subnational, or national boundaries. A registrant could use either of these methods, both methods, a combination, or another method as long as it identifies the method used and its source. For example, if using the location-based method, the registrant would apply an appropriate emission factor for the electricity grid in its region to the total amount of electricity purchased from that grid during its fiscal year. The registrant would then calculate the amount of CO₂ e from purchased steam/heat, if any, by applying the appropriate emission factor for that type of energy source to the total amount consumed. The registrant would report the sum of its CO₂ e from purchased electricity and steam/heat as its total Scope 2 emissions for the fiscal year.

As noted above, in all instances a registrant would be required to describe its methodology, including its organizational and operational boundaries, calculation approach (including any emission factors used and the source of the emission factors), and any calculation tools used to calculate the GHG emissions. Requiring a registrant to describe its methodology for determining its GHG emissions should provide investors with important information to assist them in evaluating the registrant's GHG emissions disclosure as part of its overall business and financial disclosure. Such disclosure should enable investors to evaluate the reasonableness and accuracy of the emission disclosures, and should promote consistency and comparability over time. For example, an investor would be able to evaluate both if the registrant's selection of an emission factor is reasonable given the registrant's industry sector and whether changes in reported emissions reflect changes in actual emissions in accordance with its strategy or simply a change in calculation methodology.

Like registrants in other sectors, registrants in the financial sector would be required to disclose their Scope 3 emissions if those emissions are material and to describe the methodology used to calculate those emissions. A financial registrant's Scope 3 emissions disclosures would likely include the emissions from companies that the registrant provides debt or equity financing to (“financed emissions”). While financial registrants may use any appropriate methodology to calculate its Scope 3 emissions, the Partnership for Carbon Accounting Financials' Global GHG Accounting & Reporting Standard (the “PCAF Standard”) provides one methodology that complements the GHG Protocol and assists financial institutions in calculating their financed emissions. The PCAF Standard was developed to work with the calculation of Scope 3 emissions for the “investment” category of downstream emissions and was endorsed by the drafters of the GHG Protocol. The PCAF Standard covers six asset classes: Listed equity and corporate bonds; business loans and unlisted equity; project finance; commercial real estate; mortgages; and motor vehicle loans.

At this time, we are not proposing to require a particular methodology for the financial sector in order to provide a financial sector registrant the flexibility to choose the methodology that best suits its particular portfolio and financing activities. We believe the proposed requirement to disclose the methodology used ( e.g., the PCAF Standard or another standard) would provide sufficient information to an investor.

d. Additional Rules Related to Methodology Disclosure

We are proposing additional rules related to the methodology for calculating GHG emissions. Some of these rules would apply generally to the determination of GHG emissions while some would apply specifically to the calculation of Scope 3 emissions. For example, one proposed rule would provide that a registrant may use reasonable estimates when disclosing its GHG emissions as long as it also describes the assumptions underlying, and its reasons for using, the estimates. While we encourage registrants to provide as accurate a measurement of its GHG emissions as is reasonably possible, we recognize that, in many instances, direct measurement of GHG emissions at the source, which would provide the most accurate measurement, may not be possible.

Several commenters indicated that a registrant may find it difficult to complete its GHG emissions calculations for its most recently completed fiscal year in time to meet its disclosure obligations for that year's Exchange Act annual report. The proposed rules would permit a registrant to use a reasonable estimate of its GHG emissions for its fourth fiscal quarter if no actual reported data is reasonably available, together with actual, determined GHG emissions data for its first three fiscal quarters when disclosing its GHG emissions for its most recently completed fiscal year, as long as the registrant promptly discloses in a subsequent filing any material difference between the estimate used and the actual, determined GHG emissions data for the fourth fiscal quarter. We believe that this proposed provision would help address the concerns of commenters about the timely completion of both the work required to disclose a registrant's GHG emissions as of its fiscal year-end and to meet its other Exchange Act annual reporting obligations.

Another proposed provision would require a registrant to disclose, to the extent material and as applicable, any use of third-party data when calculating its GHG emissions, regardless of the particular scope of emissions. While this proposed provision would be most relevant to the disclosure of Scope 3 emissions, where the use of third-party data is common, it would apply in other instances when third-party data is material to the GHG emissions determination, such as when determining Scope 2 emissions using contractual, supplier-provided emission factors for purchased electricity. When disclosing the use of third-party data, a registrant would be required to identify the source of the data and the process the registrant undertook to obtain and assess such data. This information would help investors better understand the basis for, and assess the reasonableness of, the GHG emissions determinations and, accordingly, evaluate the GHG disclosures as part of a registrant's business and financial information.

One proposed provision would require a registrant to disclose any material change to the methodology or assumptions underlying its GHG emissions disclosure from the previous fiscal year. For example, if a registrant uses a different set of emission factors, or develops a more direct method of measuring GHG emissions, which results in a material change to the GHG emissions produced from the previous year under (or assuming) the same organizational and operational boundaries, it would be required to report that change. This should help investors more knowledgeably compare the emissions data from year to year and better understand the nature and significance of a material change in emissions ( i.e., was the change primarily due to an implementation of strategy or a change in methodology).

Another proposed provision would require a registrant to disclose, to the extent material and as applicable, any gaps in the data required to calculate its GHG emissions. This proposed provision would be particularly relevant to a registrant's Scope 3 emissions. While a registrant's GHG emissions disclosure should provide investors with a reasonably complete understanding of the registrant's GHG emissions in each scope of emissions, as previously noted, we recognize that a registrant may encounter data gaps, particularly when calculating its Scope 3 emissions. The proposed provision would require the registrant to disclose the data gaps and discuss whether it used proxy data or another method to address such gaps. A registrant would also be required to discuss how its accounting for any data gaps has affected the accuracy or completeness of its GHG emissions disclosure. This information should help investors understand certain underlying uncertainties and limitations, and evaluate the corresponding reliability, of a registrant's GHG emissions disclosure, particularly for its Scope 3 emissions, as part of their assessment of the registrant's business and financial information.

One proposed provision would provide that, when determining whether its Scope 3 emissions are material, and when disclosing those emissions, in addition to emissions from activities in its value chain, a registrant must include GHG emissions from outsourced activities that it previously conducted as part of its own operations, as reflected in the financial statements for the periods covered in the filing. This proposed approach, which is consistent with the GHG Protocol, would help ensure that investors receive a complete picture of a registrant's carbon footprint by precluding the registrant from excluding emissions from activities that are typically conducted as part of operations over which it has ownership or control but that are outsourced in order to reduce its Scopes 1 or 2 emissions.

Another proposed provision would provide that, if a registrant is required to disclose Scope 3 emissions, and if there was any significant overlap in the categories of activities producing the Scope 3 emissions, the registrant must describe the overlap, how it accounted for the overlap, and its disclosed total Scope 3 emissions. For example, a mining registrant may mine and process iron ore for conversion into steel products. Because the processing of iron ore and steelmaking both require the use of coal, GHG emissions would arise both from the downstream activities involving the processing of sold products and the use of sold products ( i.e., the use of iron ore in the production of steel). If the registrant has allocated GHG emissions to both categories ( i.e., processing of sold products and use of sold products), it would be required to describe the overlap in emissions between the two categories of downstream activities, how it accounted for the overlap, and the effect on its disclosed total Scope 3 emissions. For example, if the total reported Scope 3 emissions involved some double-counting because of the overlap, a registrant would be required to report this effect. This information could help investors better understand the true extent of a registrant's disclosed Scope 3 emissions and, thus, the climate-related risks faced by the registrant.

Finally, a proposed provision would provide that a registrant may present its estimated Scope 3 emissions in terms of a range as long as it discloses its reasons for using the range and the underlying assumptions. This proposed provision reflects our understanding that, because a registrant may encounter more difficulties obtaining all of the data required for determining its Scope 3 emissions compared to determining its Scopes 1 and 2 emissions, presenting its Scope 3 emissions in terms of a range may be a reasonable means of estimating these emissions when faced with such gaps in the data.

Request for Comment

115. Should we require a registrant to disclose the methodology, significant inputs, and significant assumptions used to calculate its GHG emissions metrics, as proposed? Should we require a registrant to use a particular methodology for determining its GHG emission metrics? If so, should the required methodology be pursuant to the GHG Protocol's Corporate Accounting and Reporting Standard and related standards and guidance? Is there another methodology that we should require a registrant to follow when determining its GHG emissions? Should we base our climate disclosure rules on certain concepts developed by the GHG Protocol without requiring a registrant to follow the GHG Protocol in all respects, as proposed? Would this provide flexibility for registrants to choose certain methods and approaches in connection with GHG emissions determination that meet the particular circumstances of their industry or business or that emerge along with developments in GHG emissions methodology as long as they are transparent about the methods and underlying assumptions used? Are there adjustments that should be made to the proposed methodology disclosure requirements that would provide flexibility for registrants while providing sufficient comparability for investors?

116. Should we require a registrant to disclose the organizational boundaries used to calculate its GHG emissions, as proposed? Should we require a registrant to determine its organizational boundaries using the same scope of entities, operations, assets, and other holdings within its business organization as that used in its consolidated financial statements, as proposed? Would prescribing this method of determining organizational boundaries avoid potential investor confusion about the reporting scope used in determining a registrant's GHG emissions and the reporting scope used for the financial statement metrics, which are included in the financial statements? Would prescribing this method of determining organizational boundaries result in more robust guidance for registrants and enhanced comparability for investors? If, as proposed, the organizational boundaries must be consistent with the scope of the registrant's consolidated financial statements, would requiring separate disclosure of the organizational boundaries be redundant or otherwise unnecessary?

117. Except for calculating Scope 3 emissions, the proposed rules would not require a registrant to disclose the emissions from investments that are not consolidated, proportionately consolidated, or that do not qualify for the equity method of accounting. Should we require such disclosures for Scopes 1 and 2 emissions, and if so, how?

118. Could situations arise where it is impracticable for a registrant to align the scope of its organizational boundaries for GHG emission data with the scope of the consolidation for the rest of its financial statements? If so, should we allow a registrant to take a different approach to determining the organizational boundaries of its GHG emissions and provide related disclosure, including an estimation of the resulting difference in emissions disclosure (in addition to disclosure about methodology and other matters that would be required by the proposed GHG emissions disclosure rules)?

119. Alternatively, should we require registrants to use the organizational boundary approaches recommended by the GHG Protocol ( e.g., financial control, operational control, or equity share)? Do those approaches provide a clear enough framework for complying with the proposed rules? Would such an approach cause confusion when analyzing information in the context of the consolidated financial statements or diminish comparability? If we permit a registrant to choose one of the three organizational boundary approaches recommended by the GHG Protocol, should we require a reconciliation with the scope of the rest of the registrant's financial reporting to make the disclosure more comparable?

120. Should we require a registrant to disclose its operational boundaries, as proposed? Should we require a registrant to discuss its approach towards the categorization of emissions ( e.g., as direct or indirect emissions) and emissions sources ( e.g., stationary or mobile) when describing its operational boundaries, as proposed?

121. The proposed operational boundaries disclosure is based largely on concepts developed by the GHG Protocol. Would requiring a registrant to determine its organizational boundaries pursuant to the GAAP applicable to the financial statement metrics included in the financial statements but its operational boundaries largely pursuant to concepts developed by the GHG Protocol cause confusion? Should we require a registrant to apply the GAAP applicable to its financial statements when determining whether it “controls” a particular source pursuant to the definition of Scope 1 emissions, or particular operations pursuant to the definition of Scope 2 emissions, as proposed? If not, how should “control” be determined and would applying a definition of control that differs from applicable GAAP result in confusion for investors?

122. Should we require a registrant to use the same organizational boundaries when calculating its Scopes 1 and 2 emissions, as proposed? Are there any circumstances when a registrant's organizational boundaries for determining its Scope 2 emissions should differ from those required for determining its Scope 1 emissions? Should we also require a registrant to apply the same organizational boundaries used when determining its Scopes 1 and 2 emissions as an initial step in identifying the sources of indirect emissions from activities in its value chain over which it lacks ownership and control and which must be included in the calculation of its Scope 3 emissions, as proposed? Are there any circumstances where using a different organizational boundary for purposes of Scope 3 emissions disclosure would be appropriate?

123. Should we require a registrant to be consistent in its use of its organizational and operational boundaries once it has set those boundaries, as proposed? Would the proposed requirement help investors to track and compare the registrant's GHG emissions over time?

124. Should we require a registrant to disclose the methodology for calculating the GHG emissions, including any emission factors used and the source of the emission factors, as proposed? Should we require a registrant to use a particular set of emission factors, such as those provided by the EPA or the GHG Protocol?

125. Should we permit a registrant to use reasonable estimates when disclosing its GHG emissions as long as it also describes the assumptions underlying, and its reasons for using, the estimates, as proposed? Should we permit the use of estimates for only certain GHG emissions, such as Scope 3 emissions? Should we permit a registrant to use a reasonable estimate of its GHG emissions for its fourth fiscal quarter if no actual reported data is reasonably available, together with actual, determined GHG emissions data for its first three fiscal quarters when disclosing its GHG emissions for its most recently completed fiscal year, as long as the registrant promptly discloses in a subsequent filing any material difference between the estimate used and the actual, determined GHG emissions data for the fourth fiscal quarter, as proposed? If so, should we require a registrant to report any such material difference in its next Form 10-Q if domestic, or in a Form 6-K, if a foreign private issuer? Should we permit a domestic registrant to report any such material difference in a Form 8-K if such form is filed (rather than furnished) with the Commission? Should any such reasonable estimate be subject to conditions to help ensure accuracy and comparability? If so, what conditions should apply?

126. Should we require a registrant to disclose, to the extent material, any use of third-party data when calculating its GHG emissions, regardless of the particular scope of emissions, as proposed? Should we require the disclosure of the use of third-party data only for certain GHG emissions, such as Scope 3 emissions? Should we require the disclosure of the use of third-party data for Scope 3 emissions, regardless of its materiality to the determination of those emissions? If a registrant discloses the use of third-party data, should it also be required to identify the source of such data and the process the registrant undertook to obtain and assess the data, as proposed?

127. Should we require a registrant to disclose any material change to the methodology or assumptions underlying its GHG emissions disclosure from the previous year, as proposed? If so, should we require a registrant to restate its GHG emissions data for the previous year, or for the number of years for which GHG emissions data has been provided in the filing, using the changed methodology or assumptions? If a registrant's organizational or operational boundaries, in addition to methodology or assumptions, change, to what extent should we require such disclosures of the material change, restatements or reconciliations? In these cases, should we require a registrant to apply certain accounting standards or principles, such as FASB ASC Topic 250, as guidance regarding when retrospective disclosure should be required?

128. Should we require a registrant to disclose, to the extent material, any gaps in the data required to calculate its GHG emissions, as proposed? Should we require the disclosure of data gaps only for certain GHG emissions, such as Scope 3 emissions? If a registrant discloses any data gaps encountered when calculating its Scope 3 emissions or other type of GHG emissions, should it be required to discuss whether it used proxy data or another method to address such gaps, and how its management of any data gaps has affected the accuracy or completeness of its GHG emissions disclosure, as proposed? Are there other disclosure requirements or conditions we should adopt to help investors obtain a reasonably complete understanding of a registrant's exposure to the GHG emissions sourced by each scope of emissions?

129. When determining the materiality of its Scope 3 emissions, or when disclosing those emissions, should a registrant be required to include GHG emissions from outsourced activities that it previously conducted as part of its own operations, as reflected in the financial statements for the periods covered in the filing, in addition to emissions from activities in its value chain, as proposed? Would this requirement help ensure that investors receive a complete picture of a registrant's carbon footprint by precluding the registrant from excluding emissions from activities that are typically conducted as part of operations over which it has ownership or control but that are outsourced in order to reduce its Scopes 1 or 2 emissions? Should a requirement to include outsourced activities be subject to certain conditions or exceptions and, if so, what conditions or exceptions?

130. Should we require a registrant that must disclose its Scope 3 emissions to discuss whether there was any significant overlap in the categories of activities that produced the Scope 3 emissions? If so, should a registrant be required to describe any overlap, how it accounted for the overlap, and its effect on the total Scope 3 emissions, as proposed? Would this requirement help investors assess the accuracy and reliability of the Scope 3 emissions disclosure?

131. Should we permit a registrant to present its Scope 3 emissions in terms of a range as long as it discloses its reasons for using the range and the underlying assumptions, as proposed? Should we place limits or other parameters regarding the use of a range and, if so, what should those limits or parameters be? For example, should we require a range to be no larger than a certain size? What other conditions or guidance should we provide to help ensure that a range, if used, is not overly broad and is otherwise reasonable?

132. Should we require a registrant to follow a certain set of published standards for calculating Scope 3 emissions that have been developed for a registrant's industry or that are otherwise broadly accepted? For example, should we require a registrant in the financial industry to follow PCAF's Global GHG Accounting & Reporting Standard for the Financial Industry when calculating its financed emissions within the “Investments” category of Scope 3 emissions? Are there other industry-specific standards that we should require for Scope 3 emissions disclosure? Should we require a registrant to follow the GHG Protocol's Corporate Value Chain (Scope 3) Accounting and Reporting Standard if an industry-specific standard is not available for Scope 3 emissions disclosure? If we should require the use of a third-party standard for Scope 3 emissions reporting, or any other scope of emissions, how should we implement this requirement?

3. The Scope 3 Emissions Disclosure Safe Harbor and Other Accommodations

We recognize that the calculation and disclosure of Scope 3 emissions may pose difficulties compared to Scopes 1 and 2 emissions, which has caused concern for some commenters. It may be difficult to obtain activity data from suppliers and other third parties in a registrant's value chain, or to verify the accuracy of that information. It may also be necessary to rely heavily on estimates and assumptions to generate Scope 3 emissions data. For example, registrants may need to rely on assumptions about how customers will use their products in order to calculate Scope 3 emissions from the use of sold products.

Depending on the size and complexity of a company and its value chain, the task of calculating Scope 3 emissions could be challenging. We expect that some of these challenges may recede over time. For example, as more companies make their Scope 1 and 2 emissions data publicly available, these data can serve as the input for other companies' Scope 3 calculations. In addition, large companies that are voluntarily disclosing Scope 3 emissions information currently are also working with suppliers to increase access to emissions data and improve its reliability, which could have positive spillover effects for other companies that use the same suppliers. Furthermore, within certain industries, there is work underway to improve methodologies and share best practices to make Scope 3 calculations less burdensome and more reliable. Notwithstanding these anticipated developments, calculating and disclosing Scope 3 emissions could represent a challenge for certain registrants, in particular those that do not currently report such information on a voluntary basis.

To balance concerns about reporting Scope 3 emissions with the need for decision-useful emissions disclosure, we are proposing the following accommodations for Scope 3 emissions disclosure:

• A safe harbor for Scope 3 emissions disclosure from certain forms of liability under the Federal securities laws;

• An exemption for smaller reporting companies (“SRCs”) from the Scope 3 emissions disclosure provision; and

• A delayed compliance date for Scope 3 emissions disclosure.

We are proposing a safe harbor for Scope 3 emissions disclosure to alleviate concerns that registrants may have about liability for information that would be derived largely from third parties in a registrant's value chain. Many commenters recommended that the Commission adopt a safe harbor for climate-related disclosures. These commenters asserted that a safe harbor would encourage registrants to provide meaningful, quantitative metrics and analysis. Other commenters focused their recommendation for a safe harbor on certain types of climate-related disclosures, such as those pertaining to scenario analysis, third-party derived data (such as Scope 3 emissions), or forward-looking statements generally. With respect to Scope 3 emissions specifically, commenters recommended that the Commission provide a safe harbor due to the reliance on estimates and data needed for Scope 3 emissions reporting that are outside of the registrant's control.

While we are not proposing a broad safe harbor for all climate-related disclosures, many of which are similar to other business and financial information required by Commission rules, we are proposing a targeted safe harbor for Scope 3 emissions data in light of the unique challenges associated with this information. The proposed safe harbor would provide that disclosure of Scope 3 emissions by or on behalf of the registrant would be deemed not to be 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 would extend to any statement regarding Scope 3 emissions that is disclosed pursuant to proposed subpart 1500 of Regulation S-K and made in a document filed with the Commission. For purposes of the proposed safe harbor, the term “fraudulent statement” would be defined to mean a statement that is an untrue statement of material fact, a statement false or misleading with respect to any material fact, an omission to state a material fact necessary to make a statement not misleading, or that constitutes the employment of a manipulative, deceptive, or fraudulent device, contrivance, scheme, transaction, act, practice, course of business, or an artifice to defraud as those terms are used in the Securities Act or the Exchange Act or the rules or regulations promulgated thereunder. The proposed safe harbor is intended to mitigate potential liability concerns associated with providing emissions disclosure based on third-party information by making clear that registrants would only be liable for such disclosure if it was made without a reasonable basis or was disclosed other than in good faith. It also may encourage more robust Scope 3 emissions information, to the extent registrants feel reassured about relying on actual third-party data as opposed to national or industry averages for their emissions estimates.

Several commenters expressed concern that the Commission would impose a “one size fits all” approach, which could disproportionately impact smaller registrants, when adopting climate-related disclosure rules. Several commenters recommended that the Commission phase-in or scale down the climate-related disclosure requirements for smaller registrants.

Although we are not proposing to exempt SRCs from the full scope of the proposed climate-related disclosure rules, we are proposing to exempt SRCs from the proposed Scope 3 emissions disclosure requirement. We believe that exempting SRCs from the proposed Scope 3 emissions disclosure requirement would be appropriate in light of the proportionately higher costs they could incur, compared to non-SRCs, to engage in the data gathering, verification, and other actions associated with Scope 3 emissions reporting, many of which may have fixed cost components.

To further ease the burden of complying with the proposed Scope 3 disclosure requirement, we are also proposing a delayed compliance date for this requirement. As explained in greater detail below, all registrants, regardless of their size, would have an additional year to comply initially with the Scope 3 disclosure requirement beyond the compliance date for the other proposed rules. Moreover, because a registrant's Scope 3 emissions consist of the Scopes 1 and 2 emissions of its suppliers, distributors, and other third parties in the registrant's value chain, to the extent those parties become subject to the proposed rules, the increased availability of Scopes 1 and 2 emissions data following the rules' effectiveness should help ease the burden of complying with the Scope 3 emissions disclosure requirement.

Finally, we note that Securities Act Rule 409 and Exchange Act Rule 12b-21, which provide accommodations for information that is unknown and not reasonably available, would be available for the proposed Scope 3 emissions disclosures. These rules allow for the conditional omission of required information when such information is unknown and not reasonably available to the registrant, either because obtaining the information would involve unreasonable effort or expense, or because the information rests peculiarly within the knowledge of another person not affiliated with the registrant.

Request for Comment

133. Should we provide a safe harbor for Scope 3 emissions disclosure, as proposed? Is the scope of the proposed safe harbor clear and appropriate? For example, should the safe harbor apply to any registrant that provides Scope 3 disclosure pursuant to the proposed rules, as proposed? Should we limit the use of the safe harbor to certain classes of registrants or to registrants meeting certain conditions and, if so, which classes or conditions? For example, should we require the use of a particular methodology for calculating and reporting Scope 3 emissions, such as the PCAF Standard if the registrant is a financial institution, or the GHG Protocol Scope 3 Accounting and Reporting Standard for other types of registrants? Should we clarify the scope of persons covered by the language “by or on behalf of a registrant” by including language about outside reviewers retained by the registrant or others? Should we define a “fraudulent statement,” as proposed? Is the level of diligence required for the proposed safe harbor ( i.e., that the statement was made or reaffirmed with a reasonable basis and disclosed in good faith) the appropriate standard? Should the safe harbor apply to other climate-related disclosures, such as Scopes 1 and 2 emissions disclosures, any targets and goals disclosures in response to proposed Item 1505 (discussed below), or the financial statement metrics disclosures required pursuant to Proposed Article 14 of Regulation S-X? Should the safe harbor apply indefinitely, or should we include a sunset provision that would eliminate the safe harbor some number of years, ( e.g., five years) after the effective date or applicable compliance date of the rules? Should the safe harbor sunset after certain conditions are satisfied? If so, what types of conditions should we consider? What other approaches should we consider?

134. Should we provide an exemption from Scope 3 emissions disclosure for SRCs, as proposed? Should the exemption not apply to a SRC that has set a target or goal or otherwise made a commitment to reduce its Scope 3 emissions? Are there other classes of registrants we should exempt from the Scope 3 emissions disclosure requirement? For example, should we exempt EGCs, foreign private issuers, or a registrant that is filing or has filed a registration statement for its initial public offering during its most recently completed fiscal year from the Scope 3 disclosure requirement? Instead of an exemption, should we provide a longer phase in for the Scope 3 disclosure requirements for SRCs than for other registrants?

H. Attestation of Scope 1 and Scope 2 Emissions Disclosure

1. Overview

The proposed rules would require a registrant, including a foreign private issuer, that is an accelerated filer or large accelerated filer to include in the relevant filing an attestation report covering the disclosure of its Scope 1 and Scope 2 emissions and to provide certain related disclosures about the service provider. As proposed, the attestation engagement must, at a minimum, be at the following assurance level for the indicated fiscal year for the required GHG emissions disclosure:

To provide additional clarity, the following table illustrates the application of the transition periods assuming that the proposed rules will be adopted with an effective date in December 2022 and that the accelerated filer or large accelerated filer has a December 31st fiscal year-end:

During the transition period when limited assurance is required, the proposed rules would permit an accelerated filer or a large accelerated filer, at its option, to obtain reasonable assurance of its Scope 1 and 2 emissions disclosure. For example, an accelerated filer or a large accelerated filer may choose to obtain reasonable assurance such that its GHG emissions disclosure receives the same level of assurance as its financial statements.

At its option, an accelerated filer or a large accelerated filer would be able to obtain any level of assurance over its climate-related disclosures that are not required to be assured pursuant to proposed Item 1505(a). For example, an accelerated filer or a large accelerated filer could voluntarily include an attestation report at the limited assurance level for its GHG intensity metrics or its Scope 3 emissions disclosure. To avoid potential confusion, however, the voluntary assurance obtained by such filer would be required to follow the requirements of proposed Item 1505(b)-(d), including using the same attestation standard as the required assurance over Scope 1 and Scope 2. For filings made by accelerated filers and large accelerated filers after the compliance date for the GHG emissions disclosure requirements but before proposed Item 1505(a) requires limited assurance, the filer would only be required to provide the disclosure called for by proposed Item 1505(e). As discussed below in Section II.H.5, a registrant that is not an accelerated filer or a large accelerated filer that obtains voluntary assurance would be required to comply only with proposed Item 1505(e).

Many commenters recommended that we require climate-related disclosures to be subject to some level of assurance to enhance the reliability of the disclosures. Commenters noted that companies are increasingly seeking some type of third-party assurance or verification over ESG and climate-related disclosures. For example, according to one commenter, 80 percent of S&P 100 companies currently subject certain items of their ESG information, including climate-related disclosures such as greenhouse gas emissions, to some type of third-party assurance or verification. Several commenters recommended that we require climate-related disclosures to be subject to limited assurance, which provides a lower level of assurance than reasonable assurance, but is less costly, and is the most common form of assurance provided for ESG, including climate-related disclosures, in the current voluntary reporting landscape.

One commenter recommended that, at a minimum, we require a registrant to obtain a limited assurance report for its Scopes 1 and 2 emissions disclosure while encouraging optional verification for other ESG metrics. Another commenter indicated that a limited assurance requirement for climate-related disclosures would be similar to the EU's Corporate Sustainability Reporting Directive proposal that, if adopted, would initially require companies in the European Union to obtain limited assurance on reported sustainability information with an option to move towards reasonable assurance in the future. One commenter stated the view that, while the professional capacity of audit firms might, at this point, be insufficient to provide reasonable assurance of ESG data, it supported a mandatory limited assurance requirement for climate risk reporting. Other commenters recommended that we require climate-related disclosures to be audited at the reasonable assurance level.

Some commenters, however, opposed any third-party assurance requirement for climate-related disclosures because of the significant cost that these commenters asserted it could impose on public companies, and because, in their view, application of assurance standards to data that is different from traditional financial reporting disclosures, such as GHG emissions, would be a relatively new and evolving field. Some of these commenters indicated that, as a first step, registrants should develop their internal controls and disclosure controls and procedures (“DCP”) to include climate-related disclosures, and defer mandated third-party assurance requirements to a later time.

We recognize that requiring GHG emissions disclosure in Commission filings should enhance the consistency, comparability, and reliability of such disclosures due to the application of DCP and the proposed inclusion of certain prescriptive elements that may help improve standardization of GHG emissions calculations. Nevertheless, the evolving and unique nature of GHG emissions reporting involves and, in some cases, warrants varying methodologies, differing assumptions, and a substantial amount of estimation. Certain aspects of GHG emissions disclosure also involve reliance on third-party data. As such, requiring a third party's attestation over these disclosures would provide investors with an additional degree of reliability regarding not only the figures that are disclosed, but also the key assumptions, methodologies, and data sources the registrant used to arrive at those figures. In other contexts, such as mineral resources and oil and gas reserves, the Commission has recognized the value that third parties with specialized expertise in audit and engineering can bring to company disclosures of physical resources or risks.

Our rules typically do not require registrants to obtain assurance over disclosure provided outside of the financial statements, including quantitative disclosure. We believe, however, that there are important distinctions between existing quantitative disclosure required to be provided outside of the financial statements and the proposed GHG emissions disclosure. In contrast to GHG emissions disclosure, quantitative disclosure outside of the financial statements typically is derived, at least in part, from the same books and records that are used to generate a registrant's audited financial statements and accompanying notes and that are subject to ICFR. Accordingly, such quantitative disclosure has been subject to audit procedures as part of the audit of the financial statements in the same filing. Further, the auditor's read and consider obligation requires an evaluation of this quantitative information based on the information obtained through the audit of the financial statements. Unlike other quantitative information that is provided outside of the financial statements, GHG emissions disclosure would generally not be developed from information that is included in the registrant's books and records and, therefore, would not be subjected to audit procedures. In addition, although not an assurance engagement, we have adopted rules requiring an expert to review and provide conclusions on other specialized, quantitative data that is provided outside of the financial statements. Accordingly, to enhance its reliability, we believe it is appropriate to require that GHG emissions disclosure be subject to third-party attestation.

For similar reasons, we also considered proposing to require that management assess and disclose the effectiveness of controls over GHG emissions disclosure (apart from the existing requirements with respect to the assessment and effectiveness of DCP). More specifically, in addition to the requirement to assess such controls, we considered whether to require management to include a statement in their annual report regarding their responsibility for the design and evaluation of controls over GHG emissions disclosures, as well as to disclose their conclusion regarding the effectiveness of such controls. We also considered proposing to require a GHG emissions attestation provider's attestation of the effectiveness of controls over GHG emissions disclosure in addition to the proposed attestation over the Scopes 1 and 2 GHG emissions disclosure. Although both such requirements could further enhance the reliability of the related Scopes 1 and 2 GHG emissions disclosure, we are not currently proposing them at this time. We are, however, continuing to consider these alternatives, including: (i) the need to develop guidance for management on conducting such an assessment and (ii) whether appropriate attestation standards exist. Accordingly, we request comment on these and related issues below.

The Commission has long recognized the important role played by an independent audit in contributing to the reliability of financial reporting. Relatedly, studies suggest that investors have greater confidence in information that has been assured, particularly when it is assured at the reasonable assurance level. Although a limited assurance engagement provides a lower level of assurance than a reasonable assurance engagement, studies of ESG-related assurance, which is typically provided at a limited assurance level, have found benefits such as credibility enhancement, lower cost of equity capital, and lower analyst forecast errors and dispersion. Therefore, proposing to require Scope 1 and Scope 2 emissions disclosure by accelerated filers and large accelerated filers be subject to limited assurance initially, with an eventual scaling up to reasonable assurance, could potentially improve both the actual reliability of disclosure and investor confidence in such disclosure.

Increasing investor demand for consistent, comparable, and reliable climate-related financial information appears to have led a growing number of companies to voluntarily obtain third-party assurance over their climate-related disclosures both within the U.S. and globally. For example, according to one study, 53% of the S&P 500 companies had some form of assurance or verification over climate-related metrics, along with other metrics. Another survey of sustainability reporting trends from 5,200 companies across 52 countries (including the United States) stated that, of the top 100 companies (by revenue), 80% have reporting on ESG (including climate), with up to 61% of those companies also obtaining assurance. The prevalence of major companies obtaining assurance in connection with their voluntary sustainability reports suggests that both the companies and their investors are focused on the reliability of such disclosures.

Although many registrants have voluntarily obtained some level of assurance for their climate-related disclosures, current voluntary ESG assurance practices have been varied with respect to the levels of assurance provided ( e.g., limited versus reasonable), the assurance standards used, the types of service providers, and the scope of disclosures covered by the assurance. This fragmentation has diminished the comparability of the assurance provided and may require investors to become familiar with many different assurance standards and the varying benefits of different levels of assurance. The consequences of such fragmentation has also been highlighted by certain international organizations, including IOSCO, which stated that the “perceived lack of clarity and consistency around the purpose and scope of [voluntary] assurance . . . potentially lead[s] to market confusion, including misleading investors and exacerbating the expectations gap.” For example, investors may see that a service provider has produced an assurance report for a registrant's GHG emissions disclosure and have an expectation that such assurance will enhance the reliability of that disclosure without always understanding the service provider's qualifications for producing the report, what level of assurance ( e.g., limited versus reasonable) is being provided, what scope of assurance ( e.g., the disclosures covered by the assurance) is being provided with respect to the registrant's GHG emissions disclosure, and the methodologies and procedures that the attestation provider used. While some experienced assurance providers may be proficient in applying attestation standards to GHG emissions disclosures, other assurance providers may lack GHG emissions expertise. Similarly, some service providers providing assurance may have expertise in GHG emissions but have minimal assurance experience. Moreover, some service providers may use standards that are developed by accreditation bodies with notice and public comment and other robust due process procedures for standard setting, while other service providers may use privately developed “verification” standards.

To improve accuracy, comparability, and consistency with respect to the proposed GHG emissions disclosure, we are proposing to require a minimum level of attestation services for accelerated filers and large accelerated filers including: (1) Limited assurance for Scopes 1 and 2 emissions disclosure that scales up to reasonable assurance after a specified transition period; (2) minimum qualifications and independence requirements for the attestation service provider; and (3) minimum requirements for the accompanying attestation report. These proposed requirements would be minimum standards that the GHG emissions attestation provider engaged by accelerated filers and large accelerated filers must meet, but, as mentioned above, would not prevent a registrant from obtaining a heightened level of assurance over its climate-related disclosures (prior to the transition to reasonable assurance) or to obtain assurance over climate-related disclosures other than Scope 1 and Scope 2 emissions.

By specifying minimum standards for the attestation provided with respect to GHG emissions disclosure by accelerated filers and large accelerated filers, the proposed rules should improve accuracy and consistency in the reporting of this information, while also providing investors with an enhanced level of reliability against which to evaluate the disclosure. In addition to the proposed minimum standards for attestation services, the proposed additional disclosure requirements for registrants, described below, should further assist investors in understanding the qualifications and suitability of the GHG emissions attestation provider selected by the registrant, particularly in light of the broad spectrum of attestation providers that would be permitted to provide attestation services under the proposed rules.

Although we are proposing certain minimum standards for attestation services, this proposal does not aim to create or adopt a specific attestation standard for assuring GHG emissions, just as this proposal does not define a single methodology for calculating GHG emissions. This is because both the reporting and attestation landscapes are currently evolving and it would be premature to adopt one approach and potentially curtail future innovations in these two areas. The evolving nature of GHG emissions calculations and attestation standards could suggest that it may also be premature to require assurance. We are soliciting comment on the feasibility of our proposal and will consider any public feedback received, but we have preliminarily determined that the phased-in approach that we are proposing, along with an extended period for disclosure compliance for accelerated filers, balances the benefits of third-party review with the costs of seeking assurance in this evolving space.

The proposed minimum standards for attestation services and the proposed additional disclosure requirements would not eliminate fragmentation with respect to assurance or obviate the need for investors to assess and compare multiple attestation standards. Nevertheless, we believe some flexibility in our approach is warranted at this time given the unique and evolving nature of third-party assurance for climate-related disclosures. We believe the proposed minimum standards and additional disclosure requirements would enable investors to better understand the assurance that has been provided.

We are cognizant of the fact that the calculation and disclosure of GHG emissions would be new for many registrants, as would be the application of assurance standards to GHG emissions disclosure. For these reasons and the reasons discussed in greater detail below, we are proposing to require assurance (1) only for accelerated filers and large accelerated filers, (2) only with respect to Scope 1 and Scope 2 emissions, and (3) with an initial transition period for limited assurance and a subsequent transition period for reasonable assurance.

Although we have considered the challenges that mandatory assurance of GHG emissions disclosure could present, accelerated filers and large accelerated filers should have the necessary resources to devote to complying with such requirements over the proposed implementation timetable. For the many large accelerated filers that are already voluntarily obtaining some form of assurance over their GHG emissions, any cost increases associated with complying with the proposed rules would be mitigated. Furthermore, larger issuers generally bear proportionately lower compliance costs than smaller issuers due to the fixed cost components of such compliance.

The proposed transition periods would also provide existing accelerated filers and large accelerated filers one fiscal year to transition to limited assurance and two additional fiscal years to transition to reasonable assurance. For existing accelerated filers, this transition period would be in addition to the one additional year they will have to comply with the Scopes 1 and 2 emission disclosure requirements (compared to large accelerated filers). As such, these filers would have significant time to develop processes to support their GHG emissions disclosure requirements and the relevant DCP, as well as to adjust to the incremental costs and efforts associated with escalating levels of assurance. During this transition period, GHG emissions attestation providers would also have time to prepare themselves for providing such services in connection with Commission filings.

In addition to the challenges posed by the newness of calculating and disclosing GHG emissions, we believe that only requiring assurance over Scope 1 and Scope 2 emissions would be appropriate because the emissions result directly or indirectly from facilities owned or activities controlled by a registrant, which makes it relatively more accessible and easier to subject to the registrant's DCP compared to Scope 3 data. Further, as discussed earlier, many registrants already voluntarily seek assurance over their GHG emissions disclosure (predominately Scope 1 and Scope 2 disclosures), which further supports the feasibility and readiness of Scope 1 and Scope 2 emissions disclosure for mandatory assurance. In contrast, we are not proposing to require assurance of Scope 3 emissions disclosure at this time because the preparation of such disclosure presents unique challenges. Depending on the size and complexity of a company and its value chain, the task of calculating Scope 3 emissions could be relatively more burdensome and expensive than calculating Scope 1 and Scope 2 emissions. In particular, it may be difficult to obtain activity data from suppliers, customers, and other third parties in a registrant's value chain, or to verify the accuracy of that information compared to disclosures of Scope 1 and Scope 2 emissions data, which are more readily available to a registrant.

We are proposing to require accelerated filers and large accelerated filers to obtain limited assurance, with an eventual scaling up to reasonable assurance. The objective of a limited assurance engagement is for the service provider to express a conclusion about whether it is aware of any material modifications that should be made to the subject matter ( e.g., the Scopes 1 and 2 emissions disclosure) in order for it to be fairly stated or in accordance with the relevant criteria ( e.g., the methodology and other disclosure requirements specified in proposed 17 CFR 229.1504 (Item 1504 of Regulation S-K). In such engagements, the conclusion is expressed in the form of negative assurance regarding whether any material misstatements have been identified. In contrast, the objective of a reasonable assurance engagement, which is the same level of assurance provided in an audit of a registrant's consolidated financial statements, is to express an opinion on whether the subject matter is in accordance with the relevant criteria, in all material respects. A reasonable assurance opinion provides positive assurance that the subject matter is free from material misstatement.

Reasonable assurance is feasible whenever limited assurance can be provided on a subject, and as noted above the voluntary attestation obtained by some registrants has been at the reasonable assurance level. We understand, however, that a limited assurance engagement is less extensive and is currently the level of assurance most commonly provided in the voluntary assurance market for climate-related disclosure. Therefore, prior to the transition to reasonable assurance, the additional compliance efforts required to comply with the proposed assurance requirement should be limited for the many registrants that—according to commenters and others—are already obtaining limited assurance for their climate-related disclosures. Furthermore, although reasonable assurance provides a significantly higher level of assurance than limited assurance, we believe limited assurance would benefit investors during the initial transition period by enhancing the reliability of a registrant's Scopes 1 and 2 emissions disclosure, in light of the benefits that assurance provides, as discussed above. Moreover, under the proposed rules, accelerated filers and large accelerated filers would not be prevented from obtaining reasonable assurance for their climate disclosures earlier than required. After the transition to mandatory reasonable assurance, investors would have the benefits of a higher level of assurance with smaller incremental costs to accelerated filers and large accelerated filers than moving directly to a reasonable assurance requirement.

Request for Comment

135. Should we require accelerated filers and large accelerated filers to obtain an attestation report covering their Scope 1 and Scope 2 emissions disclosure, as proposed? Should we require accelerated filers and large accelerated filers to obtain an attestation report covering other aspects of their climate-related disclosures beyond Scope 1 and 2 emissions? For example, should we also require the attestation of GHG intensity metrics, or of Scope 3 emissions, if disclosed? Conversely, should we require accelerated filers and large accelerated filers to obtain assurance covering only Scope 1 emissions disclosure? Should any voluntary assurance obtained by these filers after limited assurance is required be required to follow the same attestation requirements of Item 1505(b)-(d), as proposed?

136. If we required accelerated filers and large accelerated filers to obtain an attestation report covering Scope 3 emissions disclosure, should the requirement be phased-in over time? If so, what time frame? Should we require all Scope 3 emissions disclosure to be subject to assurance or only certain categories of Scope 3 emissions? Would it be possible for accelerated filers and large accelerated filers to obtain an attestation report covering the process or methodology for calculating Scope 3 emissions rather than obtaining an attestation report covering the calculations of Scope 3 emissions? Alternatively, is there another form of verification over Scope 3 disclosure that would be more appropriate than obtaining an attestation report?

137. Should the attestation requirement be limited to accelerated filers and large accelerated filers, as proposed? Alternatively, should the attestation requirement be limited to a subset of accelerated filers and large accelerated filers? If so, what conditions should apply? Should the attestation requirement only apply to well-known seasoned issuers? Should the attestation requirement also apply to other types of registrants? Should we create a new test for determining whether the attestation requirements apply to a registrant that would take into account the resources of the registrant and also apply to initial public offerings? For example, should we create a test similar to the SRC definition, which includes a separate determination for initial registration statements, but using higher public float and annual revenue amounts?

138. Instead of requiring only accelerated filers and large accelerated filers to include an attestation report for Scope 1 and Scope 2 emissions, should the proposed attestation requirements also apply to registrants other than accelerated filers and large accelerated filers? If so, should the requirement apply only after a specified transition period? Should such registrants be required to provide assurance at the same level as accelerated filers and large accelerated filers and over the same scope of GHG emissions disclosure, or should we impose lesser requirements ( e.g., only limited assurance and/or assurance over Scope 1 emissions disclosure only)?

139. Should we require accelerated filers and large accelerated filers to initially include attestation reports reflecting attestation engagements at a limited assurance level, eventually increasing to a reasonable assurance level, as proposed? What level of assurance should apply to the proposed GHG emissions disclosure, if any, and when should that level apply? Should we provide a one fiscal year transition period between the GHG emissions disclosure compliance date and when limited assurance would be required for accelerated filers and large accelerated filers, as proposed? Should we provide an additional two fiscal year transition period between when limited assurance is first required and when reasonable assurance is required for accelerated filers and large accelerated filers, as proposed?

140. Should we provide the same transition periods (from the Scopes 1 and 2 emissions disclosure compliance date) for accelerated filers and large accelerated filers, as proposed? Instead, should different transition periods apply to accelerated filers and large accelerated filers? Should we provide transition periods with different lengths than those proposed? Should we require the attestation to be at a reasonable assurance level without having a transition period where only limited assurance is required? Should we instead impose assurance requirements to coincide with reporting compliance periods?

141. Under prevailing attestation standards, “limited assurance” and “reasonable assurance” are defined terms that we believe are generally understood in the marketplace, both by those seeking and those engaged to provide such assurance. As a result, we have not proposed definitions of those terms. Should we define “limited assurance” and “reasonable assurance” and, if so, how should we define them? Would providing definitions in this context cause confusion in other attestation engagements not covered by the proposed rules? Are the differences between these types of attestation engagements sufficiently clear without providing definitions?

142. As proposed, there would be no requirement for a registrant to either provide a separate assessment and disclosure of the effectiveness of controls over GHG emissions disclosure by management or obtain an attestation report from a GHG emissions attestation provider specifically covering the effectiveness of controls over GHG emissions disclosure. Should we require accelerated filers and large accelerated filers to provide a separate management assessment and disclosure of the effectiveness of controls over GHG emissions disclosure (separate from the existing requirements with respect to the assessment and effectiveness of DCP)? Should we require management to provide a statement in their annual report on their responsibility for the design and evaluation of controls over GHG emissions disclosure and to disclose their conclusion regarding the effectiveness of such controls? Instead of, or in addition to, such management assessment and statement, should we require the registrant to obtain an attestation report from a GHG emissions attestation provider that covers the effectiveness of such GHG emissions controls as of the date when the accelerated filer or large accelerated filer is required to comply with the reasonable assurance requirement under proposed Item 1505(a)? If so:

(i) Would it be confusing to apply either such requirement in light of the existing DCP requirements that would apply to the proposed GHG emissions disclosure?

(ii) Would a separate management assessment and statement on the effectiveness of controls over GHG emissions provide meaningful disclosure to investors beyond the existing requirement for DCP?

(iii) Should we specify that the separate management assessment and statement must be provided by the accelerated filer's or large accelerated filer's principal executive and principal financial officers, or persons performing similar functions? Should we clarify which members of the accelerated filer or large accelerated filer's management should be involved in performing the underlying assessment?

(iv) What controls framework(s) would the effectiveness of the registrant's controls over GHG emissions disclosure be evaluated against, if any?

(v) For the GHG emissions attestation provider, what requirements should be applied to such GHG emissions disclosure controls attestation requirement? For example, what attestation standards should apply? Should other service provider(s) in addition to or in lieu of the GHG emissions attestation provider be permitted to provide such attestation over the effectiveness of the GHG controls?

(vi) Should we limit such a requirement to accelerated filers and large accelerated filers only or should it apply to other registrants as well?

(vii) What would be the potential benefits and costs of either approach?

(viii) Should we require a certification on the design and evaluation of controls over GHG emissions disclosures by officers serving in the principal executive and principal financial officer roles or persons performing similar functions for an accelerated filer or large accelerated filer? Would a certification requirement have any additional benefits or impose any additional costs when compared to a requirement for management to assess and disclose in a statement in the annual report the effectiveness of controls over GHG emissions?

143. We considered whether to require registrants to include the GHG emissions metrics in the notes or a separate schedule to their financial statements, by amending Regulation S-X instead of Regulation S-K.

(i) Would there be benefits to including this information in a registrant's financial statements? For example, would requiring the GHG emissions disclosure to be included in the financial statements improve the consistency, comparability, reliability, and decision-usefulness of the information for investors? Would it facilitate the integration of GHG metrics and targets into the registrant's financial analysis? Would such placement cause registrants to incur significantly more expense in obtaining an audit of the disclosure? If so, please quantify those additional expenses where possible.

(ii) Should we require a registrant to include the GHG emissions disclosure in its audited financial statements so that the disclosure would be subject to the existing requirements for an independent audit and ICFR? If so, we seek comment on the following aspects of this alternative:

(a) If GHG emissions disclosure is subject to ICFR, or an internal control framework similar to ICFR, would GHG emissions disclosure be more reliable compared to what is currently proposed? What are the benefits or costs?

(b) Should the GHG emissions disclosure be included in a note to the registrant's financial statements ( e.g., in the note where the proposed financial statement metrics as discussed above in Section II.F would be included) or in a schedule, or somewhere else? If the GHG emissions disclosure was required in the financial statements, should it be subject to a reasonable assurance audit like the other information in the financial statements? If in a schedule, should the GHG emissions disclosure be disclosed in a schedule similar to those required under Article 12 of Regulation S-X, which would subject the disclosure to audit and ICFR requirements? Should we instead require the metrics to be disclosed as supplemental financial information, similar to the disclosure requirements under FASB ASC Topic 932-235-50-2 for registrants that have significant oil- and gas-producing activities? If so, should such supplemental schedule be subject to ICFR requirements? Instead of requiring the GHG emissions disclosure to be included in a note to the registrant's audited financial statements, should we require a new financial statement for such metrics?

(c) PCAOB auditing standards apply to the audit of a registrant's financial statements. If GHG emissions disclosure is included in a supplemental schedule to the financial statements, should we allow other auditing standards to be applied? If so, which ones? What, if any, additional guidance or revisions to such standards would be needed in order to apply them to the audit of GHG emissions disclosure?

(d) What are the costs and benefits of employing registered public accounting firms to perform audits of GHG emissions disclosure and related attestation of internal controls? Are there potential cost savings in employing registered public accountants that currently perform audits of financial statements and attestation of ICFR to review GHG emissions disclosure and any related internal controls? If we require GHG emissions disclosure to be presented in the financial statements, should we permit entities other than registered public accounting firms to provide assurance of this information, as proposed for the current attestation requirements under Regulation S-K? If not limited to registered public accounting firms, who should be permitted to provide assurance of GHG emissions disclosure? Should we permit environmental consultants, engineering firms, or other types of specialists to provide assurance? What are the costs and benefits of such approach? Would the reliability of the audits and therefore the information disclosed be affected if assurance providers other than registered public accounting firms are permitted to conduct these audits? Please provide supporting data where possible. If we should allow for assurance providers that are not registered public accounting firms, what qualifications and oversight should they have, and what requirements should we impose on them? Should we direct the PCAOB to develop a separate registration process for service providers that are not otherwise registered? What expertise, independence and quality control standards should apply?

(e) What would be the other potential benefits and costs of such an approach?

2. GHG Emissions Attestation Provider Requirements

The proposed rules would require the GHG emissions attestation report required by proposed Item 1505(a) for accelerated filers and large accelerated filers to be prepared and signed by a GHG emissions attestation provider. The proposed rules would define a GHG emissions attestation provider to mean a person or a firm that has all of the following characteristics:

• Is an expert in GHG emissions by virtue of having significant experience in measuring, analyzing, reporting, or attesting to GHG emissions. Significant experience means having sufficient competence and capabilities necessary to:

o perform engagements in accordance with professional standards and applicable legal and regulatory requirements; and

o enable the service provider to issue reports that are appropriate under the circumstances.

• Is independent with respect to the registrant, and any of its affiliates, for whom it is providing the attestation report, during the attestation and professional engagement period.

The proposed expertise requirement is intended to help ensure that the service provider preparing the attestation report has sufficient competence and capabilities necessary to execute the attestation engagement. In this regard, if the service provider is a firm, we would expect that it have policies and procedures designed to provide it with reasonable assurance that the personnel selected to conduct the GHG emissions attestation engagement have significant experience with respect to both attestation engagements and GHG disclosure. This would mean that the service provider has the qualifications necessary for fulfillment of the responsibilities that it would be called on to assume, including the appropriate engagement of specialists, if needed. The proposed expertise requirement would apply to the person or the firm signing the GHG emissions attestation report.

The second proposed requirement is modeled on the Commission's qualifications for accountants under 17 CFR 210.2-01 (Rule 2-01 of Regulation S-X), which are designed to ensure that auditors are independent of their audit clients. Similar to how assurance provided by independent public accountants improves the reliability of financial statements and disclosures and is a critical component of our capital markets, assurance of GHG emissions disclosure by independent service providers should also improve the reliability of such disclosure. Academic studies demonstrate that assurance provided by an independent auditor reduces the risk that an entity provides materially inaccurate information to external parties, including investors, by facilitating the dissemination of transparent and reliable financial information. We expect that GHG emissions disclosure would similarly benefit if assured by an independent service provider. Moreover, the potential conflicts of interest, or even the appearance of such conflicts of interest, between the GHG emissions attestation provider and the registrant could raise doubts for investors about whether they can rely on the attestation service and its report.

Similar to Rule 2-01 of Regulation S-X, the proposed rules would provide that a GHG emissions attestation provider is not independent if during the attestation and professional engagement period such attestation provider is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that such attestation provider is not, capable of exercising objective and impartial judgment on all issues encompassed within the attestation provider's engagement. The proposed definition for the attestation and professional engagement period, which is modeled on Rule 2-01 of Regulation S-X, includes both (1) the period covered by the attestation report and (2) the period of the engagement to attest to the registrant's GHG emissions or to prepare a report filed with the Commission (the “professional engagement period”). Under the proposed rules, the professional engagement period would begin when the GHG attestation service provider either signs an initial engagement letter (or other agreement to attest to a registrant's GHG emissions) or begins attest procedures, whichever is earlier.

The proposed rules would further state that, in determining whether a GHG emissions attestation provider is independent, the Commission will consider:

• Whether a relationship or the provision of a service creates a mutual or conflicting interest between the attestation provider and the registrant (or any of its affiliates), places the attestation provider in the position of attesting to such attestation provider's own work, results in the attestation provider acting as management or an employee of the registrant (or any of its affiliates), or places the attestation provider in a position of being an advocate for the registrant (or any of its affiliates); and

• all relevant circumstances, including all financial or other relationships between the attestation provider and the registrant (or any of its affiliates), and not just those relating to reports filed with the Commission.

These proposed provisions are modeled on the factors used by the Commission in determining whether an accountant is independent. Similar to Rule 2-01 of Regulation S-X, the proposed provisions should help protect investors by requiring the GHG emissions attestation provider to be independent both in fact and appearance from the registrant, including its affiliates.

Because the GHG emissions attestation provider would be a person whose profession gives authority to the statements made in the attestation report and who is named as having provided an attestation report that is part of the registration statement, the registrant would be required to obtain and include the written consent of the GHG emissions attestation provider pursuant to Securities Act Section 7, the corresponding rule requiring the written consents of such experts, and the Regulation S-K provision requiring the attachment of the written consent of an expert to a Securities Act registration statement or an Exchange Act report that incorporates by reference a written expert report attached to a previously filed Securities Act registration statement. The GHG emissions attestation provider would also be subject to liability under the federal securities laws for the attestation conclusion or, when applicable, opinion provided. Such liability should encourage the attestation service provider to exercise due diligence with respect to its obligations under a limited or reasonable assurance engagement.

Request for Comment

144. Should we require a registrant to obtain a GHG emissions attestation report that is provided by a GHG emissions attestation provider that meets specified requirements, as proposed? Should one of the requirements be that the attestation provider is an expert in GHG emissions, with significant experience in measuring, analyzing, reporting, or attesting to GHG emissions, as proposed? Should we specify that significant experience means having sufficient competence and capabilities necessary to: (a) Perform engagements in accordance with professional standards and applicable legal and regulatory requirements and (b) enable the service provider to issue reports that are appropriate under the circumstances, as proposed? Should we instead require that the GHG emissions attestation provider have a specified number of years of the requisite type of experience, such as 1, 3, 5, or more years? Should we specify that a GHG emissions attestation provider meets the expertise requirements if it is a member in good standing of a specified accreditation body that provides oversight to service providers that apply attestation standards? If so, which accreditation body or bodies should we consider ( e.g., AICPA)? Are there any other requirements for the attestation provider that we should specify? Instead, should we require a GHG emissions attestation provider to be a PCAOB-registered audit firm?

145. Is additional guidance needed with respect to the proposed expertise requirement? Should we instead include prescriptive requirements related to the qualifications and characteristics of an expert under the proposed rules? For example, should we include a provision that requires a GHG emissions attestation provider that is a firm to have established policies and procedures designed to provide it with reasonable assurance that the personnel selected to provide the GHG attestation service have the qualifications necessary for fulfillment of the responsibilities that the GHG emissions attestation provider will be called on to assume, including the appropriate engagement of specialists, if needed?

146. Should we require the GHG emissions attestation provider to be independent with respect to the registrant, and any of its affiliates, for whom it is providing the attestation report, as proposed? Should we specify that a GHG emissions attestation provider is not independent if such attestation provider is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that such attestation provider is not, capable of exercising objective and impartial judgment on all issues encompassed within the attestation provider's engagement, as proposed? The proposed provision is based on a similar provision regarding the qualification of an accountant to be an independent auditor under Rule 2-01 of Regulation S-X. Is Rule 2-01 an appropriate model for determining the independence of a GHG emissions attestation provider? Is being independent from a registrant and its affiliates an appropriate qualification for a GHG emissions attestation provider?

147. Should we specify that the factors the Commission would consider in determining whether a GHG emissions attestation provider is independent include whether a relationship or the provision of a service creates a mutual or conflicting interest between the attestation provider and the registrant, including its affiliates, places the attestation provider in the position of attesting to such attestation provider's own work, results in the attestation provider acting as management or an employee of the registrant, including its affiliates, or places the attestation provider in a position of being an advocate for the registrant and its affiliates, as proposed? Should we specify that the Commission also will consider all relevant circumstances, including all financial and other relationships between the attestation provider and the registrant, including its affiliates, and not just those relating to reports filed with the Commission, as proposed?

148. Should we adopt all of the proposed factors for determining the independence of a GHG emissions attestation provider, or are there factors we should omit? Are there any additional factors that we should specify that the Commission will consider when determining the independence of a GHG emissions attestation provider? For example, should we include any non-exclusive specifications of circumstances that would be inconsistent with the independence requirements, similar to those provided in 17 CFR 210.2-01(c) (Rule 2-01(c) of Regulation S-X)?

149. Should the definition of “affiliates” be modeled on Rule 2-01, as proposed, or should we use a different definition? Would defining the term differently than proposed cause confusion because the rest of the proposed independence requirement is modeled on Rule 2-01? Many accountants are likely familiar with the proposed definition given their required compliance with Rule 2-01, would non-accountants understand how to comply with and apply this concept?

150. Should the term “attestation and professional engagement period” be defined in the proposed manner? If not, how should “attestation and professional engagement period” be defined? Alternatively, should the Commission specify a different time period during which an attestation provider must meet the proposed independence requirements?

151. Should we include disclosure requirements when there is a change in, or disagreement with, the registrant's GHG emissions attestation provider that are similar to the disclosure requirements in Item 4.01 of Form 8-K and 17 CFR 229.304 (Item 304 of Regulation S-K)?

152. Accountants are already required to comply with the relevant quality control and management standards when providing audit and attest services under the PCAOB, AICPA, or IAASB standards. These quality control and management standards would apply to accountants providing GHG attestation services pursuant to those standards as well. Should we require the GHG emissions attestation provider to comply with additional minimum quality control requirements ( e.g., acceptance and continuance of engagements, engagement performance, professional code of conduct, and ethical requirements) to provide greater consistency over the quality of service provided by GHG emissions attestation providers who do not (or cannot) use the PCAOB, AICPA, or IAASB attestation standards? If so, what should the minimum requirements be?

153. As proposed, the GHG emissions attestation provider would be a person whose profession gives authority to statements made in the attestation report and who is named as having provided an attestation report that is part of the registration statement, and therefore the registrant would be required to obtain and include the written consent of the GHG emissions provider pursuant to Securities Act Section 7 and related Commission rules. This would subject the GHG emissions attestation provider to potential liability under Section 11 of the Securities Act. Would the possibility of Section 11 liability deter qualified persons from serving as GHG emissions attestation providers? Should we include a provision similar to 17 CFR 230.436(c), or amend that rule, to provide that a report on GHG emissions at the limited assurance level by a GHG emissions attestation provider that has reviewed such information is not considered part of a registration statement prepared or certified by a person whose profession gives authority to a statement made by him or a report prepared or certified by such person within the meaning of Section 7 and 11 of the Act?

3. GHG Emissions Attestation Engagement and Report Requirements

The proposed rules would require the attestation report required by proposed Item 1505(a) for accelerated filers and large accelerated filers to be included in the separately-captioned “Climate-Related Disclosure” section in the relevant filing and provided pursuant to standards that are publicly available at no cost and are established by a body or group that has followed due process procedures, including the broad distribution of the framework for public comment. The requirement that the standards be established by a body or group that has followed due process procedures would be similar to the requirements for determining a suitable, recognized control framework for use in management's evaluation of an issuer's ICFR. In both cases, a specific framework is not prescribed but minimum requirements for what constitutes a suitable framework are provided. This approach would help to ensure that the standards upon which the attestation engagement and report are based are the result of a transparent, public, and reasoned process. This requirement should also help to protect investors who may rely on the attestation report by limiting the standards to those that have been sufficiently developed. Rather than prescribe a particular attestation standard, the proposed approach recognizes that more than one suitable attestation standard exists and that others may develop in the future.

In our view, the attestation standards, for example, of the PCAOB, AICPA, and IAASB would meet this due process requirement. In addition, all of these attestation standards are publicly available at no cost to investors who desire to review them. We believe that open access is an important consideration when determining the suitability of attestation standards for application to GHG emissions disclosure because it would enable investors to evaluate the report against the requirements of the selected attestation standard. By highlighting these standards, we do not mean to imply that other standards currently used in voluntary reporting would not be suitable for use under the proposed rules. Our proposal intends to set minimum standards while acknowledging the current voluntary practices of registrants. As noted below, we seek comment on whether other standards currently used in the voluntary climate-related assurance market or that are otherwise under development would meet the proposed due process requirement and also be suitable for application to GHG emissions under the Commission's proposed rules.

The proposed rules would not include any requirement for a registrant to obtain an attestation report covering the effectiveness of internal control over GHG emissions disclosure, and therefore such a report would not be required even when the GHG emissions attestation engagement is performed at a reasonable assurance level. Given the current evolving state of GHG emissions reporting and assurance, we believe that existing DCP obligations, and the proposed requirement that accelerated filers and large accelerated filers initially obtain at least limited assurance of such disclosure, are appropriate first steps toward enhancing the reliability of GHG emissions disclosure. We also note that, under prevailing attestation standards for limited assurance engagements, the testing of and attestation over internal controls are not required. With respect to the eventual reasonable assurance engagements, while there are requirements under prevailing attestation standards to consider and obtain an understanding of internal controls, there is no required attestation of the effectiveness of internal controls such as that included in Section 404(b) of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act).

We recognize that the attestation standards that a GHG emissions attestation provider may use would have specific requirements for the form and content of attestation reports. The proposed rules would require a GHG emissions attestation provider to follow the specific requirements regarding form and content of the reports set forth by the attestation standard (or standards) used by such attestation provider. Nevertheless, in order to provide some standardization and comparability of GHG emissions attestation reports, the proposed rules would impose minimum requirements for the GHG emissions attestation report. In particular, such minimum report requirements would provide investors with consistent and comparable information about the GHG emissions attestation engagement and report obtained by the registrant when the engagement is conducted by a GHG emissions attestation provider using an attestation standard that may be less widely used or that has less robust report requirements than more prevalent standards.

The proposed minimum attestation engagement and report requirements are primarily derived from the AICPA's attestation standards ( e.g., SSAE No. 18), which are commonly used by accountants who currently provide GHG attestation engagement services as well as other non-GHG-related attestation engagement services, and are largely similar to the report requirements under PCAOB AT-101 and IAASB ISAE 3410. Many of the following proposed minimum attestation report requirements are also elements of an accountant's report when attesting to internal control over financial reporting, of an accountant's report on audited financial statements (which is conducted at a reasonable assurance level), or of a review report on interim financial statements (which is conducted at a limited assurance level). We explain below each of the proposed minimum components of a GHG emissions attestation report. These are all common elements of current assurance reports and are also similar to elements of other expert reports and legal opinions provided in Commission filings and other transactions.

As proposed, the GHG emissions attestation report would be required to include an identification or description of the subject matter or assertion on which the attestation provider is reporting. For example, the attestation report would identify the subject matter as Scope 1 and Scope 2 emissions disclosure. If a registrant voluntarily sought attestation of additional items of disclosure, such as GHG intensity metrics or Scope 3 emissions, the attestation provider would be required to identify those additional items as well in the attestation report. If a registrant has made an assertion about the measurement or evaluation of the subject matter to the attestation provider, the attestation report must include such assertion. For example, the attestation report might refer to the registrant's assertion that the Scope 1 and Scope 2 emissions disclosure included within the filing has been presented in accordance with Item 1504 of Regulation S-K. These proposed minimum requirements would elicit information that is fundamental to understanding the attestation report and would clarify the scope of the attestation report when the scope does not align with the scope of the registrant's GHG emissions disclosure ( e.g., when Scope 3 emissions disclosure is included in the filing but not covered by the attestation report).

The proposed rules would also require the GHG emissions attestation report to include the point in time or period of time to which the measurement or evaluation of the subject matter or assertion relates. Therefore, the attestation provider would be required to identify the time period to which the Scopes 1 and 2 emissions disclosure (or other additional disclosure) relates, which would be the registrant's most recently completed fiscal year or some other 12-month period if permitted under the applicable climate-related disclosure rules as well as any relevant historical period disclosure included within the filing. This proposed requirement seeks to avoid any confusion investors may have about which period or periods of the climate-related disclosures included within the filing are subject to the attestation.

The proposed rules would also require the attestation report to identify the criteria against which the subject matter was measured or evaluated. For an attestation report solely covering Scopes 1 and 2 emissions disclosure, the identified criteria would include the requirements in proposed Item 1504 of Regulation S-K and, in particular, Item 1504(a), which includes presentation requirements such as disaggregation by each constituent greenhouse gas. The identified criteria would also include Item 1504(b) and the applicable instructions in Item 1504(e) regarding methodology, organizational boundary, and operational boundary. In other words, this minimum requirement would require an attestation provider to refer to the requirements with which the registrant must comply when making the disclosure that is subject to the attestation. Without the frame of reference provided by the identified criteria, the conclusion or opinion included in the report may be open to individual interpretation and misunderstanding by investors.

Prevailing attestation standards require the criteria against which the subject matter is measured or evaluated to be “suitable.” In the context of the proposed rules, suitable criteria would, when followed, result in reasonably consistent measurement or evaluation of the registrant's disclosure that is within the scope of the engagement. Characteristics of suitable criteria include relevance, objectivity, measurability, and completeness. We believe that proposed Item 1504 of Regulation S-K would satisfy the suitable criteria requirements of the prevailing attestation standards because the proposed requirements set forth relevant, objective standards that call for measurable and complete disclosure of GHG emissions that would allow for a consistent evaluation of the registrant's disclosure.

The GHG emissions attestation report would further be required to include a statement that identifies the level of assurance provided and describes the nature of the attestation engagement. For example, under the proposed rule, an attestation report providing limited assurance would need to include not only a statement that limited assurance is the provided level of assurance, but also would need to describe the scope of work performed in a limited assurance engagement, which typically would indicate that the procedures performed vary in nature, timing, and extent compared to a reasonable assurance engagement. This proposed minimum requirement would help investors understand the level of assurance provided.

The proposed rules would require the attestation report to include a statement that identifies the attestation standard (or standards) used. As previously discussed, the standard used must be publicly available at no cost and have been established by a body or group that has followed due process procedures, including the broad distribution of the framework for public comment. This minimum report requirement would allow investors to easily identify the attestation standard that the engagement is executed against, which is particularly important because the proposed rules do not prescribe a particular attestation standard. Understanding the attestation standard used would allow investors to better understand the attestation performed by evaluating the report against the attestation standard's requirements and would facilitate comparability across the attestation reports of different registrants.

The attestation report would also be required to include a statement that describes the registrant's responsibility to report on the subject matter or assertion being reported on in order to make it clear to investors who is ultimately responsible for the disclosure. At a minimum, this proposed provision would require a statement that the registrant is responsible for the subject matter, or its assertion on the subject matter. This proposed requirement, like all of the minimum requirements, has corollaries outside of the GHG emissions context. For example, an independent auditor's audit report on a registrant's financial statements is required to include a statement that the registrant's management is responsible for the financial statements that are being audited.

The proposed rules would further require the attestation report to include a statement that describes the attestation provider's responsibilities in connection with the preparation of the attestation report. This is consistent with existing requirements in reports such as those issued by the independent auditor on the audited financial statements or a review report on the interim financial statements. For example, with respect to a limited assurance engagement, under prevailing attestation standards, the report would typically include a statement that the attestation provider's responsibilities include expressing a conclusion on the subject matter or the assertion based on the attestation provider's review. Similarly, for a reasonable assurance engagement, the report would typically include a statement that the attestation provider's responsibilities include expressing an opinion on the subject matter or assertion, based on the attestation provider's examination.

The proposed rules would also require the attestation report to include a statement that the attestation provider is independent, as required by proposed 17 CFR 229.1505(a). Because independence from the registrant, including its affiliates, would be a necessary qualification for the GHG emissions attestation provider, the attestation report would be required to include the attestation provider's confirmation of his or her compliance with the proposed independence requirement.

The proposed rules would further require the attestation report, for a limited assurance engagement, to include a description of the work performed as a basis for the attestation provider's conclusion. This proposed provision is intended to enhance the transparency of the GHG emissions attestation report for investors by eliciting disclosure about the procedures undertaken by the attestation provider in its limited assurance engagement, such as inquiries and analytical procedures. This information would allow investors to assess and understand the extent of procedures performed to support the conclusion reached by the attestation provider, which could also facilitate an investor's comparison of different attestation reports provided under the same or different attestation standards.

The GHG emissions attestation report would also be required to include a statement that describes any significant inherent limitations associated with the measurement or evaluation of the subject matter (at a minimum, Scopes 1 and 2 emissions) against the criteria ( i.e., the applicable requirements in proposed Item 1504). Such a statement is a common characteristic of attestation reports, including the independent auditor's report on internal control over financial reporting. This proposed provision is intended to elicit disclosure about the estimation uncertainties inherent in the quantification of GHG emissions, driven by reasons such as the state of the science, methodology, and assumptions used in the measurement and reporting processes. For example, an attestation provider might include in its report a statement about measurement uncertainty resulting from accuracy and precision of GHG emission conversion factors.

The proposed rules would require the GHG emissions attestation report to include the attestation provider's conclusion or opinion, as applicable, based on the attestation standard(s) used. For a limited assurance engagement, under prevailing attestation standards, the conclusion would typically state whether the provider is aware of any material modifications that should be made to the subject matter in order for the disclosure to be in accordance with (or based on) the requirements specified in Item 1504, or for the registrant's assertion about such subject matter to be fairly stated. For a reasonable assurance engagement, the attestation provider would typically provide an opinion on whether the subject matter is in accordance with (or based on) the requirements specified in Item 1504 in all material respects, or that the registrant's assertion about its subject matter is fairly stated, in all material respects.

Finally, the proposed rules would require the GHG emissions attestation report to include the signature of the attestation provider (whether by an individual or a person signing on behalf of the attestation provider's firm), the city and state where the attestation report has been issued, and the date of the report. These are all common elements of current assurance and expert reports, and each of these proposed provisions would help to identify and confirm the validity of the GHG emissions attestation provider.

Request for Comment

154. Should we require the attestation engagement and related attestation report to be provided pursuant to standards that are publicly available at no cost and are established by a body or group that has followed due process procedures, including the broad distribution of the framework for public comment, as proposed? Is the requirement of “due process procedures, including the broad distribution of the framework for public comment” sufficiently clear? Would the attestation standards of the PCAOB, AICPA, and IAASB meet this due process requirement? Are there other standards currently used in the voluntary climate-related assurance market or otherwise in development that would meet the due process and publicly availability requirements? For example, would verification standards commonly used by non-accountants currently, such as ISO 14064-3 and the AccountAbility's AA1000 Series of Standards, meet the proposed requirements? Are there standards currently used in the voluntary climate-related assurance market or otherwise under development that would be appropriate for use under the Commission's climate-related disclosure rules although they may not strictly meet the proposed public comment requirement? If so, please explain whether those standards have other characteristics that would serve to protect investors?

155. Should we require that the attestation standards used be publicly available at no cost to investors, as proposed? Should we permit the use of attestation standards, even if not publicly available at no cost, provided that registrants provide access to those standards at the request of their investors?

156. Should we require the GHG emissions attestation report to meet certain minimum requirements in addition to any form and content requirements set forth by the attestation standard or standards used by the GHG emissions attestation provider, as proposed? Should we instead require that the attestation report solely meet whatever requirements are established by the attestation standard or standards used?

157. Should we adopt each of the proposed minimum requirements? Are there any proposed requirements that we should omit or add to the proposed list of minimum GHG emissions attestation report requirements?

158. Regarding the proposed provision requiring the identification of the criteria against which the subject matter was measured or evaluated, would reference to proposed Item 1504(a), Item 1504(b), and Item 1504(e)'s instructions concerning the presentation, methodology, including underlying assumptions, and organizational and operational boundaries applicable to the determination of Scopes 1 and 2 emissions meet the “suitable criteria” requirement under prevailing attestation standards ( e.g., AICPA SSAE No. 18, AT-C 105.A16)?

159. If we require or permit a registrant to use the GHG Protocol as the methodology for determining GHG emissions, would the provisions of the GHG Protocol qualify as “suitable criteria” against which the Scope 1 and Scope 2 emissions disclosure should be evaluated?

4. Additional Disclosure by the Registrant

In addition to the minimum attestation report requirements described above, which reflect the contents of attestation reports under prevailing attestation standards, we are proposing to require disclosure by the registrant of certain additional matters related to the attestation of a registrant's GHG emissions. These disclosures are not typically included in an attestation report, and would not be included in the GHG emissions attestation report under the proposed rules. Instead, the registrant would be required to provide these disclosures in the separately captioned “Climate-Related Disclosure” section, where the GHG emissions disclosure would be provided pursuant to the proposed rules.

These proposed additional disclosures should assist investors in evaluating the qualifications of the GHG emissions attestation provider selected by the registrant, particularly in light of the broad spectrum of attestation providers that would be permitted to provide an attestation report under the proposed rules.

We considered requiring the proposed disclosures to be provided in the attestation report but are not proposing to do so because we are concerned such an approach may create confusion by conflicting with prevalent attestation standards. Furthermore, in light of the variety of attestation service providers the registrant is permitted to engage, requiring the registrant to provide such disclosures may allow the registrant to better provide its investors with relevant information about the qualifications of the service provider that the registrant engaged for the GHG emissions attestation.

With respect to the Scope 1 and Scope 2 emissions attestation required pursuant to proposed Item 1505(a) for accelerated filers and large accelerated filers, the registrant would be required to disclose in the filing, based on relevant information obtained from any GHG emissions attestation provider:

• Whether the attestation provider has a license from any licensing or accreditation body to provide assurance, and if so, the identity of the licensing or accreditation body, and whether the attestation provider is a member in good standing of that licensing or accreditation body;

• Whether the GHG emissions attestation engagement is subject to any oversight inspection program, and if so, which program (or programs); and

• Whether the attestation provider is subject to record-keeping requirements with respect to the work performed for the GHG emissions attestation engagement and, if so, identify the record-keeping requirements and the duration of those requirements.

The first two above items of disclosure would help investors better understand the qualifications of the GHG emissions attestation provider, which in turn could help them assess the reliability of the attestation results. An example of a license from a licensing or accreditation body to provide assurance would be a Certified Public Accountant license issued by a state board of accountancy ( e.g., the California Board of Accountancy), while an example of oversight programs would include the AICPA peer review program, among others. The proposed disclosure requirement about any record-keeping requirements to which the attestation provider is subject would help enhance the transparency of the attestation process by providing investors with information about the business practices of the attestation provider that has been retained by the registrant.

Request for Comment

160. Should we require certain items of disclosure related to the attestation of a registrant's GHG emissions to be provided by the registrant in its filing that includes the attestation report (where the GHG emissions and other climate-related disclosures are presented), based on relevant information obtained from the GHG emissions attestation provider, as proposed? Should these additional items of disclosure instead be included in the attestation report?

161. Should we require the registrant to disclose whether the attestation provider has a license from any licensing or accreditation body to provide assurance, and if so, the identity of the licensing or accreditation body, and whether the attestation provider is a member in good standing of that licensing or accreditation body, as proposed? In lieu of disclosure, should we require a GHG emissions attestation provider to be licensed to provide assurance by specified licensing or accreditation bodies? If so, which licensing or accreditation bodies should we specify?

162. Should we require a registrant to disclose whether the GHG emissions attestation engagement is subject to any oversight inspection program, and if so, which program (or programs), as proposed? Should we instead require the registrant to disclose whether the attestation engagement is subject to certain specified oversight programs? If so, which oversight programs should we specify?

163. Should we require a registrant to disclose whether the attestation provider is subject to record-keeping requirements with respect to the work performed for the GHG emissions attestation engagement and, if so, identify the record-keeping requirements and duration of those requirements, as proposed? In lieu of disclosure, should we specify that the record-keeping requirements of a GHG emissions attestation provider must be of a certain minimum duration, such as three, five, or seven years, or some other period? Should we specify that the record-keeping requirements must include certain reasonable procedures and, if so, what procedures?

5. Disclosure of Voluntary Attestation

Because GHG emissions reporting and assurance landscapes are both relatively new and evolving as described earlier, at this time, we are proposing to require a registrant, other than a large accelerated filer or an accelerated filer that is required to include a GHG emissions attestation report pursuant to proposed Item 1505(a), to disclose within the separately captioned “Climate-Related Disclosure” section in the filing the following information if the registrant's GHG emissions disclosures were subject to third-party attestation or verification:

(i) Identify the provider of such assurance or verification;

(ii) Describe the assurance or verification standard used;

(iii) Describe the level and scope of assurance or verification provided;

(iv) Briefly describe the results of the assurance or verification;

(v) Disclose whether the third-party service provider has any other business relationships with or has provided any other professional services to the registrant that may lead to an impairment of the service provider's independence with respect to the registrant; and

(vi) Disclose any oversight inspection program to which the service provider is subject ( e.g., the AICPA's peer review program).

Taken together, these proposed disclosure items should help investors understand the nature and reliability of the attestation or verification provided and help them assess whether the voluntary assurance or verification has enhanced the reliability of the GHG emissions disclosure. We are limiting the proposed assurance disclosure requirement to a registrant's GHG emissions disclosure because registrants are more likely to obtain assurance voluntarily for this disclosure item than for other climate-related disclosures. The proposed approach should mitigate the compliance burden of the proposed GHG emissions disclosure rules, taking into consideration the proportionate compliance costs that may impact accelerated and large accelerated filers versus other types of filers, while providing transparency for investors about the level and reliability of the assurance or verification, if any, provided on the GHG emissions disclosures.

Request for Comment

164. Should we require a registrant that is not required to include a GHG emissions attestation report pursuant to proposed Item 1505(a) to disclose within the separately captioned “Climate-Related Disclosure” section in the filing the following information, if the registrant's GHG emissions disclosure was subject to third-party attestation or verification, as proposed:

(i) Identify the provider of such assurance or verification;

(ii) Disclose the assurance or verification standard used;

(iii) Describe the level and scope of assurance or verification provided;

(iv) Briefly describe the results of the assurance or verification;

(v) Disclose whether the third-party service provider has any other business relationships with or has provided any other professional services to the registrant that may lead to an impairment of the service provider's independence with respect to the registrant; and

(vi) Disclose any oversight inspection program to which the service provider is subject ( e.g., the AICPA's peer review program), each as proposed?

Are there other disclosure items that we should require if a registrant has obtained voluntary assurance or verification of the climate-related disclosures? Are there any of the proposed disclosure items that we should omit? Should we specify parameters or include guidance on when the services provided by a third-party would be considered “assurance” or “verification” and thus require disclosure pursuant to the proposed rules? Should a registrant be required to furnish a copy of or provide a link to the assurance or verification report so that it is readily accessible by an investor?

165. Instead of requiring a registrant to disclose whether the third-party service provider has any other business relationships with or has provided any other professional services to the registrant that may lead to an impairment of the service provider's independence with respect to the registrant as proposed, should we require the third-party service provider to be independent, according to the standard proposed under Item 1505(b) for accelerated filers and large accelerated filers that are required to include a GHG emissions attestation report pursuant to proposed Item 1505(a)? If not, should we provide guidance as to what constitutes an impairment of a service provider's independence with respect to the registrant? Would this result in decision-useful information to an investor? Should we instead require a registrant to disclose whether the third-party service provider would be considered independent under some other independence requirement?

166. As proposed, a registrant would be required to disclose any oversight inspection program to which the service provider is subject, such as the PCAOB's inspection program or the AICPA's peer review program. Are there other oversight programs that we should provide as examples? Would such disclosure provide decision-useful information to an investor? Is it clear what “any oversight inspection program” would include?

167. As proposed, a registrant would not be required to disclose the voluntary assurance or verification fees associated with the GHG disclosures. Should we require GHG disclosure assurance or verification fees to be disclosed? Would such disclosure be decision-useful to investors making voting or investment decisions?

I. Targets and Goals Disclosure

If a registrant has set any climate-related targets or goals, then the proposed rules would require the registrant to provide certain information about those targets or goals. Those goals or targets might, for example, relate to the reduction of GHG emissions, or address energy usage, water usage, conservation or ecosystem restoration. A registrant might also set goals with regard to revenues from low-carbon products in line with anticipated regulatory requirements, market constraints, or other goals established by a climate-related treaty, law, regulation, policy, or organization. The proposed disclosure requirements could help investors better understand the scope of a registrant's climate-related targets or goals, including those related to GHG emissions, and assist in assessing progress towards achieving those targets or goals.

Many commenters recommended that we require registrants to provide detailed information about their climate-related targets and goals, including action plans and timelines for achieving such targets as GHG emissions reductions and performance data measured against those targets. This information could be important for investors in light of the fact that, according to one publication, two-thirds of S&P 500 companies had set a carbon reduction target by the end of 2020. Despite the numerous commitments to reduce GHG emissions, according to several sources, many companies do not provide their investors with sufficient information to understand how the companies intend to achieve those commitments or the progress made regarding them. The proposed disclosure requirements are intended to elicit enhanced information about climate-related targets and goals so that investors can better evaluate these points.

If a registrant has set climate-related targets or goals, the proposed rules would require it to disclose them, including, as applicable, a description of:

• The scope of activities and emissions included in the target;
• The unit of measurement, including whether the target is absolute or intensity based;
• The defined time horizon by which the target is intended to be achieved, and whether the time horizon is consistent with one or more goals established by a climate-related 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 set by the registrant; and

• How the registrant intends to meet its climate-related targets or goals.

This information would help investors understand a registrant's particular target or goal and a particular timeline for that target or goal, how the target or goal is to be measured, and how progress against the target or goal is to be tracked. For example, a registrant might disclose that it plans to cut its Scopes 1 and 2 emissions by 50 percent by 2030. The registrant might also disclose a target to reduce its Scope 3 emissions by 50 percent by 2035. In addition, the registrant might also set a goal of achieving net zero greenhouse gas emissions across its operations by 2050, in keeping with the goals of the Paris Agreement.

Under the proposed rules, the registrant would be required to disclose the baseline year for multiple targets. Requiring disclosure of defined baseline time periods and baseline emissions against which progress will be tracked, with a consistent base year for multiple targets, could help investors compare the progress made towards each target. The registrant would also be required to disclose the unit of measurement, including whether the target is expressed in absolute terms or is intensity-based. If the registrant has set intervening targets ( e.g., reducing its Scope 3 emissions by 35 percent by 2030), the registrant would be required to disclose these targets. Each of the proposed disclosure requirements is intended to provide investors with additional insight into the scope and specifics of a registrant's climate-related targets or goals.

The proposed rules would further require a registrant to discuss how it intends to meet its climate-related targets or goals. This information should enable investors to better understand the potential impacts on a registrant associated with pursuing its climate-related targets or goals. For example, for a target or goal regarding net GHG emissions reduction, the discussion could include a strategy to increase energy efficiency, transition to lower carbon products, purchase carbon offsets or RECs, or engage in carbon removal and carbon storage. For a registrant operating in a water-stressed area, with the goal of reducing its freshwater needs, the discussion could include a strategy to increase the water efficiency of its operations, such as by recycling wastewater or, if in agriculture, engaging in bioengineering techniques to make crops more resilient and less water dependent. Information about how a registrant intends to achieve its climate-related target or goal could provide investors with a better understanding of the potential costs to mitigate a potential climate-related risk, such as a manufacturer's reduction of GHG emissions through implementation of a relatively high cost solution such as carbon capture and storage technology.

The proposed rules would also require a registrant to disclose relevant data to indicate whether it is making progress toward achieving the target or goal and how such progress has been achieved. A registrant would be required to update this disclosure each fiscal year by describing the actions taken during the year to achieve its targets or goals. This proposed disclosure could help investors assess how well a registrant is managing its identified climate-related risks.

Some companies might establish climate-related goals or targets without yet knowing how they will achieve those goals. They might plan to develop their strategies over time, particularly as new technologies become available that might facilitate their achievement of their goals. The fact that a company has set a goal or target does not mean that it has a specific plan for how it will achieve those goals. What is important is that investors be informed of a registrant's plans and progress wherever it is in the process of developing and implementing its plan.

If the registrant has used carbon offsets or RECs in its plan to achieve climate-related targets or goals, it would be required to disclose the amount of carbon reduction represented by the offsets or the amount of generated renewable energy represented by the RECS, the source of the offsets or RECs, a description and location of the underlying projects, any registries or other authentication of the offsets or RECs, and the cost of the offsets or RECs. For example, a carbon offset might pertain to an underlying project to reduce GHG emissions, increase the storage of carbon, or enhance GHG removals from the atmosphere. Information regarding the source, value, underlying projects, and authentication of the offsets or RECs could help investors assess the offsets or RECs and the effectiveness of the registrant's plan to achieve its climate-related targets or goals. Such information could also help investors understand changes in the use or viability of the carbon offsets or RECs as part of achieving a registrant's climate-related targets or goals that are caused by changes in regulation or markets. A reasonable investor could well assess differently the effectiveness and value to a registrant of the use of carbon offsets where the underlying projects resulted in authenticated reductions in GHG emissions compared to the use of offsets where the underlying projects resulted in the avoidance, but not the reduction, in GHG emissions or otherwise lacked verification. As some commenters have indicated, mandated detailed disclosure about the nature of a purchased carbon offset could also help to mitigate instances of greenwashing.

Proposed 17 CFR 229.1505(a)(2) (Item 1505(a)(2)) would state that a registrant may provide the disclosures required by the section when discussing climate-related impacts on its strategy, business model, and outlook (in response to proposed Item 1502) or when discussing its transition plan as part of its risk management disclosure (in response to proposed Item 1503). If so, it need not repeat the disclosure in response to the proposed targets and goals section but should cross-refer to the section where the information has been provided.

A registrant's disclosure of its climate-related targets or goals should not be construed to be promises or guarantees. To the extent that information regarding a registrant's climate-related targets or goals would constitute forward-looking statements, which we would expect, for example, with respect to how a registrant intends to achieve its climate-related targets or goals and expected progress regarding those targets and goals, the PSLRA safe harbors would apply to such statements, assuming all other statutory requirements for those safe harbors are satisfied.

Request for Comment

168. Should we require a registrant to disclose whether it has set any targets related to the reduction of GHG emissions, as proposed? Should we also require a registrant to disclose whether it has set any other climate-related target or goal, e.g., regarding energy usage, water usage, conservation or ecosystem restoration, or revenues from low-carbon products, in line with anticipated regulatory requirements, market constraints, or other goals, as proposed? Are there any other climate-related targets or goals that we should specify and, if so, which targets or goals? Is it clear when disclosure under this proposed item would be triggered, or do we need to provide additional guidance? Would our proposal discourage registrants from setting such targets or goals?

169. Should we require a registrant, when disclosing its targets or goals, to disclose:

• The scope of activities and emissions included in the target;
• The unit of measurement, including whether the target is absolute or intensity based;
• The defined time horizon by which the target is intended to be achieved, and whether the time horizon is consistent with one or more goals established by a climate-related treaty, law, regulation, 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 intervening targets set by the registrant; and
• How it intends to meet its targets or goals, each as proposed?

Are there any other items of information about a registrant's climate-related targets or goals that we should require to be disclosed, in addition to or instead of these proposed items? Are there any proposed items regarding such targets or goals that we should exclude from the required disclosure? If a registrant has set multiple targets or goals, should it be permitted to establish different base years for those targets or goals?

170. Should we require a registrant to discuss how it intends to meet its climate-related targets or goals, as proposed? Should we provide examples of potential items of discussion about a target or goal regarding GHG emissions reduction, such as a strategy to increase energy efficiency, a transition to lower carbon products, purchasing carbon offsets or RECs, or engaging in carbon removal and carbon storage, as proposed? Should we provide additional examples of items of discussion about climate-related targets or goals and, if so, what items should we add? Should we remove any of the proposed examples of items of discussion?

171. Should we require a registrant, when disclosing its targets or goals, to disclose any data that indicates whether the registrant is making progress towards meeting the target and how such progress has been achieved, as proposed?

172. Should we require that the disclosure be provided in any particular format, such as charts? Would certain formats help investors and others better assess these disclosures in the context of assessing the registrant's business and financial condition? What additional or other requirements would help in this regard?

173. If a registrant has used carbon offsets or RECs, should we require the registrant to disclose the amount of carbon reduction represented by the offsets or the amount of generated renewable energy represented by the RECS, the source of the offsets or RECs, the nature and location of the underlying projects, any registries or other authentication of the offsets or RECs, and the cost of the offsets or RECs, as proposed? Are there other items of information about carbon offsets or RECs that we should specifically require to be disclosed when a registrant describes its targets or goals and the related use of offsets or RECs? Are there proposed items of information that we should exclude from the required disclosure about offsets and RECs?

174. Should we apply the PSLRA statutory safe harbors as they currently exist to forward-looking statements involving climate-related targets and goals, or other climate-related forward-looking information? Should we instead create a separate safe harbor for forward-looking climate-related information, including targets and goals? Should we adopt an exception to the PSLRA statutory safe harbors that would extend the safe harbors to climate-related forward-looking disclosures made in an initial public offering registration statement?

J. Registrants Subject to the Climate-Related Disclosure Rules and Affected Forms

The proposed climate-related disclosure rules would apply to a registrant with Exchange Act reporting obligations pursuant to Exchange Act Section 13(a) or Section 15(d) ⁶⁸⁹ and

companies filing a Securities Act or Exchange Act registration statement. Specifically, we are proposing to require a registrant to include climate-related disclosure in Securities Act or Exchange Act registration statements (Securities Act Forms S-1, F-1, S-3, F-3, S-4, F-4, and S-11, and Exchange Act Forms 10 and 20-F) and Exchange Act annual reports (Forms 10-K and 20-F), including the proposed financial statement metrics.⁶⁹¹ Similar to the treatment of other important business and financial information, the proposed rules would also require registrants to disclose any material change to the climate-related disclosure provided in a registration statement or annual report in its Form 10-Q (or, in certain circumstances, Form 6-K for a registrant that is a foreign private issuer that does not report on domestic forms).⁶⁹²

The proposed rules would amend Form 20-F and the Securities Act forms that a foreign private issuer may use to register the offer and sale of securities under the Securities Act to require the same climate-related disclosures as proposed for a domestic registrant. Because climate-related risks potentially impact both domestic and foreign private issuers, regardless of the registrant's jurisdiction of origin or organization, requiring that foreign private issuers provide this disclosure would be important to achieving our goal of more consistent, reliable, and comparable information across registrants. Moreover, we note that Form 20-F imposes substantially similar disclosure requirements as those required for Form 10-K filers on matters, such as risk factors and MD&A, that are similar and relevant to the proposed climate-related disclosures.

We are not proposing generally to exempt SRCs, EGCs, or registrants that are foreign private issuers from the entire scope of the proposed climate-related disclosure rules because we agree with commenters who stated that, because of their broad impact across industries and jurisdictions, climate-related risks may pose a significant risk to the operations and financial condition of domestic and foreign issuers, both large and small. While we are not proposing to exempt SRCs from the full scope of the proposed climate-related disclosure rules, we are proposing to exempt SRCs from the proposed Scope 3 emissions disclosure requirement. We also are proposing to provide a longer transition period for SRCs to comply with the proposed rules than we are proposing for other registrants. The proposed accommodations for Scope 3 emissions disclosures could mitigate the proposed rules' compliance burden for smaller registrants that, when compared to larger registrants with more resources, may be less able to afford the fixed costs associated with the reporting of GHG emissions. In addition, the extended compliance period would give SRCs additional time to allocate the resources necessary to compile and prepare their climate-related disclosures.

Request for Comment

175. Should the proposed climate-related disclosures be required in Exchange Act reports and registration statements, as proposed? Should we exempt SRCs from all of the proposed climate-related disclosure rules instead of exempting them solely from Scope 3 emissions disclosure requirements, as proposed? Should we exempt SRCs from certain other proposed climate-related disclosure requirements and, if so, which requirements? For example, in addition to the proposed exemption from Scope 3 emissions disclosure, should we exempt SRCs from the proposed requirement to disclose Scopes 1 and 2 emissions? Are there certain types of other registrants, such as EGCs or business development companies (“BDCs”), that should be excluded from all or some of the proposed climate-related disclosure rules?

176. Should we require foreign private issuers that report on Form 20- F to provide the same climate-related disclosures as Form 10-K filers, as proposed? Should we require climate-related disclosures in the registration statements available for foreign private issuers, as proposed? If not, how should the climate-related disclosures provided by foreign private issuer registrants differ from the disclosures provided by domestic registrants?

177. Should we require a registrant to disclose any material changes to the climate-related disclosure provided in its registration statement or annual report in its Form 10-Q or Form 6-K, as proposed? Are there any changes that should be required to be reported on Form 8-K?

178. Should we require the climate-related disclosure in the forms specified above? Is the application of the proposed rules to the forms sufficiently clear, or should we include additional clarifying amendments? For example, would the application of proposed Article 14 to Forms 20-F, F-1 and F-3 be sufficiently clear when a registrant prepares its financial statements pursuant to IFRS as issued by the International Accounting Standards Board (“IASB”) without reconciliation to U.S. generally accepted accounting principles (“U.S. GAAP”), or should we add a related instruction to those forms?

179. Are there certain registration statements or annual reports that should be excluded from the scope of the proposed climate-related disclosure rules? For example, should we exclude Securities Act registration statements filed in connection with a registrant's initial public offering? Would such an accommodation help address concerns about the burdens of transitioning to public company status? We have not proposed to require climate-related disclosures in registration statements on Form S-8 or annual reports on Form 11-K. Should we require such disclosures?

180. Should we require climate-related disclosure in Forms S-4 and F-4, as proposed? Should we provide transitional relief for recently acquired companies? For example, should we provide that a registrant would not be required to provide the proposed climate-related disclosures for a company that is a target of a proposed acquisition under Form S-4 or F-4 until the fiscal year following the year of the acquisition if the target company is not an Exchange Act reporting company and is not the subject of foreign climate-related disclosure requirements that are substantially similar to the Commission's proposed requirements? Should such transitional relief in this instance be for a longer period than one year and, if so, for how long should such transitional relief extend?

181. We have not proposed to amend Form 40-F, the Exchange Act form used by a Canadian issuer eligible to report under the Multijurisdictional Disclosure System (“MJDS”) to register securities or to file its annual report under the Exchange Act, to include the proposed climate-related disclosure requirements. Should we require a Form 40-F issuer to comply with the Commission's proposed climate-related disclosure requirements? Should we permit a MJDS issuer to comply with Canadian climate-related disclosure requirements instead of the proposed rules if they meet certain conditions or provide certain additional disclosures and, if so, which conditions or disclosures?

182. The proposed rules would not apply to asset-backed issuers. The Commission and staff are continuing to evaluate climate-related disclosures with respect to asset-backed securities. Should we require asset-backed issuers to provide some or all of the disclosures under proposed Subpart 1500 of Regulation S-K? If so, which of the proposed disclosures should apply to asset-backed issuers? Are other types of climate disclosure better suited to asset-backed issuers? How can climate disclosure best be tailored to various asset classes?

183. Should we adopt an alternative reporting provision that would permit a registrant that is a foreign private issuer and subject to the climate-related disclosure requirements of an alternative reporting regime that has been deemed by the Commission to be substantially similar to the requirements of proposed Subpart 1500 of Regulation S-K and Article 14 of Regulation S-X to satisfy its disclosure obligations under those provisions by complying with the reporting requirements of the alternative reporting regime (“alternative reporting provision”)? If so, should we require the submission of an application for recognition of an alternative reporting regime as having substantially similar requirements for purposes of alternative reporting regarding climate-related disclosures? Should we permit companies, governments, industry groups, or climate-related associations to file such an application? Should we require the applicant to follow certain procedures, such as those set forth in 17 CFR 240.0-13?

184. If we adopt an alternative reporting provision, should we specify certain minimum standards that the alternative reporting regime must meet in order to be recognized and, if so, what standards? For example, should we specify that an alternative reporting regime must require the disclosure of a foreign private issuer's Scopes 1 and 2 emissions and related targets, the proposed financial statement metrics, as well as disclosures pursuant to the TCFD's recommendations regarding governance, strategy, and risk management disclosure? Should we specify that the alternative reporting regime must require the disclosure of Scope 3 emissions and, if so, should we deem the alternative reporting regime to be substantially similar even if its Scope 3 emissions requirements become effective after the Commission's phase in period for Scope 3 emissions disclosure requirements? Should we specify that the alternative reporting regime must require the disclosure of scenario analysis if a registrant uses scenario analysis in formulating its strategy regarding climate-related risks? Are there certain climate-related disclosure requirements that have been adopted or are in the process of being adopted in other jurisdictions that we should consider to be substantially similar to the Commission's rules for purposes of an alternative reporting provision? If so, which requirements should we consider?

185. If we adopt an alternative reporting provision, should it be a mutual recognition system, so that, as a condition of our recognition of a particular jurisdiction as an alternative reporting regime, that jurisdiction must recognize the Commission's climate-related disclosure rules as an alternative reporting system that a registrant dual-listed in the United States and the other jurisdiction may use to fulfill the foreign jurisdiction's climate-related disclosure rules?

186. If we adopt an alternative reporting provision, should we require a registrant filing the alternative climate-related disclosure to make certain changes that we deem necessary as a condition to alternative reporting? For example, should we require a registrant to comply with XBRL tagging requirements as a condition to filing alternative climate-related disclosure? Are there other specific conditions that we should impose on disclosure under an alternative climate reporting provision?

187. If we adopt an alternative reporting provision, should we require a registrant using that system to:

• State in the filing that it is relying on this alternative reporting provision;

• Identify the alternative reporting regime for which the climate-related disclosure was prepared;

• Identify the exhibit number of the filing where the alternative disclosure can be found; and
• File a fair and accurate English translation of the alternative climate-related disclosure if in a foreign language?

Would these requirements enhance the accessibility of the alternative disclosures? Are there other requirements that we should impose to enhance the transparency of the alternative climate-related disclosure?

188. If we adopt an alternative reporting provision, should we permit a registrant to follow the submission deadline of the approved alternative reporting regime even if that deadline differs from the deadline for reporting under our rules? If so, what conditions, if any, should apply to permit the use of such alternative deadline? For example, should the registrant be required to provide adequate notice, before the due date of the Commission filing in which the alternative disclosure is required to be included? Should such notice indicate the registrant's intent to file the alternative disclosure using the alternative jurisdiction's deadline? If so, what would constitute adequate notice? For example, should the deadline for filing the notice be three, five, or ten business days before the Commission filing deadline? Should we permit a registrant to provide such notice through an appropriate submission to the Commission's EDGAR system? Should we permit a registrant to indicate in its Form 20-F or other report that it will file the alternative disclosure at a later date if permitted to do so by the alternative reporting regime? In that case, should we permit the registrant to file the alternative disclosure on a Form 6-K or 8-K? Should we instead require a registrant to submit the notice via a form that we would create for such purpose? Should there be any consequences if a registrant fails to file a timely notice or fails to file the alternative disclosure by the alternative regime's due date? For example, should we preclude such a registrant from relying on the alternative reporting provision for the following fiscal year?

189. An International Sustainability Standards Board (ISSB) has recently been created, which is expected to issue global sustainability standards, including climate-related disclosure standards. If we adopt an alternative reporting provision, should that provision be structured to encompass reports made pursuant to criteria developed by a global sustainability standards body, such as the ISSB? If so, should such alternative reporting be limited to foreign private issuers, or should we extend this option to all registrants? What conditions, if any, should we place on a registrant's use of alternative reporting provisions based on the ISSB or a similar body?

K. Structured Data Requirement

The proposed rules would require a registrant to tag the proposed climate-related disclosures in a structured, machine-readable data language. Specifically, the proposed rules would require a registrant to tag climate-related disclosures in Inline eXtensible Business Reporting Language (“Inline XBRL”) in accordance with 17 CFR 232.405 (Rule 405 of Regulation S-T) and the EDGAR Filer Manual. The proposed requirements would include block text tagging and detail tagging of narrative and quantitative disclosures provided pursuant to Subpart 1500 of Regulation S-K and Article 14 of Regulation S-X.

In 2009, the Commission adopted rules requiring operating companies to submit the information from the financial statements (including footnotes and schedules thereto) included in certain registration statements and periodic and current reports in a structured, machine-readable data language using eXtensible Business Reporting Language (“XBRL”). In 2018, the Commission adopted modifications to these requirements by requiring issuers to use Inline XBRL, which is both machine-readable and human-readable, to reduce the time and effort associated with preparing XBRL filings and improve the quality and usability of XBRL data for investors. In 2020, the Commission adopted Inline XBRL requirements for business development companies that will be effective no later than February 2023.

Requiring Inline XBRL tagging of the proposed climate-related disclosures would benefit investors by making the disclosures more readily available and easily accessible to investors, market participants, and other users for aggregation, comparison, filtering, and other analysis, as compared to requiring a non-machine readable data language such as ASCII or HTML. This would enable automated extraction and analysis of climate-related disclosures, allowing investors and other market participants to more efficiently perform large-scale analysis and comparison of climate-related disclosures across companies and time periods. At the same time, we do not expect the incremental compliance burden associated with tagging the additional information to be unduly burdensome, because issuers subject to the proposed requirements are or in the near future will be subject to similar Inline XBRL requirements in other Commission filings.

Request for Comment

190. Should we require registrants to tag the climate-related disclosures, including block text tagging and detail tagging of narrative and quantitative disclosures required by Subpart 1500 of Regulation S-K and Article 14 of Regulation S-X in Inline XBRL, as proposed? Should we permit custom tags for the climate-related disclosures?

191. Should we modify the scope of the proposed climate-related disclosures required to be tagged? For example, should we only require tagging of the quantitative climate-related metrics?

192. Are there any third-party taxonomies the Commission should look to in connection with the proposed tagging requirements?

193. Should we require issuers to use a different structured data language to tag climate-related disclosures? If so, what structured data language should we require? Should we leave the structured data language undefined?

L. Treatment for Purposes of Securities Act and Exchange Act

We are proposing to treat the proposed required climate-related disclosures as “filed” and therefore subject to potential liability under Exchange Act Section 18, except for disclosures furnished on Form 6-K. The proposed filed climate-related disclosures would also be subject to potential Section 11 liability if included in or incorporated by reference into a Securities Act registration statement. This treatment would apply both to the disclosures in response to proposed subpart 1500 of Regulation S-K and to proposed Article 14 of Regulation S-X.

Form 6-K disclosures would not be treated as “filed” because the form, by its own terms, states that “information and documents furnished in this report shall not be deemed to be “filed” for the purposes of Section 18 of the Act or otherwise subject to the liabilities of that section.” The treatment of disclosures on Form 6-K as furnished is a long-standing part of our foreign private issuer disclosure system.

Commenters expressed differing views on whether we should treat Commission-mandated climate-related disclosures as filed or furnished. Many commenters recommended that we treat such climate-related disclosures as filed. Some of these commenters stated that we should treat climate-related disclosures like financial disclosures and require them to be filed together with the rest of the Commission filing. Other commenters indicated that the treatment of climate-related disclosures as filed would help ensure that investors have confidence in the accuracy and completeness of such disclosures because of the liability associated with filed documents.

Other commenters recommended that we treat climate-related disclosures as furnished. Some of these commenters stated that the Commission's treatment of such disclosures as filed could act as a disincentive to providing “broader” disclosure and would incentivize some issuers “to disclose in the manner most limited to meet the specific requirement and avoid more robust explanation.” Other commenters stated that the treatment of climate-related disclosures as furnished would be appropriate because, in their view, much of that disclosure is based on projections and aspirational statements ill-suited to the application of a stricter liability standard.

We agree with those commenters who indicated that the treatment of climate-related disclosures as filed could help promote the accuracy and reliability of such disclosures for the benefit of investors. In this regard, we believe these disclosures should be subject to the same liability as other important business or financial information that the registrant includes in its registration statements and periodic reports. While we acknowledge commenters who stated that the methodology underlying climate data continues to evolve, we intend to provide registrants with an ample transition period to prepare to provide such disclosure. Further, much of the disclosure proposed to be required reflects discussion of a company's own climate risk assessment and strategy, which is not dependent on external sources of information. In addition, we have provided guidance and proposed rules on the applicability of safe harbors to certain disclosures under the proposed rules. For these reasons, we believe it would be appropriate for the proposed disclosures to be filed rather than furnished, except with respect to the proposed disclosure we are requiring on Form 6-K.

Request for Comment

194. Should we treat the climate-related disclosures required by proposed subpart 1500 of Regulation S-K and proposed Article 14 of Regulation S-X as filed for purposes of potential liability under the Securities Act and Exchange Act, except for the climate disclosures on Form 6-K, as proposed? Should we instead treat the climate-related disclosures required by both proposed subpart 1500 of Regulation S-K and proposed Article 14 of Regulation S-X as furnished? Are there reasons why the proposed climate-related disclosures should not be subject to Section 18 liability?

195. Should we only treat the climate-related disclosures required by proposed subpart 1500 of Regulation S-K as filed? Should we only treat the climate-related disclosures required by proposed Article 14 of Regulation S-X as filed? Is there some other subset of climate-related disclosures that should be treated as furnished rather than filed? For example, should we only treat as filed disclosures related to a registrant's Scopes 1 and 2 emissions, and treat a registrant's Scope 3 emissions as furnished?

196. Should we treat the climate disclosures on Form 6-K as filed?

M. Compliance Date

We recognize that many registrants may require time to establish the necessary systems, controls, and procedures to comply with the proposed climate-related disclosure requirements. In addition, some commenters recommended that the Commission not adopt a “one size fits all” approach when promulgating climate-related disclosure rules because such an approach would disproportionately impact smaller registrants. In order to provide registrants, especially smaller registrants, with additional time to prepare for the proposed climate-related disclosures, we are proposing phased-in dates for complying with proposed subpart 1500 of Regulation S-K and Article 14 of Regulation S-X, which would provide additional time for certain smaller registrants. The table below summarizes the proposed phase-ins for the compliance date.

The table assumes, for illustrative purposes, that the proposed rules will be adopted with an effective date in December 2022, and that the registrant has a December 31st fiscal year-end.

The proposed compliance dates in the table above would apply to both annual reports and registration statements. For example, if a non-accelerated filer with a December 31st fiscal year-end filed a registration statement that was not required to include audited financial statements for fiscal year 2024 ( e.g., the registration statement was filed in 2023 or 2024), it would not be required to comply with the proposed climate disclosure rules in that registration statement.

A registrant with a different fiscal year-end date that results in its fiscal year 2023 commencing before the effective date of the rules would not be required to comply with subpart 1500 of Regulation S-K and Article 14 of Regulation S-X until the following fiscal year. For example, a large accelerated filer with a March 31st fiscal year-end date would not be required to comply with the proposed climate disclosure rules until its Form 10-K for fiscal year 2024, filed in June, 2024. This would provide large accelerated filers, who would have the earliest compliance date of all categories of filers, with what we believe is a reasonable amount of time to comply with the rules.

We believe that initially applying the disclosure requirements to the more limited pool of large accelerated filers would be appropriate, because many large accelerated filers are already collecting and disclosing climate-related information, have already devoted resources to these efforts, and have some levels of controls and processes in place for such disclosure. In comparison, registrants that are not large accelerated filers may need more time to develop the systems, controls, and processes necessary to comply with the proposed rules, and may face proportionately higher costs. Accordingly, we propose to provide them additional time to comply.

We also recognize that obtaining the data necessary to calculate a registrant's Scope 3 emissions might prove challenging since much of the data is likely to be under the control of third parties. In order to provide sufficient time for registrants to make the necessary arrangements to begin gathering and assessing such data, we are proposing an additional one-year phase-in period for the Scope 3 emissions disclosure requirements. As previously mentioned, we also are proposing an exemption for SRCs from the proposed Scope 3 emissions disclosure provision.

The proposed mandatory compliance periods are intended to provide registrants with ample time to prepare to provide the proposed disclosures. Registrants would, however, be able to provide the disclosures at any time after the effective date of the rules.

Request for Comment

197. Should we provide different compliance dates for large accelerated filers, accelerated filers, non-accelerated filers, or SRCs, as proposed? Should any of the proposed compliance dates in the table above be earlier or later? Should any of the compliance dates be earlier so that, for example, a registrant would be required to comply with the Commission's climate-related disclosure rules for the fiscal year in which the rules become effective?

198. Should we provide a compliance date for the proposed Scope 3 emissions disclosure requirements that is one year later than for the other disclosure requirements, as proposed? Should the compliance dates for the Scope 3 emissions disclosure requirements be earlier or later? Should the compliance date for the Scope 3 emissions disclosure requirements depend upon whether the registrant is a large accelerated filer, accelerated filer, or non-accelerated filer?

199. Should we provide different compliance dates for registrants that do not have a December 31st fiscal year-end?

200. Should we include rules or guidance addressing less common situations, such as, but not limited to, reverse mergers, recapitalizations, other acquisition transactions, or if a registrant's SRC (or EGC) status changes as a result of such situations?

201. Are there other phase-ins or exemptions regarding any or all of the proposed rules that we should provide?

III. General Request for Comments

We request and encourage any interested person to submit comments on any aspect of the proposed amendments, other matters that might have an impact on the proposed amendments, and any suggestions for additional changes. With respect to any comments, we note that they are of greatest assistance to our rulemaking initiative if accompanied by supporting data and analysis of the issues addressed in those comments and by alternatives to our proposals where appropriate.

IV. Economic Analysis

We are mindful of the economic effects that may result from the proposed rules, including the benefits, costs, and the effects on efficiency, competition, and capital formation. ⁷²³ This section analyzes the expected economic effects of the proposed rules relative to the current baseline, which consists of the regulatory framework of disclosure requirements in existence today, the current disclosure practices of registrants, and the use of such disclosures by investors and other market participants.

We anticipate the proposed rules will give rise to several benefits by strengthening investor protection, improving market efficiency, and facilitating capital formation. The primary benefit is that investors would have access to more consistent, comparable, and reliable disclosures with respect to registrants' climate-related risks, which is expected to enable investors to make more informed investment or voting decisions. By providing access to this information through SEC filings for all public issuers, this enhanced disclosure could mitigate the challenges that investors currently confront in assessing the nature and extent of the climate-related risks faced by registrants and their impact on registrants' business operations and financial condition. In this way, the proposed rules may reduce information asymmetry both among investors, which can reduce adverse selection problems and improve stock liquidity, and between investors and firms, which can reduce investors' uncertainty about estimated future cash flows, thus lowering the risk premium they demand and therefore registrant's cost of capital. The proposed rules could also mitigate certain agency problems between the firm's shareholders and management, thus strengthening investor protection. Further, by enabling climate-related information to be more fully incorporated into asset prices, the proposed rules would allow climate-related risks to be borne by those who are most willing and able to bear them, thereby strengthening financial system resilience. Taken together, the proposed rules are expected to contribute to the efficient allocation of capital, capital formation, competition, and the maintenance of fair and orderly markets.

We are also mindful of the costs that would be imposed by the proposed rules. Registrants would face increased compliance burdens in meeting the new disclosure requirements. In some cases, these additional compliance burdens could be significant while in others relatively small if companies already provide information similar to that required by our rules. Other potential costs include increased litigation risk and the potential disclosure of proprietary information about firms' operations and/or production processes.

A. Baseline and Affected Parties

This section describes the current regulatory and economic landscape with respect to climate-related disclosures. It discusses the parties likely to be affected by the proposed rules, current trends in registrants' voluntary reporting on climate risks, related assurance practices, and existing mandatory disclosure rules under state and other Federal laws. These factors form the baseline against which we estimate the likely economic effects of the proposed rules.

1. Affected Parties

The proposed disclosure requirements would apply to Forms S-1, F-1, S-3, F-3, S-4, F-4, S-11, 6-K, 10, 10-Q, 10-K, and 20-F. Thus, the parties that are likely affected by the proposed rules include registrants subject to the disclosure requirements imposed by these forms, as well as investors and other market participants that use the information in these filings ( e.g. financial analysts, investment advisors, asset managers, etc.).

The proposed rules may affect both domestic registrants and foreign private issuers (FPIs). We estimate that during calendar year 2020, excluding registered investment companies, there were approximately 6,220 registrants that filed on domestic forms and approximately 740 FPIs that filed on Forms 20-F. Among the registrants that filed on domestic forms, approximately 31 percent were large accelerated filers, 11 percent were accelerated filers, and 58 percent were non-accelerated filers. In addition, we estimate that approximately 50 percent of these domestic registrants were smaller reporting companies (SRCs) and 22 percent were emerging growth companies (EGCs).

2. Current Regulatory Framework

A number of the Commission's existing disclosure requirements may elicit disclosure about climate-related risks; however, many of these requirements are principles-based in nature and thus the nature and extent of the information provided depends to an extent on the judgment of management. As discussed above, in 2010, the Commission published interpretive guidance on existing disclosure requirements as they pertain to business or legal developments related to climate change. The 2010 Guidance emphasized that if climate-related factors have a material impact on a firm's financial condition, disclosure may be required under current Item 101 (Description of Business), Item 103 (Legal Proceedings), Item 105 (Risk Factors), or Item 303 (MD&A) of Regulation S-K. While these provisions may elicit some useful climate-related disclosure, these provisions have not resulted in the consistent and comparable information about climate-related risks that many investors have stated that they need in order to make informed investment or voting decisions.

3. Existing State and Federal Laws

There are also state and other Federal laws that require certain climate-related disclosures or reporting. For instance, there are requirements for mandatory climate risk disclosure within the insurance industry. As of 2021, 14 states and the District of Columbia require any domestic insurers that write more than $100 million in annual net written premium to disclose their climate-related risk assessment and strategy via the NAIC Climate Risk Disclosure Survey. Survey question topics include climate risk governance, climate risk management, modeling and analytics, stakeholder engagement, and greenhouse gas management. In fiscal year 2020, there were 66 publicly traded insurance companies that may be required to provide disclosure pursuant to these state law provisions and that also would be subject to the proposed rules.

There also exist Federal- and state-level reporting requirements related to greenhouse gas (GHG) emissions. Federal GHG reporting requirements consist of the U.S. Environmental Protection Agency's (EPA) 2009 Mandatory Reporting of Greenhouse Gases Rule. This rule requires large direct emitters and suppliers of fossil fuels to report their emissions to the EPA. Specifically, the rule requires each facility that directly emits more than 25,000 metric tons of CO₂ e per year to report these direct emissions. Additionally, facilities that supply certain products that would result in over 25,000 metric tons of CO₂ e if those products were released, combusted, or oxidized must similarly report these “supplied” emissions. The resulting emissions data are then made public through their website.

Due to the nature of the EPA's reporting requirements, their emissions data does not allow a clean disaggregation across the different scopes of emissions for a given registrant. The EPA requires reporting of facility-level direct emissions, which can contribute to a registrant's Scope 1 emissions (but can typically be considered a subset, to the extent that the registrant has other non-reporting facilities), and facility-level supplied emissions, which can contribute to a registrant's Scope 3 emissions (but can also be very different from it). Gases required to be reported by the EPA include all those referenced by the GHG Protocol and included within the proposed definition of “greenhouse gases.” The EPA estimates that the required reporting under their rule covers 85-90% of all GHG emissions from over 8,000 facilities in the United States.

In addition, at least 17 states have specific GHG emissions reporting requirements. States' rules vary with respect to reporting thresholds and emissions calculation methodologies, but most tend to focus on direct emissions ( i.e., Scope 1), with certain exceptions. For example, New York requires the reporting of direct emissions from any owner or operator of a facility that directly emits or has the potential to emit 100 tons per year or more of GHGs, and 100,000 tons per year or more of carbon dioxide equivalent (CO₂ e). Colorado excludes oil and gas that is exported out of state, but includes both imported and exported electricity when calculating the state's emissions inventory. California requires annual reporting of GHG emissions by industrial sources that emit more than 10,000 metric tons of CO₂ e, transportation and natural gas fuel suppliers, and electricity importers. As a result of these federal and state-level emissions reporting requirements, some registrants affected by the proposed rules may already have in place certain processes and systems to measure and disclose their emissions.

4. International Disclosure Requirements

Issuers with operations abroad may also be subject to those jurisdictions' disclosure requirements. Many jurisdictions' current and/or proposed requirements are based on the TCFD's framework for climate-related financial reporting. In 2015, the Financial Stability Board (FSB) established the TCFD, an industry-led task force charged with developing a framework for assessing and disclosing climate-related financial risk. In 2017, the TCFD published disclosure recommendations that provide a framework to evaluate climate-related risks and opportunities through an assessment of their projected short-, medium-, and long-term financial impact on an issuer. The framework establishes eleven disclosure topics related to four pillars that reflect how companies operate: Governance, strategy, risk management, and metrics and targets. The TCFD forms the framework for the recently published climate prototype standard that the IFRS Foundation is considering as a potential model for standards by the IFRS Foundation's International Sustainability Standards Board (ISSB). As of September 2021, the TCFD reported that eight jurisdictions have implemented formal TCFD-aligned disclosure requirements for domestic issuers: Brazil, the European Union, Hong Kong, Japan, New Zealand, Singapore, Switzerland, and the United Kingdom. In these jurisdictions, disclosures are already being provided by in-scope issuers or are expected to start between 2022 and 2025. Plans to expand the scope of current requirements have also been announced in several countries, including the United Kingdom, the European Union, and Japan. In addition, several other jurisdictions have proposed TCFD-aligned disclosure requirements, issued policies or guidance in line with the TCFD recommendations, or otherwise indicated support for the TCFD recommendations, including Australia, Canada, Denmark, France, Ireland, Italy, Malaysia, Norway, Russia and South Korea. Insofar as issuers have operations abroad, they would already be subject to these mandatory disclosure requirements, policies and guidance.

5. Current Market Practices

a. Climate-Related Disclosures in SEC Filings

The Commission's staff reviewed 6,644 annual reports (Forms 10-K, 40-F, and 20-F) submitted from June 27, 2019 until December 31, 2020 to determine how many contain any of the following keywords: “climate change”, “climate risk”, or “global warming”. The presence of any of the keywords in any part of the annual report is indicative of some form of climate-related disclosure. Table 1 (presented as a graph in Figure 1) shows that 33% of all annual reports contain some disclosure related to climate change, with a greater proportion coming from foreign registrants (the corresponding percentages for Forms 20-F and 40-F are 39% and 73%, respectively). Table 2 (presented as a graph in Figure 2) provides a breakdown by accelerated filer status. Among large accelerated filers, 49% of filings discussed climate change, while the figures for accelerated filers and non-accelerated filers are 29% and 17%, respectively. Table 3 (presented as a graph in Figure 3), which provides a breakdown by industry groups, shows that the industries with the highest percentage of annual reports containing climate-related disclosure include maritime transportation, electric services, oil and gas, steel manufacturing, and rail transportation, among others.

Using the same sample of annual reports, additional analysis was conducted by Commission's staff using natural language processing (NLP), which can provide insight on the semantic meaning of individual sentences within registrants' climate-related disclosures and classify them into topics ( i.e. clusters). The NLP analysis suggests that climate-related disclosures can be broadly organized into four topics: Business impact, emissions, international climate accords, and physical risks. The analysis finds significant heterogeneity, both within the quantity and content, of climate-related disclosures across industries, as shown in Figures 4 and 5. Figure 4 presents the intensity of disclosure for domestic filings. The intensity refers to sentences per firm, which is calculated by taking the aggregate number of sentences in an industry and dividing it by the total number of firms within the industry (including those that do not discuss climate change at all). Thus, the intensity represents a more comparable estimate across industries.

Figure 4 shows that firms in the following industries have the most ample climate-related discussion, on average: Electric services, oil and gas, steel manufacturing, passenger air and air freight, and maritime transportation. The majority of the discussion is on business impact, followed by emissions, international climate accords, and physical risks. Figure 5 presents the corresponding information for foreign filings (Forms 40-F and 20-F). Overall, the analysis indicates that the majority of the disclosure is focused on transition risks, with comparatively fewer mentions of physical risk.

The staff's findings are consistent with academic studies that have looked at the extent of climate-related disclosures by SEC registrants. Bolstad et al. (2020) systematically reviewed Form 10-K filings from Russell 3000 firms over the last 12 years and found that the majority of climate-related disclosure is focused on transition risks as opposed to physical risks. They further report that while 35% of Russell 3000 firms provided climate-related information in 2009, this figure grew to 60% in 2020, representing a significant increase. They also found that the extent of disclosure for a given report has increased. In 2009, firms mentioned climate risks 8.4 times on average in their Form 10-K. This figure grew to 19.1 times in 2020.

b. Additional Trends in Climate-Related Disclosures

While Commission staff reviewed certain firms' sustainability reports for climate-related disclosures, they did not conduct a systematic review of a large, representative sample of sustainability reports. However, as discussed below, a number of industry and advocacy groups have examined the scope of voluntary ESG reporting, including climate-related disclosures and their findings could be relevant to an assessment of the proposed rules' impact.

The U.S. Chamber of Commerce's Center for Capital Markets Competitiveness (CCMC), in collaboration with several other organizations, conducted a survey (“CCMC Survey”) on a sample of U.S. public companies—436 companies across 17 industries that range from small to large in terms of market capitalization. According to the survey, over half of the companies (52%) are currently publishing a corporate social responsibility (CSR), sustainability, ESG or similar report whose content commonly includes information regarding climate-related risks. The most frequently discussed topics there are energy (74%), emissions (70%), environmental policy (69%), water (59%), climate mitigation strategy (57%), and supplier environmental policies (35%). Among the registrants that report climate-related information to the public, the majority disclose such information via external reports or company websites rather than regulatory filings. Similar to the Commission staff review, the CCMC Survey finds that about a third (34%) of the respondents disclose climate change, greenhouse gas emissions, or energy sourcing in their SEC filings information on risks. Among these firms, 82% disclose such information in Risk Factors, 26% in the MD&A, 19% in the Description of Business, and 4% in Legal Proceedings.

The Governance & Accountability Institute (“G&A”) analyzed sustainability reports by the companies belonging to the Russell 1000 Index and found that in 2020, 70% published sustainability reports—up from 65% in 2019 and 60% in 2018.

Other sources confirm that, at least within samples of larger firms, a sizeable portion already measure and disclose their emissions, though not necessarily through their regulatory filings. The CDP reports that out of the 524 U.S. companies in their Climate High Impact Sample, 402 disclosed through the CDP system in 2021, up from 379 in 2020, and 364 in 2019. Out of the sample of reviewed companies, 22.1% (89 out of 402 companies) reported Scope 3 emissions in 2021. This reflects an increase from the previous two years, during which 18% (67 out of 379 companies) reported such information in 2020, and 17% (62 out of 364 companies) in 2019. One commenter stated that there is significant variation in disclosure rates of GHG emissions across various industries. The commenter, using a sample of the 1,100 U.S. companies included within the Sustainalytics dataset, reports that the disclosure rate of material Scopes 1, 2, and 3 emissions is 59.5%. Furthermore, the International Platform on Sustainable Finance found that among the U.S. listed firms present in the Refinitiv dataset, 10.8% disclosed Scope 1 emissions in 2019, representing 55.4% of U.S. market capitalization. To the extent that registrants' current climate-related disclosures overlap with the proposed rules, registrants may face lower incremental compliance costs, as discussed in further detail below.

c. Use of Third-Party Frameworks

Some companies follow existing third-party reporting frameworks when developing climate-related disclosures for SEC filings or to be included in CSR, sustainability, ESG, or similar reports. For instance, the CCMC Survey finds that 59% of respondents follow one or more such frameworks. Among these respondents, 44% use the SASB, 31% use the GRI, 29% use the TCFD, and 24% use the CDP. Similar statistics on the usage of different reporting frameworks are also provided by other studies. The G&A report finds that 53% of the Russel 1000 reporters either mention or align with SASB, 52% utilized GRI reporting standards, 30% either mention or align with TCFD recommendations, and 40% responded to the CDP Climate Change questionnaire. The law firm White & Case also conducted an in-depth review of website sustainability disclosures by 80 small- and mid-cap firms across five different industries and found comparable numbers.

While these various frameworks are distinct, they overlap in their alignment with the TCFD. In particular, the CDP questionnaire fully incorporates the TCFD framework and thus exhibits full alignment. The Corporate Reporting Dialogue also provides a detailed assessment of the various frameworks' degrees of alignment with each TCFD disclosure item, ranging from maximum to minimum alignment as follows: Full, Reasonable, Moderate, Very Limited, and None. They report that the GRI exhibits “Reasonable” alignment, while the SASB generally exhibits “Moderate” or “Reasonable” alignment with the majority of the TCFD disclosure items. Thus, companies that report following the CDP, SASB, or GRI frameworks are, to varying degrees, already producing disclosures that are in line with parts of the TCFD. However, because each framework takes different approaches ( e.g. intended audience, reporting channel) and because certain differences exist in the scope and definitions of certain elements, investors may find it difficult to compare disclosures under each framework. Table 4 reports the rate of disclosure for each TCFD disclosure element for a sample of 659 U.S. companies in 2020/21.

d. Climate-Related Targets, Goals, and Transition Plan Disclosures

Carbon reduction targets or goals have become an increasing focus for both companies and countries. For example, 191 countries, including the United States and European Union, have signed the Paris Climate Agreement. The agreement aims to strengthen the global response to the threat of climate change by keeping a rise in global temperatures to well below 2 °Celsius above pre-industrial levels this century, as well as pursue efforts to limit the temperature increase even further to 1.5° degrees Celsius. As of 2020, according to one source, about two-thirds of S&P 500 companies have established a target for carbon emissions—a number that has nearly doubled over the past decade. Approximately one-fifth of these companies have science-based targets in-line with a 1.5 degree Celsius limit on global warming. In addition, a growing number of companies or organizations have signed on to the Climate Pledge, which indicates a commitment to achieve net-zero emissions by 2040. The trend in companies disclosing other climate-related targets ( e.g. water usage) has also been increasing over time.

Despite the increasing prevalence in stated targets and goals, monitoring which firms are taking steps to implement them is difficult given the lack of required recurring standardized metrics for progress. Absent such a monitoring device, investors have insufficient information to gauge the credibility of the targets. Moreover, without knowing the specific strategy that registrants intend on adopting in pursuit of their targets, investors are unable to determine how the targets will impact the company's financial position ( e.g., a company that plans to only purchase offsets may face different risks and costs over time than a company that invests in renewable energy or carbon capture technology).

Consistent with this need for an oversight or monitoring mechanism, research suggests that the prevalence of “green bonds” and positive cumulative abnormal stock returns surrounding their announcements may arise, at least in part, because they help signal credible value-enhancing targets in the absence of mandatory standardized public disclosures. These findings suggest a demand for such an oversight or monitoring mechanism for targets and goals among investors that would facilitate their understanding of registrants' stated climate-related targets and progress and the impact on the registrant's business.

e. Third-Party Assurance of Climate-Related Disclosures

Among the companies that provide climate-related disclosures, a considerable portion include some form of third-party assurance for these disclosures. The G&A study finds that 35% of Russell 1000 index firms, which are virtually all large accelerated filers, obtained third-party assurance for their sustainability reports in 2020, up from 24% in the year prior. The rate of assurance is concentrated among the larger half of the sample firms ( i.e., the S&P 500 firms). Among the firms that obtained assurance, however, only 3% obtained assurance for the entire report. The remaining firms were evenly split between obtaining assurance on specified sections only and GHG emissions only. Regarding the level of assurance, the overwhelming majority (90%) obtained limited assurance while only 7% obtained reasonable assurance. Regarding service providers, 14% of firms received assurance from an accounting firm, 31% from small consultancy/boutique firms, and 55% from engineering firms. Because these statistics are limited to Russell 1000 firms, corresponding figures for the full sample of U.S. registrants may be lower to the extent that the practice of obtaining third-party assurance is concentrated in large firms.

B. Broad Economic Considerations

1. Investors' Demand for Climate Information

Investors have expressed a need for information on climate-related risks as they relate to companies' operations and financial condition. The results of multiple recent surveys indicate that climate risks are among the most important priorities for a broad set of large asset managers. PWC reported in their Annual Global CEO Survey that in 2016, only 39% of asset and wealth management CEOs reported that they were concerned about the threats posed by physical risks brought about climate change, whereas this figure increased to 70% in 2021.

Investors' demand for climate-related information may also be related to the transition risks that companies face ( e.g. changes in future regulation, shifts in investor, consumer, counterparty preferences or other market conditions, and other technological challenges or innovations). For example, the United States' commitment to the Paris Agreement may have contributed to investors' demand for information on registrants' emissions and exposure to potential transition risk, as well as whether they have in place emissions targets with credible pathways of achievement. The 2021 Institutional Investors Survey solicited the views of 42 global institutional investors managing over $29 trillion in assets (more than a quarter of global assets under management (AUM)) and found that climate risk remains the number one investor engagement priority. A significant majority (85%) of surveyed investors cite climate risk as the leading issue driving their engagements with companies. These institutional investors also indicated that they consider climate risk to be material to their investment portfolios and are demanding robust and quantifiable disclosure around its impacts and the plan to transition to net zero.

State Street Global Advisors (SSGA) and Blackrock, two of the world's largest investment managers, recently announced the focus areas for their asset stewardship program for 2022, with climate change at the top of their priority list. One of the key expectations set by SSGA this year is a requirement for companies to provide disclosures aligned with TCFD recommendations, including reporting on board oversight on climate-related risks and opportunities, Scope 1 and 2 GHG emissions, and targets for emissions reduction. Similarly, Blackrock expects to continue encouraging companies to demonstrate that their plans are resilient under likely decarbonization pathways, and to ask that companies disclose a net zero-aligned business plan that is consistent with their business model to demonstrate how their targets are consistent with the long-term economic interests of their shareholders.

Investors, including large institutional investors, have also formed initiatives aimed in part at improving corporate disclosures on climate-related risks. These initiatives include the Climate Disclosure Project, Climate Action 100+, the Global Investor Coalition on Climate Change (“GIC”), the Institutional Investors Group on Climate Change (“IIGCC”), and the Transition Pathway Initiative (“TPI”), with many of these groups seeing increasing membership in recent years. In addition to stated demand, revealed preferences from investment decisions and asset price responses to ESG-related news and climate change risk suggest substantive demand for information on climate-related risks. Investors have also demonstrated their interest in climate-related issues through an increase in climate-related shareholder proposals and increased flows into mutual funds with environmental goals in their investment mandates.

2. Impediments to Voluntary Climate-Related Disclosures

a. General Impediments to Voluntary Climate-Related Disclosures

In practice, however, investors' demand for climate-related information is often met by inconsistent and incomplete disclosures due to the considerable variation in the coverage, specificity, location, and reliability of information related to climate risk. Multiple third-party reporting frameworks and data providers have emerged over the years; however, these resources lack mechanisms to ensure compliance and can contribute to reporting fragmentation. Due to deficiencies in current climate-reporting practices, investor demand for comparable and reliable information does not appear to have been met. As a result, investors may face difficulties locating and assessing climate-related information when making their investment or voting decisions. Below we describe some key market failures with regard to disclosure, for example (1) disclosures are not costless; (2), there are agency problems; (3) managers may inaccurately present information; and (4) investor responses may be unpredictable and non-unfirm. In addition, there may be other problems, e.g. a lack of consistency, that may indicate Commission action.

(1) Disclosures Are Not Costless

In practice, firms can still approach full disclosure voluntarily if there are costs to disclosure, as long as these costs are relatively low. This is not the case, however, if individual firms' private benefits of disclosure are also small, yet those same disclosures provide positive informational externalities. For example, disclosures by one registrant may provide investors with useful information via inference with respect to peer firms. Consistent with this theory, research in the accounting literature has documented that earnings announcements by one firm can provide predictive signals about the earnings of other firms in the same industry. In these cases, disclosures can benefit investors in the aggregate (though not necessarily investors of a specific firm) by allowing them to make comparisons across firms, which can aid in their capital allocation decisions.

This illustrates how, theoretically, in the absence of mandated disclosure requirements, registrants fully internalize the costs of disclosure but not the benefits, which may lead them to rationally under-disclose relative to what is optimal from the investors' perspective. As a result, a tension can exist between investors (in the aggregate) and managers, where investors prefer more disclosure and managers prefer less. In such instances, there may be scope for regulation to substantially increase information provision since absent regulation, investors are not able to fully ascertain the risks and opportunities that firms face.

(2) Agency Problems

In order for voluntary disclosure to result in the complete revelation of all relevant private information, there would need to be no agency problems ( i.e., no conflicts of interest between managers and shareholders) such that managers' sole objective with respect to such disclosures would be to maximize shareholder information and, ultimately, shareholder value. However, if managers have other objectives and incentives for making voluntary disclosures ( i.e., there exist agency problems), then the voluntary disclosures may not result in the same complete information. Moreover, when agency problems exist, investors can no longer be sure if the absence of disclosure under a voluntary regime reflects good or bad news for the firm, given that some managers may have self-serving incentives. For example, managers may have career concerns which could incentivize them to withhold disclosing information they expect to be favorably received until it is useful to balance out bad news. In contrast, when the disclosure requirements are mandatory, the relevant, complete information should be disclosed regardless of managers' objectives or incentives, and investors would accordingly have more confidence in the completeness of the resulting disclosures. For these reasons, the benefits of a mandatory reporting regime may be more pronounced in settings in which disclosure-related conflicts of interests exist between managers and shareholders.

(3) Misrepresentation by Managers

If investors are unable to verify that managerial disclosures are complete and truthful ( e.g., if investors have difficulty in determining the extent of managers' selective disclosure of metrics or methods of computation, exaggeration, obfuscation, outright misreporting, etc.), then voluntary disclosures may not be fully revealing. For example, managers may be able to engage in misleading reporting ( i.e., they can apply a favorable bias to their disclosures), but they incur a cost that increases with the magnitude of the misreporting. Under these circumstances, theoretical research suggests that, in equilibrium, they may not accurately report their private information. This is because investors would not be able to distinguish truthful disclosures from those that are misleading ( i.e., favorably biased). In this setting, all managers would then have an incentive to misreport by providing disclosures with a favorable bias, the extent of which depends on the cost of misreporting. Furthermore, because misreporting comes at a cost, this would violate the assumption of costless disclosure, which can exacerbate the issue of incomplete disclosures.

If, on the other hand, misreporting has no costs for managers, then this results in what is referred to as a cheap talk equilibrium. In this setting, any misalignment of incentives between managers and investors could again result in a situation in which not all relevant private information is fully revealed. While this could be driven by agency problems stemming from managerial self-interest, it also occurs when investors have heterogeneous preferences that cause differing incentives or if managers are concerned with strategic disclosures that may be viewed by not only investors, but also competitors, regulators, and customers.

In this case, a mandatory reporting regime would be beneficial to investors to the extent that voluntary disclosures are unverifiable and possibly misleading. These include situations where managers obfuscate certain information in their disclosures, convey information in a complex or difficult manner, or conceal the discretionary choices with respect to what was reported.

(4) Uncertain Investor Responses

Another condition necessary for voluntary reporting to be fully revealing is that managers must be certain of investor responses to disclosures. However, if investors have heterogeneous prior beliefs, such that managers cannot determine whether investors will consider a given disclosure good or bad news, then not all managers will choose to disclose, resulting in certain private information remaining undisclosed. Similarly, if there are varying levels of sophistication among investors in their ability to understand disclosures, then again, some managers may be uncertain about how reports may be interpreted, leading them to abstain from some disclosures. In this respect, mandatory disclosure is more likely to benefit investors in settings where the types of disclosures are complex or divisive, such that managers may not be certain how they will be perceived by investors with differing prior beliefs and/or sophistication.

b. Climate-Specific Factors That Exacerbate Impediments to Voluntary Disclosure

In the context of climate-related disclosure, these impediments may be made worse due to agency problems arising from the potentially long-term nature of certain climate-related risks and other issues related to the complexity and uncertainty of climate-related factors. We explore each of these impediments in further detail.

Impediments to climate-related disclosures may be exacerbated due to agency problems related to potential conflicts between short-term profitability and long-term climate risk horizons. Physical and transition risks can materialize over time horizons ranging from the immediate future to several decades. Likewise, shareholders may have interests in maximizing their investment returns over both the short- and long-term. Agency problems can worsen to the extent that the investment horizons of a firm's shareholders and its management are misaligned. If management prioritizes short-term results due to pressures to perform along certain metrics, management may fail to assess and provide relevant disclosures on certain climate-related risks, particularly those that are medium- or long-term in nature. Stock-based management compensation has the potential to mitigate this issue, provided that the stock price reflects the value of the company in the long-run. However, under the current regime, certain climate-related risks may be unobservable or obfuscated, and hence not fully reflected into stock prices, giving short-term-focused managers an incentive to initiate or continue projects exposed to these risks to maximize their compensation at the expense of long-term shareholder value.

Impediments to voluntary climate-related disclosures can also be exacerbated due to the uncertainty and complexity of climate-related risks and the multidimensional nature of the information being disclosed. First, this uncertainty and complexity may lead to misrepresentation of disclosures, which, as discussed previously, violates a condition for the full revelation of material information in a voluntary reporting environment. The complexity of these risks has led to many types of methodologies, metrics, and statements that can be provided to communicate potential economic impacts and risks. This multitude of choices to represent such risks may therefore allow managers substantial discretion to selectively choose metrics that appear favorable. If this managerial discretion is more difficult to be verified by investors, managers may face lower costs for their misreporting. Moreover, the complex and multidimensional nature of certain climate-related risks may further impede investors' abilities to detect misreporting. This could lead to a cheap-talk equilibrium, which, as previously discussed, could lead to climate-related information remaining undisclosed.

The uncertainty and complexity of climate-related risks may also be an impediment to voluntary disclosure if managers are less able to anticipate how investors may respond to such disclosures. As noted above, predictable investor responses to disclosures is one of the key assumptions necessary for the full revelation of material information in a voluntary reporting environment. Uncertainty in responses means mandatory disclosures have the potential to improve information provision to investors. The challenge in anticipating investor responses to climate-related disclosure may stem, in part, from the fact that the impact of these risks on registrants' financial outcomes and operations can vary significantly. This challenge may be compounded by the uncertainty surrounding the future path of climate change and the evolving nature of the science and methodologies measuring their economic impacts. The uncertainty and complexity of climate-related risks are likely to cause substantial heterogeneity with respect to investors' interpretation of related disclosures and their understanding of firms' exposures to such risks, resulting in heterogeneous and unpredictable investor responses. In this circumstance, managers may prefer to withhold applicable disclosures.

Due to these impediments, companies may not report (or may report only limited amounts of) relevant climate-related information, and hence, the stock price that investors observe may not reflect the companies' true exposures to physical and transition risks. Even when companies assess and disclose climate-related risks, reporting fragmentation can present substantial obstacles to investors in processing this information. This is because disclosures currently vary considerably in terms of coverage, location, and presentation across companies, making it difficult for investors to navigate through different information sources and filings to identify, compare, and analyze climate-related information. Moreover, these disclosures are often vague and boilerplate, creating further challenges for investors. While it may seem that more information is always better, when the incentives of investors and managers diverge, evidence suggests such amorphous statements could reduce the quality of communication both in theory and in practice.

The current regulatory regime leaves substantial uncertainty around the type of climate-related information that should be disclosed and how it should be presented. Multiple third-party climate reporting frameworks have emerged to try to fill this reporting gap. Due to the voluntary nature of third-party frameworks, however, companies often disclose some but not all components, and the components that are disclosed may not be the same across companies. The location, format, and granularity of the information provided may also vary, although the substance may be similar. This has resulted in considerable heterogeneity in firms' existing disclosure practices. The wide range of reporting practices and frameworks makes it difficult to assess how much material climate-related information firms currently are disclosing and may leave opportunities for companies to omit unfavorable information. Some studies point to the potential for substantial underreporting of material climate-related information within the current voluntary reporting regime.

The proposed rules aim to address these market failures by requiring more specificity around the way registrants disclose climate-related risks and their impacts on business activities and operations in the short, medium, and long-term. By requiring comprehensive and standardized climate-related disclosures along several dimensions, including disclosure on governance, business strategy, risk management, financial statement metrics, GHG emissions, and targets and goals, the proposed rules would provide investors with climate-related information that is more comparable, consistent, and reliable and presented in a centralized location.

C. Benefits and Costs

Below we discuss the anticipated economic effects that may result from the proposed rules. Where possible, we have attempted to quantify these economic effects, including the benefits and costs. In many cases, however, we are unable to reliably quantify these potential benefits and costs. For example, existing empirical evidence does not allow us to reliably estimate how enhancements in climate-related disclosure affect information processing by investors or firm monitoring. Nevertheless, there is a large body of studies examining the effects of corporate disclosure in general, as well as a subset focusing on sustainability-related disclosures ( e.g. ESG- or CSR-related disclosures). We draw on existing empirical evidence and theoretical arguments from these studies to the extent they are applicable to disclosures on climate-related information specifically.

Similarly, we qualitatively describe the factors that may affect disclosure costs but we are unable to accurately quantify these costs. Costs related to preparing climate-related disclosures are generally private information known only to the issuing firm, hence such data are not readily available to the Commission. There is also likely considerable variation in these costs depending on a given firm's size, industry, complexity of operations, and other characteristics, which makes comprehensive estimates difficult to obtain.

We encourage commenters to provide us with relevant data or empirical evidence related to the costs of preparing climate-related disclosures and, more generally, to provide us with any type of data that would allow us to quantitatively assess the costs and benefits of the proposed rules.

1. Benefits

The primary benefit of the proposed rules is that investors would have access to more comparable, consistent, and reliable disclosures with respect to registrants' climate-related risks. As discussed in the previous sections, investors currently face obstacles in accessing comparable, consistent, and reliable climate-related information due to a combination of registrants not disclosing this information at all, or registrants disclosing this information but with varying degrees of coverage and specificity and in varying formats and locations, including company websites, standalone reports, and SEC filings.

Investors are expected to benefit from the required disclosures given that material climate-related information would be provided to the market more consistently across registrants of different sizes and filer status, whether domestic or foreign issuers, and regardless of industry. Investors are also expected to benefit from the more consistent content of the disclosures. Specifically, the proposed rules would enhance comparability by requiring registrants to provide disclosures on a common set of qualitative and quantitative climate-related disclosure topics in their filings.

In addition to the standardized content, investors are expected to benefit from a common location of the disclosures in regulatory filings. The proposed rules would require registrants to place all relevant climate-related disclosures in Securities Act or Exchange Act registration statements and Exchange Act annual reports in a separately captioned “Climate-Related Disclosure” section, or alternatively, to incorporate by reference from another section, such as Risk Factors, Description of Business, or MD&A. By mandating that standardized climate-related information be disclosed, and requiring it to be placed in a centralized location within regulatory filings, the proposed rules could reduce investors' search costs and improve their information-processing efficiency. These factors can also lead to positive information externalities—as more firms disclose how measures of climate risk affect their business operations, investors would gain a better understanding of how those same climate risks may affect other similar firms.

Furthermore, by requiring this information to be filed with the Commission as opposed to posted on company websites or furnished as exhibits to regulatory filings, the proposed rules are expected to improve the reliability of information provided to investors moving forward. Several commenters indicated that the treatment of climate-related disclosures as filed would help improve investor confidence in the accuracy and completeness of such disclosures. Recent academic work provides evidence of firms' engagement in obfuscation and other misleading efforts (so-called “greenwashing”) to manipulate the set of information available on corporate websites and sustainability reports with the goal of attaining higher ESG ratings, which are relied upon, in particular, by unsophisticated investors for the value of institutional certification. Direct disclosures may also reduce reliance on these ESG ratings, which are not necessarily standardized nor fully transparent with respect to their methodologies. In fact, several studies found low correlations of classifications across ESG providers. Additionally, a study suggested that models and metrics used by ESG providers for appropriately classifying funds are not always transparent and consistent across ESG providers.

As discussed in Section IV.B.1, surveys of institutional investors indicate that climate risk is one of the most prominent issues driving their investment decisions and engagements with companies. Evidence from the stock market response appears consistent with this, with increased mandatory ESG disclosure being associated with aggregate stock price movement. Such stock price effects tend to display cross-sectional heterogeneity with, for example, firms disclosing large GHG emissions experiencing price declines. Similar effects have also been observed in derivatives markets. Investor responses in real estate markets potentially affected by physical risks, as well as revealed preferences from flows into mutual funds with environmental goals in their investment mandates, provide further evidence of investors' interest in disclosures pertaining climate risks. Taken together, the mandatory and standardized nature of the proposed climate-related disclosures could benefit investors by improving their ability to assess these risks and their impact on registrants' financial condition and operations, thereby allowing investors to make better-informed investment decisions and enhancing investor protection.

Improving and standardizing climate disclosures also could mitigate adverse selection problems that may arise in the presence of asymmetric information by making more accurate and standardized information available to the general public. Improved disclosure could make it easier for investors to process information more effectively and improve the estimation of firm's future cash flows, leading to more accurate firm valuation. In particular, the enhanced disclosures may yield further benefits for the disclosures of financial firms. Because financial firms can have significant exposures to climate-related risks through their portfolio companies, any enhancements in the portfolio companies' disclosures can subsequently be leveraged by these financial firms in assessing the risks to their portfolios and to the firm as a whole.

Another benefit of the proposed rules is that it could allow firm's shareholders to better monitor management's decisions and mitigate certain agency problems stemming from management's discretionary choices with respect to climate disclosure. Agency problems could occur when management act opportunistically in their own self-interest at the expense of shareholders by disclosing only certain climate-related information at their discretion. As previously discussed in Section IV.B.2.b, management may be motivated to selectively disclose only climate-related information, while omitting harder to verify risks. In the context of climate-related risks, agency issues may be exacerbated by the potential conflicts between short-term profitability and long-term climate risk horizons and the misalignment of interests and incentives between long-term shareholders and management, whereby the latter may unduly focus on short-term results given pressures to demonstrate performance. Under the current regime, many climate-related risks may be unobservable or obfuscated, giving short-term-focused managers an incentive to initiate projects exposed to these risks without properly informing investors.

Agency problems might be exacerbated by registrants' use of boilerplate language or selective disclosure ( i.e., “cherry picking”), which might reduce transparency and impair investors' ability to effectively monitor firm management. The lack of a standardized disclosure framework could make it easier for registrants to forego the use of certain metrics or scopes and omit information that might otherwise indicate shortcomings. Previous studies have found that more detailed reporting can mitigate agency problems as it facilitates the scrutiny and discipline of firm management, allowing investors to monitor firms' operations more closely and thus evaluate whether managers have acted in the best interests of shareholders. By requiring registrants to provide comprehensive and detailed climate-related information to investors, the proposed rules are expected to reduce the likelihood of unreliable or boilerplate disclosures. This can enable investors to better monitor firm's management, reducing agency problems and ultimately strengthening investor protection. In the following sections, we discuss how specific aspects of the proposed rules could contribute to the aforementioned benefits.

The proposed rules would mandate more detailed and comprehensive disclosure with respect to climate-related risks. More consistent, comparable, and reliable disclosures could lead to capital market benefits in the form of improved liquidity, lower costs of capital, and higher asset prices (or firm valuations). These benefits would stem from reductions in information asymmetries brought about by the required disclosure of climate-related information, both among investors and between firms and their investors. In the first case, less information asymmetry among investors could mitigate adverse selection problems by reducing the informational advantage of informed traders. This is likely to improve stock liquidity which, in turn, can attract more investors, thereby reducing the cost of capital. In the second case, less information asymmetry between firms and their investors could allow investors to better estimate future cash flows, which could reduce investors' uncertainty, as well as the risk premium they demand, thus lowering the costs of capital for registrants. Economic theory illustrates how, all else equal, a drop in the cost of capital leads to a boost in equity valuation, which can further benefit investors.

a. Disclosure Regarding Climate-Related Risks and Their Impacts on Strategy, Business Model, and Outlook

The proposed rules would require registrants to identify their climate-related risks that are reasonably likely to have a material impact on the registrant's business or consolidated financial statements over the short, medium, and long-term and describe the actual and potential impacts of those risks on its strategy, business model, and outlook. Registrants would specifically be required to disclose impacts on, or any resulting significant changes made to, their: (i) Business operations, including the types and locations of its operations; (ii) products or services; (iii) supply chain or value chain; (iv) activities to mitigate or adapt to climate-related risks; and (v) expenditures for research and development.

If, as part of its net emissions reduction strategy, a registrant uses carbon offsets or RECs, the proposed rules would require it to disclose specific information around the role that carbon offsets or RECs play in the registrant's climate-related business strategy. If a registrant uses an internal carbon price, the proposed rules would require it to disclose information around the boundaries for measurement of overall CO₂ e, the price per metric ton of CO₂ e, as well as how the total price is estimated to change over time, if applicable. Similarly, to the extent that the registrant uses analytical tools such as scenario analysis, the proposed rules would require a description of those analytical tools, including the assumptions and methods used.

The specific disclosures required by the proposed rules are expected to improve investors' understanding of what the registrant considers to be the relevant short-, medium-, and long-term climate-related risks that are reasonably likely to have a material impact on its business, taking into consideration the useful life of the organization's assets or infrastructure and the fact that climate-related risks may manifest themselves over the medium and longer terms. Compared to the baseline, investors would be better able to identify and assess how climate-related risks may affect a registrant's businesses, strategy, and financial planning in several areas, including products and services, supply chain and/or value chain, adaptation and mitigation activities, investment in research and development, operations (including types of operations and location of facilities), acquisitions or divestments, and access to capital. Investors would gain insight into how climate-related risks may serve as an input to the registrant's financial planning process and the time period(s) used for this process.

For example, investors may gain better insights into the registrant's estimated costs of any operational changes expected to be implemented to achieve emission reduction targets. Alternatively, investors may gain valuable information on how certain climate events may impact the registrant's property, workforce, or its production schedule across the different physical sites where the registrant conducts business. Adverse climate-related events may impact the useful lives and/or valuation reserves of balance sheet assets. For example, sea level increases and other climate related patterns may adversely impact the estimated useful lives of coastal facilities. Similarly, more extreme weather patterns may adversely impact agricultural regions and the value of related equipment and lands. This information is expected to be useful for investors in assessing how climate-related risks are managed, and whether and how these risks may affect a registrant's financial condition and results of operations. The required disclosure around the role that carbon offsets or RECs play in the registrant's climate-related business strategy could help investors better understand that strategy, including how resilient it is to changes in costs or the availability or value of offsets or RECs over the short, medium and long-term. The required disclosures around internal carbon price, when used by a registrant, could provide investors with more standardized and detailed information regarding how the registrant developed a particular business strategy and help investors assess whether a registrant's internal carbon pricing practice is reasonable and whether its overall evaluation and planning regarding climate-related factors is sound. The required disclosure around the assumptions and methods used by a registrant when employing analytical tools or conducting scenario analysis can improve investors' assessment of the resiliency of a registrant's strategy and business model in light of foreseeable climate-related risks and improve investors' ability to compare said resiliency among registrants.

The proposed requirement to identify material climate-related risks over the short-, medium-, and long-term could also help mitigate agency problems deriving from the potential misalignment of planning horizons between the firm's shareholders and its managers. The information required to be disclosed about the firm's business operations, products or services, supply or value chain, activities to mitigate or adapt to climate-related risks, and expenditure for research and development could allow investors to assess how climate-related issues may impact the registrant's financial performance ( e.g., revenues, costs) and financial condition ( e.g., assets, liabilities). These disclosures should allow investors to gain valuable insights on how resources are being used by management to mitigate climate-related risks and to facilitate investors' evaluation of whether managers are taking appropriate steps to address such risks.

b. Governance Disclosure

The proposed rules would require a registrant to disclose information concerning the board's oversight of climate-related risks as well as management's role in assessing and managing those risks. The proposed rules would require a registrant to disclose whether any member of its board of directors has expertise in climate-related matters and the processes and frequency by which the board discusses climate-related factors. When describing management's role in assessing and managing climate-related factors, a registrant would be required to disclose whether certain management positions are responsible for assessing and managing climate-related factors and the processes by which the responsible managers are informed about and manage climate-related factors.

The disclosures required by the proposed rules should enable investors to better understand how the firm is informed about climate-related factors and how frequently the firm considers such factors as part of its business strategy, risk management, and financial oversight. Investors would be expected to gain better information around whether the organization has assigned climate-related responsibilities to management-level positions or committees and, if so, whether those responsibilities include assessing and/or managing climate-related risks. As a result, investors may be better able to understand and evaluate the processes by which management is informed about and monitors climate-related risks. For example, investors may be better positioned to assess whether and how the firm's board and management consider climate-related risks when reviewing and guiding business strategy and major plans of action, when setting and monitoring implementation of risk management policies and performance objectives, and when reviewing and approving annual budgets.

With detailed information about climate expertise among the registrant's directors, investors could more effectively evaluate the firm's governance practices related to the identification and management of climate-related risks. In particular, investors may be able to exercise closer oversight of management's actions as they assess implementation of risk management policies and performance objectives, review and approve annual budgets, and oversee major capital expenditures, acquisitions, and divestitures.

c. Risk Management Disclosure

The proposed rules would require registrants to describe their processes for identifying, assessing, and managing climate-related risks. This includes disclosure on how registrants assess materiality, whether they consider likely future regulatory actions, how they prioritize, mitigate, or adapt to climate-related risks, and overall how climate-related factors are integrated into the registrants' risk management systems or processes. Registrants would also be required to provide detailed descriptions on any transition plans, as applicable, including relevant targets and metrics, how physical and transition risks are managed, and actions taken and progress made toward the plan's targets or goals.

The disclosures required by the proposed disclosures could inform investors regarding how proactive and diligent registrants may be with respect to climate-related risks. Investors can use this information to acquire a more detailed understanding of how resilient registrants' risk management systems may be towards climate-related risks, which could contribute to better-informed investment or voting decisions. These disclosures could allow investors to better monitor and assess whether registrants have in place adequate risk management systems and whether they are aligned with investor preferences.

Conversely, investors may be better able to detect whether certain registrants' risk management systems would fail to account for certain types of climate factors such as change in consumer preferences, adjustments of business models, and technological challenges or innovations, which may have implications on companies' operations and financial conditions. These disclosures may also allow investors to assess whether registrants are evaluating these risks over specific time horizons, which may be particularly relevant in cases in which management may be more concerned with short-term performance while neglecting longer term risks. Accordingly, this provision could help address agency problems related to the misalignment of planning horizons.

d. Financial Statement Metrics

The proposed rules would require registrants to disclose certain disaggregated climate-related metrics in its financial statements under the following categories: (i) Financial impact metrics; (ii) financial expenditure metrics; and (iii) financial assumptions. The proposed rules would require a registrant to disclose the impact of climate-related events (severe weather events and other natural conditions and physical risks identified by the registrant) and transition activities (including transition risks identified by the registrant) on its consolidated financial statements, if the disclosure threshold is met. For each type of metric, the provisions would require the registrant to disclose contextual information to enable the reader to understand how it derived the metric, including a description of significant inputs and assumptions used to calculate the specified metrics, thus providing the necessary transparency for facilitating investors' understanding and peer comparisons. To avoid potential confusion and to maintain consistency with the rest of the financial statements, the proposed financial statement metrics would be required to be calculated using financial information that is consistent with the scope of the rest of the registrant's consolidated financial statements included in the filing. The proposed rules would specify the basis of calculation for the climate-related financial statement metrics and clarify how to apply these accounting principles when calculating the climate-related financial statement metrics.

With respect to financial impact metrics, the proposed rules would require a registrant to disclose the impacts arising from climate-related events, including physical risks identified by the registrant and severe weather events and natural conditions, such as flooding, drought, wildfires, extreme temperatures, and sea level rise. In addition to physical risks, registrants also would be required to disclose the financial impact of transition activities (including transition risks identified by the registrant), such as efforts to reduce GHG emissions or otherwise mitigate exposure to transition risks on any relevant line items in the registrant's consolidated financial statements. The proposed rule would require registrants to reflect the impact of the climate-related events or transition activities on each line item of the registrant's consolidated financial statements ( e.g., line items of the consolidated income statement, balance sheet, or cash flow statement) unless the aggregate impact of the events and transition activities is less than one percent of the total line item. By exempting such line item reporting when the aggregate impact of the events is less than one percent, the proposed rule would reduce overall costs for firms associated with disclosures for instances where the impact is likely to be quite small, while providing assurance to investors that more significant impacts are reflected in line item reporting.

We expect that the proposed financial statement metrics impact would provide additional transparency into the nature of a registrant's business and the significance of many of the climate-related risks and impacts on its overall financial condition. Such disclosures are expected to provide investors with valuable insights into potential changes to, among others, revenue or costs from disruptions to business operations or supply chains; impairment charges and changes to the carrying amount of assets due to the assets being exposed to physical risks; revenue or cost due to new emissions pricing or regulations resulting in the loss of a sales contract and; operating, investing, or financing cash flow from changes in upstream costs, such as transportation of raw materials. Separately reporting the financial statement impacts from the specified climate-related events and transition activities could improve comparability of both the registrant's year-to-year disclosure and between the disclosures of different registrants. Because the risks presented by the climate-related events and transition activities may be correlated across different registrants and across time, future climate-related risks could manifest in such a way that a large subset of registrants are affected, making them potentially a non-diversifiable risk. In this case, separate financial impact disclosures could inform investors of their exposure to these risks not just for a single registrant, but across all the registrants in their portfolios. Such disclosures could be beneficial as they would be informative of both individual registrant exposures to climate-related risks, and the level of climate-related risks in the aggregate, thus allowing investors to more effectively evaluate and manage the risk of their entire portfolio. Moreover, to the extent that registrants are not aware of climate-related risks in the aggregate, these disclosures would allow for a greater understanding of the climate-related risks they face, providing them the opportunity to make more informed investment decisions taking into account such risks.

With respect to financial expenditure metrics, the proposed rules would require a registrant to disclose the positive and negative impacts associated with the same climate-related events and transition activities as the proposed financial impact metrics. The expenditure metrics would require a registrant to separately aggregate amounts of expenditure expensed and capitalized costs incurred during the fiscal years presented. For each of those categories, a registrant would be required to disclose separately the amount incurred during the fiscal years presented toward positive and negative impacts associated with the specified climate-related events and to mitigate exposure to transition risks. The expenditure metrics would also be subject to the same disclosure threshold as the financial impact metrics, which should promote consistency and clarity.

Together, these disclosures are expected to provide investors with information about the total expenditure toward or capitalized costs incurred for specified climate-related events. As such, they are expected to increase the resilience of assets or operations, retire or shorten the estimated useful lives of impacted assets, relocate assets or operations at risk, or otherwise reduce the future impact of severe weather events and other natural conditions on business operations. The proposed rules also would provide investors with information about the amount of expenditure expensed or capitalized costs incurred for climate-related transition activities related, among others, to research and development of new technologies, purchase of assets, infrastructure, or products that are intended to reduce GHG emissions, increase energy efficiency, or improve other resource efficiency.

With respect to financial assumptions, the proposed rules would require registrants to disclose whether the estimates and assumptions used to produce the consolidated financial statements were impacted by risks and uncertainties associated with, or known impacts from, severe weather events and other natural conditions, such as flooding, drought, wildfires, extreme temperatures, and sea level rise. If so, the registrant would be required to provide a qualitative description of how such events have impacted the development of the estimates and assumptions used to prepare such financial statements. Similarly, if the estimates and assumptions were impacted by potential transition risks, the registrant would be required to provide a qualitative description of how the development of the estimates and assumptions were impacted by such a transition. We expect that the proposed disclosures would provide transparency to investors on the impact of climate-related events and transition activities on the estimates and assumptions used by the registrant to prepare the financial statements and allow investors to evaluate the reasonableness of the registrant's estimates and assumptions.

Prior evidence shows that existing climate-related disclosures often contain boilerplate language or are “cherry-picked” to present information that is favorable to the company. Accordingly, registrants under the current regulatory regime may choose to provide only brief, qualitative descriptions of certain climate-related factors while omitting concrete, quantitative information on how climate-related factors can impact individual financial statement line items. The proposed rule may mitigate these types of agency problems by requiring registrants to disclose specific, quantitative metrics according to standardized scopes and methodologies, thereby helping investors processing information more effectively.

The proposed financial metrics would be part of the financial statements and thus audited by an independent public accounting firm in accordance with existing Commission rules and PCAOB auditing standards. Subjecting these climate-related disclosures to reasonable assurance pursuant to an audit would require the auditor to assess the risk of material misstatement related to the estimates and judgments, including through evaluation of the method of measurement and reasonableness of the assumptions used, and to understand management's risk management processes, including the accuracy of the proposed disclosure, thereby alleviating possible concerns about the data's reliability and comparability, and improving investor confidence in such disclosure. Academic research finds that assurance procedures can increase the relevance and reliability of disclosures, particularly for those involving significant estimation uncertainties.

e. GHG Emissions Metrics

The proposed rules would require all registrants to disclose Scope 1 and Scope 2 GHG emissions. Given the possibility of a transition to a lower-carbon economy, investors and other market participants may be concerned about registrants that have high GHG emissions since these registrants may be more exposed to certain transition risks, such as regulations that restrict emissions or the potential impacts of changing consumer preferences or market conditions. Should a transition to a low-carbon economy gain momentum, registrants with higher amounts of Scope 1 and 2 emissions may be more likely to face sharp declines in cash flows, either from greater costs of emissions or the need to scale back on high-emitting activities, among other reasons, as compared to firms with lower amounts of such emissions.

Understanding the extent of this potential exposure to transition risks could help investors in assessing their risk exposures with respect to the companies in which they invest. Greater consistency in emissions disclosures can further benefit investors as it can facilitate comparisons between the registrants and their peers and assist in understanding the overall risk of their portfolios. As described below, emissions disclosures would also help inform investors about the extent to which a company has been or is following through with its disclosed strategies and transition plans. As further discussed in Section IV.D, we expect this provision to lower uncertainty for investors, thereby reducing the cost of capital. This may make it easier to raise equity and debt, or to obtain loan financing.

Besides the direct risk to cash flows through cost of emissions or the need to scale back on high-emitting activities, such a transition could also cause a registrant's assets to suffer from unanticipated or premature write-downs, devaluations, and/or adverse adjustments in reserves. The proposed Scope 1 and 2 emission disclosures would allow investors to identify registrants whose assets may be more likely to become obsolete or non-performing or lose economic value ahead of their anticipated useful life due to a potential transition to a lower-carbon economy, and more generally allow investors to discern whether certain investments are unlikely to earn the anticipated economic return due to such transition. The proposed disclosures would also allow investors to more closely monitor whether a firm's management is properly accounting for the impairment of such stranded assets to ensure that they are recorded on the balance sheet as a loss of profit and are not carried at more than their recoverable amount. Given the significant possibility that Scope 1 and 2 emissions will affect the valuation of the registrant through impacts on earnings, cost of capital, investor demand, or potentially some other channel, investor protection would be enhanced by requiring disclosure of this information.

Moreover, by specifying that the information should be provided by all registrants, investors would benefit from having access to a more comprehensive set of emissions data against which to measure a registrant's progress in meeting any stated emissions goals or otherwise managing its climate-related risks, as a part of assessing the registrant's overall business and financial condition. In the absence of the proposed rules, some registrants may choose to selectively omit quantitative emissions metrics. The resulting state of disclosures is less meaningful and less transparent, making it significantly more difficult for investors to assess the degree of risk in individual firms, to compare across firms, and to value securities.

As discussed in Section IV.A, some registrants currently report emissions via the EPA's 2009 mandatory Greenhouse Gas Reporting Program. However, the nature of the reporting requirements and the resulting data is more suited to the purpose of building a national inventory of GHG emissions, not of assessing emissions-related risks to individual registrants. Specifically, direct emitters must report their emissions at the facility-level (not registrant-level) and suppliers of certain products must report their “supplied emissions,” conditional on these emissions exceeding a specified threshold. In addition, as previously discussed, the EPA emissions data does not allow a clean disaggregation across the different scopes of emissions for a given registrant. From the point of view of an investor seeking greater information regarding a registrant, the EPA's emissions data may be difficult for investors to use, because the data are made public by facility and not by company. While each facility is matched to its parent company, this company may not be the entity registered with the SEC and thus of interest to investors. Taken together, the EPA emissions data is not well suited to enabling investors to fully assess the degree to which each registrant is exposed to transition risks.

The proposed rules would result in more comprehensive and tailored emissions information by requiring disclosure of Scope 1, Scope 2, and in some cases Scope 3 emissions by registrants in SEC filings. Prior evidence has shown that when information that is already publicly available elsewhere is included within SEC filings, the public becomes more aware of the information. While there are numerous differences with regard to EPA reporting, this evidence suggests that even were these differences not to exist, and the only change were to be inclusion in SEC filings, there would nonetheless be an advantage in improving consistency and reliability and decreasing search costs.

The proposed rules would also provide informational benefits beyond the voluntary disclosure of emissions in sustainability reports. While currently disclosed information reflects investor demand, the overall information disclosed to the market may be biased due to its voluntary nature, in that companies that have more favorable data ( e.g., lower emissions) may be more likely to make these voluntary disclosures. Requiring all registrants to provide consistent disclosures, as proposed, would reduce the bias that can result from a voluntary regime. Moreover, as discussed above, locating the information in SEC filings may make it more accessible to investors and contribute to greater consistency and reliability.

Specific provisions are designed to facilitate comparability across registrants and industries. For example, requiring the disclosure of GHG intensity in terms of metric tons of CO₂ e per unit of total revenue and per unit of production would allow investors to directly assess the efficiency of the registrant's operations and compare across different industries and firms of varying size. Increased standardization in the reporting of these metrics may allow investors to assess more effectively a registrant's transition risk against that of its competitors. As another example, the proposed rules would require a registrant to set the organizational boundaries for its GHG emissions disclosure using the same scope of entities, operations, assets, and other holdings within its business organization structure as those included in its consolidated financial statements. Requiring a consistent approach would avoid potential investor confusion about the reporting scope used in the financial statements and enhance comparability across registrants, helping investors in assessing a registrant's transition risk against that of its competitors.

The proposal would also require non-SRC registrants to disclose Scope 3 emissions if material or if the registrant has a target or goal related to Scope 3. In addition, specified registrants would also be required to disclose the methodology used to compute emissions, the breakdown of the different GHGs, as well as upstream and downstream activities, and data quality. Scope 3 emissions GHG emissions can represent the majority of the carbon footprint for many companies, in some cases as high as 85% to 95%. For example, according to Morgan Stanley Capital International (MSCI), the Scope 3 emissions of the integrated oil and gas industry are more than six times the level of its Scope 1 and 2 emissions. Companies may have indirect control over their Scope 3 emissions through choices they make, for example in selecting suppliers, designing products, or sourcing inputs more efficiently. Nevertheless, the majority of companies do not typically report this information. As of July 10, 2020, for example, within the sample of companies belonging to the MSCI ACWI Investable Market Index (IMI), the total Scope 3 average intensity was almost three times greater than the combined Scope 1 and 2 intensity. Yet, only 18% of constituents of the MSCI ACWI IMI reported Scope 3 emissions, with even lower reporting percentages when looking at the individual Scope 3 categories.

The reporting of Scope 3 emissions for these registrants would provide additional benefits for investors. Scope 3 emissions information may be material in a number of situations to help investors gain a more complete picture of the transition risks to which a registrant may be exposed. Relative to registrants with substantial Scope 1 and 2 emissions, future regulations that restrict emissions may impact registrants with high Scope 3 emissions differently. In certain industries, a transition to lower-emission products or processes may already be underway, triggered by existing policies, a shift in consumer preferences, technological changes, or other market forces.

Registrants with significant Scope 3 emissions may be more likely to face disruptions not only in their cash flows, but also in their business models or value chains to the extent that these registrants are compelled to make changes in their products, suppliers, distributors, or other commercial partners. Moreover, if consumer demand changes to favor less carbon intensive products, companies with high Scope 3 emissions may see a marked reduction in demand for their products, and companies that are not aware of these risks could be less profitable relative to those that understand these risks and are prepared to mitigate them. Alternatively, companies that can source inputs that involve less GHG emissions could achieve potential cost savings and those that could produce products that generate less GHG emissions by the end user could potentially enjoy higher demand. Some registrants may plan to shift their activities to capitalize on these changes and thus may need to allocate capital to invest in lower emissions equipment or to create new types of products. Investors would need information about the registrants' full GHG emissions footprint and intensity to determine and compare how exposed a registrant is to the financial risks associated with a transition to lower-carbon economy.

Over the last few years, a number of studies have shown that firms try to reduce their local carbon footprints by outsourcing their carbon emissions to suppliers in states or countries with weaker environmental policies. These studies provide evidence of the substitutional relationship between direct and outsourced GHG emissions. Recent studies have also analyzed the substitution effects between Scope 1 and Scope 3 GHG emission activities of U.S. firms. The findings show that the relative share of Scope 1 emissions out of a firm's total emissions tend to fall at the expense of the rising proportion of its supplier-generated Scope 3 emissions and that a firm's imports further augment the substitutional relationship between its Scope 1 and Scope 3 emissions. In addition to the outsourcing incentives related to regulatory arbitrage, the authors of these studies posit that firms may also be outsourcing emissions abroad to exploit investors' current difficulties in assessing the firm's carbon emissions through imports along the upstream supply chain. By requiring the disclosure of Scope 3 GHG emissions, the proposed rules would make it more difficult for non-SRC registrants to avoid investors' scrutiny by outsourcing all or part of their activities abroad.

Finally, as described in Section IV.A5.d, many companies have set emissions targets, and it is not always clear whether these targets pertain to Scope 3 emissions or not. As explained in Section IV.C.1.g, registrants would be required to disclose whether the targets pertain to Scope 3 emissions, and as described above, if they do, they would need to report such emissions. Without reporting of Scope 3 emissions amounts and categories, investors would not have the information they need to understand the scale and scope of actions the company may need to take to fulfill its commitment, and thus the overall financial implications of a registrant's targets. For example, a registrant's disclosure of its Scope 3 emissions, together with the proposed financial statement metrics, could allow investors to assess the potential (additional) investments the registrant may need to make to meet a certain goal. Moreover, as described further below, reporting of Scope 3 emissions gives a quantitative metric for investors to track, thus reducing opportunities for misleading claims on the part of the registrant.

Because the value of a firm's equity is largely derived from expected future cash flows, disclosure of Scope 1, 2, and 3 emissions can help investors incorporate risks associated with such future cash flows into asset values today. Indeed, the academic literature indicates that equity is a long-term asset, meaning that even risks related to regulatory changes in the distant future could be priced today. Thus, for many registrants, reasonable investors may view GHG emissions as necessary to assess the registrants' exposure to climate-related risks, particularly transition risks, and whether they have developed strategies to reduce their carbon footprint in the face of potential regulatory, policy, and market constraints. This may be particularly important in light of the investor demand documented in IV.B.1 and the potential price impact, as discussed in IV.D.

f. Assurance of GHG Scopes 1 and 2 Emissions Disclosures for Large Accelerated Filers and Accelerated Filers

The proposed rules would require registrants that are large accelerated filers and accelerated filers to provide an attestation report for the registrant's Scope 1 and 2 GHG emissions disclosures. Large accelerated filers constitute approximately 31% of the universe of registrants that filed annual reports during calendar year 2020 (1,950 out of 6,220), but account for 93.6% of market cap within the same universe. Accelerated filers constitute approximately 10% of the universe of registrants that filed annual reports during calendar year 2020 (645 out of 6,220) and account for 0.9% of market cap within the same universe.

The proposed rules provide specific transition periods for obtaining attestation reports. Large accelerated filers would be required to provide Scopes 1 and 2 emissions disclosures in the fiscal year immediately following rule adoption. Next, they would be required to obtain limited assurance over these disclosures in fiscal years 2 and 3 after adoption. They would then be required to obtain reasonable assurance over these disclosures in fiscal year 4 after adoption and going forward. Accelerated filers would follow the same timeline but with a delay of one fiscal year. Specifically, accelerated filers would be required to provide Scopes 1 and 2 emissions disclosures in fiscal year 2 after adoption. Next, they would be required to obtain limited assurance over these disclosures fiscal years 3 and 4 after adoption. They would then be required to obtain reasonable assurance over these disclosures in fiscal year 5 after adoption and going forward.

The proposed transition periods for assurance over large accelerated filers' and accelerated filers' Scopes 1 and 2 GHG emission disclosures are intended to provide these registrants time to familiarize themselves with the GHG emissions disclosure requirements, develop the relevant DCP, and provide the market with an opportunity to develop enough expertise to satisfy the increased demand for GHG emission assurance services. We expect that during the proposed transition periods, the market for assurance services would further mature with respect to institutional knowledge, procedural efficiency, and overall competition, thus lowering costs for registrants and improving the quality of service. Although Scope 3 GHG emissions can constitute a large portion of a registrant's total emission, the proposed rules would exclude Scope 3 GHG emission disclosures from the attestation requirement due to the unique challenges associated with their measurement, which is based on data sources not owned by the registrant, as well as the potential higher costs associated with their verification.

Section IV.A.5.e above discusses survey evidence on the frequency with which firms obtain assurance in sustainability reports. This evidence suggests that a significant fraction of large companies already obtain some form, albeit limited, of assurance. Practices appear to be fragmented with respect to the levels of assurance provided, the assurance standards used, the types of service providers, and the scope of disclosures covered by the assurance. One consequence of such fragmentation has been a lack of clarity about the nature of assurance provided, which can lead to confusion for investors when assessing the quality of disclosures. Moreover, as noted above, the voluntary nature of the reporting could result in biased or incomplete data. The fact, however, that a significant proportion of large companies already obtain some form of assurance over this information is indicative of investors' and companies' need for such disclosures to be reliable.

The importance of assurance for climate-related information also is highlighted by the International Federation of Accountants, which recently published its Vision for High-Quality Sustainability Assurance. As discussed earlier, contrary to other quantitative information that is provided outside of the financial statements, and which is typically derived from the same books and records that are used to generate a registrant's audited financial statements, GHG emissions disclosures are not developed from information that is included in the registrant's books and records. Accordingly, such quantitative disclosure is not be subject to audit procedures as part of the audit of the financial statements in the same filing. Because of this, the proposed requirement of a third-party attestation report may be particularly beneficial to verify the reliability of such quantitative information and enhance its accuracy. In general, subjecting climate-related disclosures to assurance would require the assurance provider to assess the risk of material misstatements related to the estimates and judgments, including through evaluation of the method of measurement and reasonableness of the assumptions used, and an understanding of management's risk management processes, including the risks identified and the actions taken to address those risks. Moreover, by specifying minimum standards for the assurance provided with respect to GHG Scope 1 and 2 emissions disclosures, we expect the proposed rules to promote accuracy and consistency in the reporting of this information, while also providing investors with a baseline level of reliability against which to evaluate the disclosures.

Academic research finds that assurance procedures can increase the relevance and reliability of disclosures, particularly for those involving significant estimation uncertainties. While most of this academic evidence focuses on the effects of reasonable assurance procedures, we cannot preclude the possibility that such findings may have implications for limited assurance as well. Experimental evidence has found that both limited and reasonable assurance can increase perceived reliability of sustainability reports, but those same studies do not find a statistically significant difference between limited and reasonable assurance. Obtaining assurance for sustainability reports, which as noted above is typically limited assurance, has also been associated with firms with lower costs of capital, increased analyst coverage, and decreased analyst forecast errors and forecast dispersion.

The proposed rules would require the attestation report to identify the criteria against which the subject matter was measured or evaluated, the level of assurance provided, the nature of the engagement, and the attestation standard used. In particular, the proposed rules would require the attestation report to include a description of the work performed as a basis for the attestation provider's conclusion and for that conclusion to be provided pursuant to standards that are established by a body or group that has followed due process procedures, including the broad distribution of the framework for public comment. We expect this provision would help ensure that the standards upon which the attestation report is based were the result of a transparent and reasoned process. In this way, the requirement should help to protect investors who may rely on the attestation report by limiting the standards used to those that are appropriate for the subject matter and purpose. Further, we expect this provision to enhance the transparency of the GHG emissions attestation report for investors by providing them with additional information about the general procedures undertaken by the attestation provider. For example, under the proposed rules, an attestation report providing limited assurance would need to state that the procedures performed vary in nature and timing from, and are less extensive than, a reasonable assurance engagement, thus helping investors understand the level of assurance provided.

The GHG emissions attestation report would also be required to include a statement that describes any significant limitations associated with the measurement or evaluation of the subject matter against the criteria. The provision would require disclosure about the estimation uncertainties inherent in the quantification of GHG emissions, driven by reasons such as the state of the science and assumptions used in the measurement and reporting processes. By eliciting disclosure with respect to the procedures undertaken by the attestation provider, such as inquiries and analytical procedures, and the methodology used in the attestation process, the proposed provision would enhance the transparency of the GHG emissions attestation quality, thus allowing investors to gain a better understanding of the emission related information. This could help investors process emission related information more effectively. More informed investment decisions by investors also may benefit registrants by lowering their cost of capital.

The proposed rules would also require registrants to disclose whether the attestation provider has a license from any licensing or accreditation body to provide assurance and whether the GHG emissions attestation engagement is subject to any oversight inspection program and record-keeping requirements with respect to the work performed for the GHG emissions attestation. These requirements are expected to benefit investors by helping them to better understand the qualifications of the GHG emissions attestation provider, which in turn would allow them to make better informed decisions about the reliability of such information.

Finally, the proposed rules would require that the GHG emissions attestation report be prepared and signed by a provider that is an expert in GHG emissions and independent with respect to the registrant, and any of its affiliates, for whom it is providing the attestation report. These qualification and independence requirements should help ensure that the attestation provider is capable of exercising informed, objective and impartial judgment. Academic research has found that the independence of assurance providers can be important in certain settings for disclosure quality. Academic research has also found that equity prices respond to analyst forecast even after management has released the exact same information, highlighting more generally the perceived value of external evaluations of firm disclosures and resulting investor confidence in the related disclosures.

g. Targets and Goals Disclosure

The proposed rules would require a registrant to disclose whether it has set any climate-related targets or goals and, if so, how it intends to meet those targets and goals. Such climate-related targets or goals might relate to the reduction of GHG emissions or address energy usage, water usage, conservation or ecosystem restoration. Associated disclosure would include the scope of activities and emissions included in the target, the unit of measurement, and the defined time horizon. Additionally, disclosures include the baseline emissions for measuring progress, any interim targets, how it intends to meet these targets or goals, and data showing any progress toward achieving these targets, including how that progress was achieved, and details about any carbon offsets of RECs that have been used.

For example, in 2019 Amazon and Global Optimism co-founded The Climate Pledge, a commitment to net zero carbon by 2040. Since then, a growing list of major companies and organizations have signed on to the Climate Pledge, which indicates a commitment to the following three principles: (i) Measure and report greenhouse gas emissions on a regular basis; (ii) Implement decarbonization strategies in line with the Paris Agreement; (iii) Neutralize any remaining emissions with additional offsets to achieve net zero annual carbon emissions by 2040. The proposed rules would help to make such commitments more transparent by requiring disclosure on the unit of measurement, time horizon, and baseline for measuring progress, including how that progress was achieved ( e.g., through efficiency improvements, renewable energy adoption, materials reductions, and other carbon emission elimination strategies).

Such standardized reporting as a form of an oversight or monitoring mechanism might be critical in overcoming agency problems in the presence of asymmetric information. Investment in achieving targets could be value-enhancing in the long-run, but reduce cash flow in the short-run. Companies may decide that it is an optimal strategy to bear the costs up front of shifting its operations to those that have fewer emissions or upgrading their equipment, rather than bearing the risk that these costs will be borne in an unpredictable and possibly disorderly way in the future. In the absence of a means to credibly convey that efforts to achieve these long-term targets are being undertaken diligently, however, investors might be unable to observe which registrants are actually following through on such actions. For example, if registrants are incurring costs in the short-run to undertake investments to reduce Scope 1, 2, and 3 emissions, reducing short-run profitability, but are unable to convey to investors that they are meaningfully following through on achieving potential long-term value-enhancing strategies, there could be a disincentive for investors to invest in the firm, thus undermining its value in the long-run. This has been put forth as one potential explanation for some private sector attempts at addressing these problems, such as green bonds, which commit firms to recurring, more standardized disclosure requirements for progress in achieving stated targets and goals. The proposed rules would provide enhanced transparency about targets and goals so that investors can identify registrants with credible goals and track their progress over time. This can not only reduce incentives for misleading goal disclosures, but can also allow investors to recognize goals that generate long-term value despite short run costs, which can attract capital and increase firm value.

As explained above, the pursuit of targets could have a material impact, either in the short-term or long-term, on a registrant's operations or financial condition. At this time, however, there is little consistency with respect to the extent of disclosure and the relevant details concerning such climate-related targets and goals. This can result in insufficient information for investors' monitoring or decision-making needs. The proposed disclosure could provide more comparable, consistent, and reliable metrics of any climate-related targets or goals. It would require a registrant to clearly define baselines for targets, the scope of activities and emissions covered by the target, the unit of measurement, the defined time horizon, and how progress is made towards the targets. For example, the disclosure would require the registrant to state whether or not the targets pertain to Scope 3 emissions. If targets do include Scope 3 emissions, disclosure of Scope 3 emission sources and amounts would be required so that investors would understand the scale and scope of changes the company would need to undertake, and thus the full financial impact of meeting the target. Such disclosures would also enable investors to monitor progress firm management has made and plans to make towards achieving climate-related targets or goals, assess the credibility of its goal, and evaluate the effectiveness of the company's investments to achieve its goals. As described above, this required disclosure could make targets more credible and serves as an oversight or monitoring mechanism.

h. Structured Data Requirement

Under the proposed rules, the new climate-related disclosures would be tagged in the Inline XBRL structured data language. The provision requiring Inline XBRL tagging of climate-related disclosures would benefit investors by making those disclosures more readily available for aggregation, comparison, filtering, and other enhanced analytical methods. These benefits are expected to reduce search costs and substantially improve investors' information-processing efficiency. XBRL requirements for public company financial statement disclosures have been observed to reduce information-processing costs, thereby decreasing information asymmetry and increasing transparency by incorporating more company-specific information into the financial markets. In addition, the proposed Inline XBRL requirement for the climate-related disclosures may further limit agency problems, as XBRL requirements for financial statement tagging have been observed to facilitate external monitoring of firms through the aforementioned reduction of information processing costs.

Investors with access to XBRL analysis software may directly benefit from the availability of the climate-related disclosures in Inline XBRL, whereas other investors may indirectly benefit from the processing of Inline XBRL disclosures by asset managers and by information intermediaries such as financial analysts. In that regard, XBRL requirements for public company financial statement disclosures have been observed to increase the number of companies followed by analysts, decrease analyst forecast dispersion, and, in some cases, improve analyst forecast accuracy. Should similar impacts on the analysts' informational environment arise from climate-related disclosure tagging requirements, this would likely benefit retail investors, who have generally been observed to rely on analysts' interpretation of financial disclosures rather than directly analyzing those disclosures themselves.

2. Costs

Below we discuss the anticipated direct and indirect costs of the proposed rules. Direct costs would include compliance burdens for registrants in their efforts to meet the new disclosure requirements. These direct costs could potentially be significant; however, the incremental costs would be lower to the extent that registrants already provide the required disclosures. Indirect costs may include heightened litigation risk and the potential disclosure of proprietary information. We proceed by discussing these various costs.

a. Direct Costs

The primary direct costs that the proposed rules would impose on registrants are compliance costs. To the extent that they are not already gathering the information required to be disclosed under the proposed rules, registrants may need to re-allocate in-house personnel, hire additional staff, and/or secure third-party consultancy services. Registrants may also need to conduct climate-related risk assessments, collect information or data, measure emissions (or, with respect to Scope 3 emissions, gather data from relevant upstream and downstream entities), integrate new software or reporting systems, seek legal counsel, and obtain assurance on applicable disclosures ( i.e., Scopes 1 and 2 emissions). In addition, even if a registrant already gathers and reports the required information, some or all of this information may be in locations outside of SEC filings (such as sustainability reports posted on company websites or emissions data reported to the EPA). These registrants may face lower incremental costs by virtue of already having the necessary processes and systems in place to generate such disclosures; however they may still incur some additional costs associated with preparing this information for inclusion in SEC filings.

(1) General Cost Estimates

In this section, we review sources that provide insight into the magnitude of the potential costs associated with the proposed rules. With some exceptions discussed in further detail, these sources provide information at the level of general costs for climate disclosures. We acknowledge that these sources are limited in scope or representativeness and thus may not directly reflect registrants' compliance costs. For instance, some third-party sources may present cost estimates that do not include all items required under the proposed rules ( e.g., assurance costs), or else they may aggregate the costs of multiple items (including those not required under the proposed rules) into a single cost figure. However, these sources may serve as useful references to the extent that they overlap with specific disclosure elements required in the proposed rules. For example, third-party cost estimates of preparing TCFD reports or completing the CDP questionnaire can offer a rough approximation of potential compliance costs due to their similarity with the proposed rules. Below, we request further data to assist us in estimating potential costs.

As discussed in Section V, for purposes of the Paperwork Reduction Act of 1995 (“PRA”), we estimate the annual costs over the first six years of compliance with the proposed rules. For non-SRC registrants, the costs in the first year of compliance are estimated to be $640,000 ($180,000 for internal costs and $460,000 for outside professional costs), while annual costs in subsequent years are estimated to be $530,000 ($150,000 for internal costs and $380,000 for outside professional costs). For SRC registrants, the costs in the first year of compliance are estimated to be $490,000 ($140,000 for internal costs and $350,000 for outside professional costs), while annual costs in subsequent years are estimated to be $420,000 ($120,000 for internal costs and $300,000 for outside professional costs). These costs are expected to decrease over time for various reasons, including increased institutional knowledge, operational efficiency, and competition within the market for relevant services.

One commenter provided cost estimates for their services in assisting client companies prepare TCFD-aligned disclosures. For companies that have no prior experience in GHG analysis or climate-related disclosures, the commenter estimates initial costs to range from $150,000 to $200,000 to prepare TCFD-aligned disclosures. Companies that have already calculated their carbon footprints and only need assistance with TCFD reporting may expect costs of $50,000 to $200,000, with the average cost of approximately $100,000. Ongoing costs for their services are expected to be zero conditional upon the TCFD requirements remaining unchanged, however the reporting company may still incur internal costs in preparing these disclosures on an annual basis.

Another source presents survey results of climate-related disclosure costs for three unnamed companies, which consist of a European-based multinational large-cap financial institution, a US-based large-cap industrial manufacturing company, and a US-based mid-cap waste management company. The survey reports that each firm has “already established robust in-house climate disclosure systems that can easily be leveraged to comply with any new disclosure rule,” as evidenced by their concurrent reporting under multiple climate disclosure frameworks ( e.g., TCFD, CDP, SASB, GRI, etc.). The respondents indicate that anticipated incremental costs of a mandatory climate disclosure rule are therefore expected to be minimal. All respondents disclose Scopes 1, 2, and 3 emissions, while none of them obtain third-party assurance for their climate-related disclosures.

The mid-cap waste management company estimates that the cost of producing their first TCFD report was less than $10,000. The company's reported annual costs consist of employee costs ($12,600) and third-party costs ($60,000 to $160,000). However, the reported annual costs may be less applicable to potential compliance costs as they combine additional costs associated with several other activities not necessarily required in the proposed rules, including its adherence to multiple climate disclosure frameworks ( e.g., TCFD, GRI, SASB, and CDP) and designing its annual sustainability report and associated web page. Overall, the company reports that its total costs related to producing climate-related disclosures across these multiple frameworks are less than 5% of its total SEC compliance-related costs.

The large-cap industrial manufacturing company reports that the costs of preparing its first CDP questionnaire was no more than $50,000. Additionally, the combined costs of producing its first TCFD, SASB, and GRI disclosures were between $200,000 and $350,000. Reported annual costs include internal costs (between $200,000 and $350,000) and the cost for auditors and consultants ($400,000). These cost estimates, however, may overestimate potential compliance costs to the extent that they include disclosure items or activities not required in the proposed rules. The company reports that their annual costs of producing its voluntary climate-related disclosures are less than 0.1% of their revenues.

The multinational financial institution reports that the cost of producing its first TCFD report, SASB report, and CDP questionnaire were each less than $100,000 given that such information overlaps with what the company already discloses under the EU's Prospectus Regulation (Regulation (EU) 2017/1129). The company estimates annual costs ranging from $250,000 and $500,000 to produce these disclosures, but as before, this range may combine the costs of activities that are not required in the proposed rules. Similar to the industrial manufacturing company, this company also notes that the annual costs of producing its voluntary climate-related disclosures are less than 0.1% of their revenues.

Some commenters also provided estimates of climate-related disclosure costs for individual firms. One commenter provided a breakdown of such costs for seven unnamed large cap firms across six different industries. Headcount requirements ranged from two to 20 full-time equivalent employees. One large-cap firm in the energy industry reported that its TCFD reporting process involved 40 employees and six months of nearly full-time participation by 20 core team members. Employee hours spent on climate reporting ranged from 7,500 to 10,000 annually. Fees for external advisory services ranged from $50,000 to $1.35 million annually, which generally included legal counsel and consulting services related to environmental engineering, emissions, climate science, modeling, or sustainability reporting. Another commenter, a Fortune 500 energy infrastructure firm, reported that it employs a full-time, management level director that spends about 25% of his time developing sustainability reports and other ESG initiatives. This commenter also reported that it pays a third-party consulting firm more than $250,000 annually to assist in its ESG and sustainability report process.

The UK's Department for Business, Energy & Industrial Strategy, as part of its Green Finance Strategy, has released a final stage impact assessment (the “UK impact assessment”) of their proposed rules that would also require certain TCFD-aligned disclosures from firms and asset managers listed on UK financial markets. The UK impact assessment provides a breakdown of estimated average compliance costs per affected entity. Under the assumption that affected entities have no pre-existing climate-related disclosure practices or expertise, the UK impact assessment estimates that first-year one-time costs would include familiarization costs ($17,300 plus $2,600 per subsidiary, as applicable) and legal review ($4,400). They also estimate recurring annual governance disclosure costs ($12,500), strategy disclosure costs ($17,900 ), risk management disclosure costs ($14,900), metrics and targets disclosure costs ($104,400 in the first year and $80,500 in subsequent years ), internal audit costs ($30,300), and signposting costs ($100). For companies with subsidiaries, the costs of collecting information from subsidiaries and processing this information are expected to be $4,300 for the parent company and $1,700 for each subsidiary. In total, the study estimates that a company with no pre-existing climate-related disclosure practices or expertise could incur costs of $201,800 in the first year and $177,900 in subsequent years, plus additional costs due to subsidiaries, as applicable. This cost estimation methodology is conditional upon assumptions regarding the number of required staff, the rank or title of the staff, and the required labor hours, which are then matched with local wage data to estimate final costs.

It is important to note that all of these cost estimates are conditional on specific assumptions and can vary significantly depending on firm characteristics, such as firm size, industry, business model, the complexity of the firm's corporate structure, starting level of internal expertise, etc. In addition, we note that, in certain cases, these cost estimates may represent a registrant's optimal response to investor demand, and thus may exceed the minimum cost necessary to fulfill mandatory reporting of climate-related risks. We are accordingly requesting comments regarding compliance costs, including cost data that can be used to generate more accurate, granular, and reliable cost estimates that are more representative of the full set of affected registrants.

(2) Cost Estimates Specific to Emissions

In this section, we review the available evidence, which provides some insight into the scope of the compliance costs associated with reporting GHG emissions. We are cognizant of the type of costs that registrants will incur to report GHG emissions, e.g. resources, systems, design and implementation of DCP, external consulting services. In light of the limited information available, however, we are unable to fully and accurately quantify these costs. Accordingly, we are requesting comments regarding cost data for GHG emissions reporting.

One commenter reports that their services in calculating client companies' GHG footprints (Scopes 1, 2, and 3 emissions) would initially cost $75,000 to $125,000 if the client company has no prior experience in this area. Ongoing costs amount to approximately $40,000 assuming no material changes in Scope 3 emissions ( i.e., assess Scopes 1 and 2 only). If there are material changes to Scope 3 emissions, ongoing costs would range from $75,000 to $125,000 ( i.e., assess Scopes 1, 2, and 3).

Another commenter, a climate management and accounting platform, provided cost estimates of the measurement and reporting of emissions. This commenter's estimates are disaggregated across scopes of emissions as well as “low maturity” vs “high maturity” companies with respect to emissions reporting. Low maturity companies are defined as those that have no formal understanding of GHG emission calculations and have no related policies or programs in place. Accordingly, these companies have not organized or collected any data for such a calculation. High maturity companies are defined as those that have the aforementioned understanding, policies, programs, and data. Therefore, high maturity companies are expected to face lower incremental costs. The commenter estimates that the average first-year startup cost of assessing Scopes 1 and 2 emissions amount to $45,000 and $25,000 for companies of low and high maturity, respectively. Including the assessment of Scope 3 emissions would increase the costs by $80,000 and $25,000 for companies of low and high maturity, respectively. The commenter indicated that it expects these costs to decrease over time as software solutions simplify the process and reduce the burden on companies.

Additional cost estimates are provided by another commenter, which is an organization that assists companies, communities, and other organizations in accurately assessing emissions data across all scopes of emissions. According to their pricing structure, initial one-time costs amount to $10,000, which includes identifying data input needs, developing the design and organization of user interfaces, establishing software and IT systems, and reporting emissions from prior years to the extent that historic data is available. Ongoing costs, which includes a subscription fee and data management fee, amount to $12,000 plus $1,200 per building that is covered in the calculation of emissions. Another organization that offers similar services, among others, indicates that their fees for GHG accounting for Scopes 1, 2, and 3 can range from $11,800 to $118,300. Their fees for applying the PCAF method on investment and lending portfolios range from $11,800 to $35,500. They note that the assessment process take approximately 1-3 months depending on the complexity and availability of data.

The EPA has also sought to quantify the costs of measuring and reporting emissions in accordance with the mandatory Greenhouse Gas Reporting Program, which generally requires facility-level reporting of emissions from large emitters and from large suppliers of certain products ( e.g., entities that produce gasoline that will eventually be consumed downstream by the end-user). The EPA estimated that the rule would impose small expected costs on the facilities under its purview. The EPA estimated that, for most sectors, the costs represent at most 0.1% of sales. For small entities, the EPA estimated that the costs are on average less than 0.5% of sales. While the EPA's emissions reporting requirements, as discussed above, may elicit some of the information required under our proposed rules, given that the requirements are different, the actual compliance costs would differ accordingly.

A survey conducted by PCAF provides some estimates of the costs of assessing financed emissions. Financed emissions, which can be one component of Scope 3 emissions for certain financial institutions, can be described as the emissions generated by companies in which a financial institution invests or to which it otherwise has exposure. The PCAF survey of 18 unnamed financial institutions found that typical staff time ranged between 50 and 100 days and the costs for contracting external support was less than $20,000 for the majority of respondents. These estimates may provide some sense of the costs that may be incurred by those financial institutions that would be required to report Scope 3 emissions under the proposed rules.

(3) Cost Estimates of Assurance for Scopes 1 and 2 Emissions Disclosures

Registrants that are accelerated filers and large accelerated filers will incur additional costs in obtaining assurance of Scopes 1 and 2 emissions disclosures. The Commission estimates these costs starting with data on these filers' median audit fees in fiscal year 2020, which is $989,566 and $2,781,962 for accelerated filers and large accelerated filers, respectively. Next, an academic study suggests that assurance costs for sustainability reports (which serve as a common location for climate-related information, in addition to other non-financial topics) may range from 5% to 10% of total audit fees. We take the minimum, median, and maximum percentages (5%, 7.5%, and 10%, respectively) and apply further adjustments based on (i) emissions disclosures typically compromising only a portion of CSR reports, (ii) the potential fee premium related to attestation report included in SEC filings, and (iii) the average pricing difference between limited and reasonable assurance. For limited assurance, we estimate that accelerated filers will incur costs ranging from $30,000 to $60,000 (with a median of $45,000), while large accelerated filers will incur costs ranging from $75,000 to $145,000 (with a median of $110,000). For reasonable assurance, we estimate that accelerated filers will incur costs ranging from $50,000 to $100,000 (with a median of $75,000), while large accelerated filers will incur costs ranging from $115,000 to $235,000 (with a median of $175,000).

On the one hand, these estimates may underestimate actual costs as they are based on relative costs of assurance for financial statements, and assurance on emissions may differ in important ways. On the other hand, the costs may be lower in the future to the extent that the market for assurance services matures with respect to institutional knowledge, procedural efficiency, and overall competition. We request additional data that may assist in accurately assessing the costs of obtaining assurance over emissions disclosures.

(4) Factors That Affect Direct Costs

Incremental compliance costs may be relatively lower for registrants that already meet some of the disclosure and tagging requirements. For instance, registrants that are currently subject to the EPA's Greenhouse Gas Reporting Program would face lower incremental costs in reporting certain scopes of emissions relative to a firm that has no emissions measurement systems in place. Similarly, registrants that already provide extensive qualitative disclosures on climate-related risks, which tend to be large accelerated filers and registrants in high emission industries, may face lower incremental costs in meeting certain disclosure requirements. As discussed in Section IV.A.5.a, the Commission's staff reviewed 6,644 recent annual reports (Forms 10-K, 40-F, and 20-F) and found that 33% of them contained disclosures related to climate change, the majority of which discussed information related to business impact, emissions, international climate accords, and physical risks. Registrants with operations in foreign jurisdictions where disclosure requirements are based on the TCFD's framework for climate-related financial reporting, would also face lower incremental costs. Moreover, costs may also be mitigated by the proposed transition period, which would allow firms to more gradually transition to the new reporting regime.

Several industry reports also document how a sizeable portion of U.S. companies report climate-related information under one or more third-party frameworks that are either fully or partially aligned with the TCFD disclosure elements. For example, the CCMC survey (G&A study) reports that among their sample of U.S. public companies, 44% (53%) use the SASB, 31% (52%) use the GRI, 29% (30%) use the TCFD, and 24% (40%) use the CDP. Moody's analytics provides a detailed view for a sample of 659 U.S. companies of the existing disclosure rate across the different TCFD disclosure elements that range from a high of 45% disclosure rate for Risks and Opportunities—Strategy (a), to a low of 5% for Risks and Opportunities—Strategy (c) (see Table 4). Since the proposed rules are broadly consistent with the TCFD framework, we would expect lower incremental compliance costs for registrants that provide most or all disclosures according to the TCFD or related frameworks, including the CDP, which has fully integrated the TCFD disclosure elements into its disclosure questionnaire, and other frameworks and/or standards partly aligned with the TCFD recommendations.

Similarly, registrants in the insurance industry may also face lower incremental costs due to their existing disclosure practices. As discussed in Section IV.A.3, a large subset of insurance firms are required to disclose their climate-related risk assessment and strategy via the NAIC Climate Risk Disclosure Survey. A comment by a state insurance commissioner stated that because this survey overlaps extensively with the TCFD recommendations, these firms should be able to easily switch to reporting via the TCFD disclosure framework. This is because the proposed rules are broadly consistent with the TCFD. We expect that registrants in the insurance industry may be able to adapt more easily to providing disclosure under these rules.

Section IV.A.5.e reports survey evidence on the frequency with which firms obtain assurance in sustainability reports. This evidence suggests that a significant fraction of large companies already obtain some form, albeit limited, of assurance. To the extent that large accelerated filers and accelerated filers already voluntarily obtain some form of assurance over their GHG emissions, these registrants would face lower incremental costs associated with complying with the proposed rules' assurance requirements. These registrants tend to bear proportionately lower compliance costs than smaller issuers due to the fixed cost components of such compliance. Additionally, as the market for assurance matures, the Commission staff expects these costs to decrease over time.

Incremental costs may be higher for smaller firms considering that they are less likely to have climate-related disclosure systems and processes already in place. If smaller firms were to face higher proportional fixed costs in meeting the disclosure requirements, this may potentially put them at a competitive disadvantage to larger firms. Conversely, incremental costs for smaller firms may be lower to the extent that they have less complexity with respect to their assets and operations, which may allow them to assess climate-risk exposures or measure emissions at lower cost.

With respect to the Inline XBRL tagging requirements, various preparation solutions have been developed and used by operating companies to fulfill their structuring requirements, and some evidence suggests that, for smaller companies, XBRL compliance costs have decreased over time. The incremental compliance costs associated with Inline XBRL tagging of climate-related disclosures would also be mitigated by the fact that filers that would be subject to the proposed requirements would also be subject to other Inline XBRL requirements for other disclosures in Commission filings, including financial statement and cover page disclosures in certain periodic reports and registration statements. As such, the proposal would not impose Inline XBRL compliance requirements on filers that would otherwise not be subject to such requirements, and filers may be able to leverage existing Inline XBRL preparation processes and/or expertise in complying with the proposed climate-related disclosure tagging requirements.

We expect that the number of registrants committed to preparing climate-related disclosures will increase in the future, independently from our proposed rules. As discussed in Section IV.B.1, a sizeable and growing portion of global investors consider climate change as the leading issue driving their engagements with companies and is demanding robust disclosure around its impacts and the plan to mitigate climate-related risks. Consistent with this increasing demand for climate-related information, recent trends showed an uptick in climate-related disclosures, particularly within samples of larger firms, though not necessarily through their regulatory filings. Furthermore, the market for related services ( e.g., GHG accounting services, auditors, and other consultants, etc.) may become more competitive, driving down costs. To the extent that these trends continue in the future, we would expect that the incremental costs for complying with the proposed rules would become lower for an increasing number of firms.

b. Indirect Costs

In addition to the direct costs of preparing climate-related disclosures, the proposed rules could also lead to indirect costs. For example, the proposed rules may result in additional litigation risk since the proposed climate-related disclosures may be new and unfamiliar to many registrants. The proposed rules would significantly expand the type and amount of information registrants are required to provide about climate-related risks. Registrants unfamiliar preparing these disclosures may face significant uncertainty and novel compliance challenges. To the extent this leads to inadvertent non-compliance, registrants may face additional exposure to litigation or enforcement action.

However, certain factors may mitigate this concern. First, existing and proposed safe harbors would provide protection from liability for certain statements by registrants, including projections regarding future impacts of climate-related risks on a registrant's consolidated financial statements and climate-related targets and goals. Second, the proposed rules would include phase-in periods after the effective date to provide registrants with sufficient time to become familiar with and meet the proposed disclosure requirements.

Another potential indirect cost is the possibility that certain provisions of the proposed rules may force registrants to disclose proprietary information. Under the proposed rules, registrants would be required to disclose a wide range of climate-related information, including potential impacts on its business operations or production processes, types and locations of its operations, products or services, supply chain and/or value chain. Registrants would be further required to disclose whether they have emissions-related targets and metrics or an internal carbon price, and if they do, what they are. To the extent that a registrant's business model or strategy relies on the confidentiality of such information, the required disclosures may put the registrant at a competitive disadvantage.

c. Other Cost Considerations

Although the proposed rules may impose significant compliance costs, we expect these costs to decrease over time, both from firm-specific and market-wide contexts. From the firm-specific context, registrant disclosing climate-related information for the first time is likely to incur initial fixed costs to develop and implement the necessary processes and controls. Once the firm invests in the institutional knowledge and systems to prepare the disclosures, the procedural efficiency of these processes and controls should subsequently improve, leading to lower costs in following years.

Establishing a framework for standardized climate-related disclosures could also reduce uncertainty for registrants over the specific content to disclose and could mitigate disclosure burdens to the extent that it reduces information requests from third parties. Before registrants can take any tangible steps toward preparing climate-related disclosures, they must first determine which specific climate-related discussions, metrics, and analyses are most appropriate to disclose—a process that, under the current regime, can involve significant uncertainty. Furthermore, the uncertain, complex, and multidimensional nature unique to climate-related risks, combined with the unpredictability of investor responses to such disclosures, can also make it costly for management to determine the risks which meet the materiality threshold.

By implementing a standardized climate disclosure framework, the proposed rules could potentially reduce the burden that registrants may face in the environment of diverging voluntary frameworks and help clarify for registrants what they should disclose, where and when to make their disclosures, and what structure or methodology to use. While a more principles-based approach would provide additional flexibility for registrants, it also may impose certain costs if they are unsure of what climate-related measures are needed to satisfy legal requirements. Such an approach could entail additional judgment on the part of management, or result in registrants erring on the side of caution in complex matters such as climate-related disclosures. This could ultimately translate into spending more resources to determine appropriate compliance with the Commission's applicable reporting standards. The proposed rules should provide legal certainty around climate-related disclosure and therefore mitigate the compliance burdens associated with the existing regulatory framework.

Furthermore, some registrants currently receive multiple, diverse requests for climate-related information from different parties, such as investors, asset managers, and data service providers. Responding to such third-party request can be costly and inefficient and may put significant and sometimes competing demands on registrants. A standardized climate disclosure framework could potentially reduce information requests from third parties to the extent that such requests overlap with the disclosures required under the proposed rules. We acknowledge, however, that registrants that currently use third-party frameworks to disclose climate-related information may incur certain costs of switching from their existing practice to our proposed disclosure framework.

From a market-wide context, mandated climate disclosures may heighten demand for certain data or third-party services related to preparing the required disclosures, including assistance with the reporting of emissions data. In the short term, there could be a potential increase in the prices of such services to extent that the initial growth in demand exceeds the supply. In the long term, however, this heightened demand is expected to spur competition, innovation, and other economies of scale that could over time lower associated costs for such services and data and improve their availability. Moreover, the aggregate accumulation of institutional knowledge may lead to a broad convergence of disclosure-related best practices, which could further reduce the costs of the proposed disclosures.

Overall, the market effects deriving from competition and innovation could enhance the efficiency and availability of relevant data and services, thereby lowering costs. These positive externalities from standard reporting practices can provide additional market-wide cost savings to the extent that they reduce duplicative effort in the production and acquisition of information.

D. Anticipated Effects on Efficiency, Competition, and Capital Formation

1. Efficiency

As discussed in Section IV.B.2, the complexity, uncertainty, and long-term nature of climate risks make it unlikely that voluntary disclosure of such risks would be fully revealing. Therefore, as detailed in Section IV.C.1, mandating that climate-related disclosures be presented in a comparable and consistent manner and in a machine-readable language (Inline XBRL) is likely to enhance the information environment for investors. In doing so, the proposed rules are expected to improve market efficiency and price discovery by enabling climate-related information to be more fully incorporated into asset prices. Improved efficiency could inform the flow of capital and allow climate-related risks to be borne by those who are most willing and able to bear them.

These expected improvements in market efficiency are broadly consistent with empirical research. If climate-related information is relevant for asset prices, and therefore market efficiency, then the effective disclosure of climate-related information would be expected to cause differential asset price/financing cost responses across firms and settings. Empirical evidence is largely consistent with this expectation. Academic studies have found evidence that among firms that voluntarily report emissions via the CDP questionnaire, those with higher emissions (relative to their size and industry peers) pay higher loan spreads. A recent report from Lazard Ltd. also found a significant relationship between carbon dioxide emissions and a company's price-to-earnings ratio. Even in settings with mandatory disclosure, evidence is consistent with abnormally positive stock returns on announcement date for low-emitters and negative returns for high-emitters.

While the disclosure of climate-related information can improve market efficiency, investor response to such disclosures can vary depending on specific circumstances, thereby highlighting the limitations of the aforementioned studies. For example, if increased disclosure causes investors to realize that their portfolios are more exposed to climate risk than previously known, valuations may fall and costs of capital may increase as investors reallocate capital to balance this risk. Further, aggregate pricing effects could also be due to a better understanding of future regulatory risks firms face. Studies find, however, that cumulative abnormal stock returns around the announcement date are negatively correlated with firms' mandatorily disclosed emission levels. This consistent with mandatory reporting of climate-related information improving price discovery and market efficiency.

Empirical research has also documented evidence of market inefficiencies with respect to climate-related risks. For example, one study finds that stock prices of food companies ( i.e. food processing and agricultural companies) may exhibit mispricing with respect to drought exposure. The study documents that drought-exposed firms report reduced future profitability, indicating that drought exposure is a financial risk. In an efficient market, this risk should result in trading activity that decreases the current stock price and increases the expected return (to compensate investors for bearing this risk). The study, however, finds that drought-exposed firms deliver lower future returns relative to firms with less exposure, suggesting that the market initially under-reacts to drought exposure. In other words, the market may fail to sufficiently incorporate the risk of drought exposure into the current stock price, resulting in investors holding mispriced assets and bearing risk for which they are not appropriately compensated. Another study finds, through similar reasoning, that stock prices may exhibit mispricing with respect to temperature changes induced by climate change. According to survey evidence of global institutional investors, respondents believe that equity valuations do not fully reflect climate-related risks. Mandatory disclosures may help address these inefficiencies as it would provide investors with the information necessary to better incorporate climate-related risks into asset prices.

These capital market benefits can be further strengthened by the requirement to tag the climate-related disclosures in Inline XBRL, as XBRL requirements have been observed to reduce informational advantages of informed traders, increase stock liquidity, and reduce cost of capital. These benefits may also have valuation implications. The discounted cash flow model illustrates how, all else equal, a drop in the cost of capital leads to a boost in equity valuation, which can further benefit investors.

There are also important efficiency implications in relation to systemic risks. The increasing frequency and severity of climate events can potentially lead to destabilizing losses for insurance companies, banks, and other financial intermediaries with direct and indirect exposures to different affected industries and assets. Some commentators state that, in addition to physical risks, the financial system could be destabilized also by potentially rapid and unexpected losses to carbon-intensive assets caused by a disorderly transition to a low-carbon economy or a shift in the market's perception of climate risks. With insufficient and inconsistent disclosures, asset prices may not fully reflect climate-related risks. Consequently, market participants may inadvertently accumulate large exposures to such risks, leaving them vulnerable to considerable unexpected and potentially sudden losses.

In the face of such losses, financial intermediaries may be forced to sell off assets at fire-sale prices to generate enough cash to pay claims or to otherwise meet the time-sensitive cash demands of creditors and counterparties. This fire-sale dynamic could push down asset prices as well as the value of firms holding similar assets due to mark-to-market losses, potentially increasing risk premia and correlations across asset classes. Stress from large, complex, and interconnected financial institutions, or correlated stress across smaller market participants, could be transmitted and propagate through the financial system, causing disruptions in the provision of financial services. A more efficient allocation of capital brought about the disclosure required by the proposed rules could reduce the probability and magnitude of disorderly price corrections or dislocations, thereby strengthening financial system resilience.

2. Competition

The provisions included in the proposed rules are expected to increase comparability among registrants by demanding climate-related information in a consistent manner and with machine-readable data language (Inline XBRL). More standardized climate reporting could improve competition among registrants as it could reduce their costs for both producing such information due to enhanced efficiencies of scale across the economy and the cost for acquiring and processing said information by investors.

As discussed in Section IV.C.2, positive externalities from standard reporting practices can provide market-wide cost savings to registrants in the long-term, to the extent that they reduce duplicative effort in registrants' production and acquisition of information ( e.g. certain data or third-party services related to preparing the required disclosures, including the reporting of emissions data, may become cheaper in the long run as the heightened demand spur competition, innovation, and other economies of scale). These cost savings could be particularly helpful for smaller registrants, or those that are capital constrained, which otherwise may not be able to provide the same amount, or level of detail, of climate-related disclosures as registrants with greater resources.

More standardized reporting should also reduce investors' costs for acquiring and processing climate-related information by facilitating investors' analysis of a registrant's disclosure and assessing its climate-related risks against those of its competitors. The placement of climate-related information in SEC filings with machine-readable data language (Inline XBRL), rather than external reports or company websites, should also make it easier for investors to find and compare this information.

Overall, we expect that by standardizing reporting practices, the proposed rules would level the playing field among firms, making it easier for investors to assess the climate-related risks of a registrant against those of its competitors. The effects of peer benchmarking can contribute to increased competition for companies in search for capital both across and within industries, whereby firms can be more easily assessed and compared by investors against alternative options.

Failure to implement the proposed rules could lead to an informational gap between U.S. registrants and companies operating in foreign jurisdictions which require climate-related disclosures. For example, such a gap may increase investors' uncertainty when assessing climate-related risks of U.S. registrants vis-à-vis foreign competitors and place U.S. registrants at a competitive disadvantage, with the potential to deter investments and hence increase U.S. registrants' cost of capital. This informational gap may also pose obstacles to U.S. companies transacting with counterparts and businesses in their supply-chain operating in foreign jurisdictions which require Scope 3 emission disclosures. According to Morningstar, more than 35% of S&P 500 firms' total revenues came from foreign markets, while this percentage is around 20% for the revenues of Russell 2000 firms. Lack of standardized disclosures around Scope 1 and 2 GHG emission by U.S. companies, which may in part be due to the aforementioned impediments to voluntary disclosure, may obstruct foreign counterparts from accurately assessing their Scope 3 GHG emissions, thus putting U.S. registrants at a competitive disadvantage over other foreign companies which may be publicly disclosing such information.

3. Capital Formation

More consistent, comparable, and reliable disclosures could lead to capital-market benefits in the form of improved liquidity, lower costs of capital, and higher asset prices (or firm valuations). Enhanced disclosures ( e.g., accurate GHG emissions disclosures) can reduce the time necessary for processing registrant's relevant information, thus increasing efficiency for registrants in their access to capital and allowing the market to more efficiently assess its cost. These benefits would stem from reductions in information asymmetries brought about by the required disclosure of climate-related information. More comparable, consistent, and reliable climate-related disclosures could reduce information asymmetries, both among investors and between firms and their investors.

In the first case, less information asymmetry among investors could mitigate adverse selection problems by reducing the informational advantage of informed traders. This is likely to improve stock liquidity ( i.e., narrower bid-ask spreads), which could attract more investors and reduce the cost of capital. In the second case, less information asymmetry between firms and their investors could allow investors to better estimate future cash flows, which could reduce investors' uncertainty, as well as the risk premium they demand, thus lowering the costs of capital.

Recent studies provide some supporting empirical evidence of these effects within the context of ESG- or climate-related disclosure. These studies have found that, when firms voluntarily provide material sustainability disclosures, they also experience improvements in liquidity ( e.g. smaller bid-ask spreads). In addition, firms that choose to disclose emissions have lower costs of equity and loan spreads. While firms' decisions about whether and when to disclose emissions data may be correlated with other factors as well asset prices/financing costs, this would be consistent with such disclosures reducing the costs of capital for firms (to the extent that some of these effects are driven by the disclosures themselves).

E. Other Economic Effects

The proposed rules may have some effects on firm behavior. Prior empirical evidence supports the notion that, in response to mandatory ESG-related disclosure rules, firms tend to report actions that appear more “favorable” with respect to the corresponding disclosures. These decisions would be made by a firm's management with the goal of maximizing firm value in response to the new disclosure mandate. To the extent that these actions reduce firms' exposures to physical and transition risks, this could lower the return that investors require for investing in these firms, hence facilitating capital formation. This could reduce volatility of stock returns due to enhanced resiliency against such risks.

Empirical evidence shows that mandatory reporting of GHG emissions results in reduced aggregate reported emissions among affected firms. Academic research shows that mandatory ESG-related disclosure often contributes, not only to increased monitoring by investors or other stakeholders, but also to enhanced peer benchmarking by firms as they can more easily compare themselves with their competitors. These changes may reflect market responses by companies and investors to the newly disclosed information. Accordingly, registrants may change their behavior in response to the proposed disclosure requirements by reducing exposures to certain physical or transition risks. However, this could also come with the potential cost of lower productivity, profitability, or market share in the short-term.

Registrants might respond to the proposed disclosures by devoting more resources to climate-related governance and risk management in an effort to address indirect effects on their business arising from the disclosures. For example, the proposed rules require disclosure of members of the board or management that have prior climate expertise. Some registrants may respond by giving more weight to climate expertise when searching for directors, which may lead them to deviate from the board composition that would have been in place absent the proposed rules. Similarly, the proposed rules would require disclosure on how climate-related risks can impact registrants' consolidated financial statements, among others. Registrants may respond by taking measures to minimize negative impacts in order to put forth more favorable metrics. For example, registrants may move assets or operations away from geographic areas with higher physical risk exposures or may seek to decrease GHG emissions.

The provision on GHG Emissions would also require scope 1, 2, and 3 (if material or the registrant has a set a target or goal for scope 3) emission disclosures. These emission disclosures may induce firms to use peer benchmarking to decide whether to investigate and reevaluate their energy usage or otherwise reduce emissions based on anticipated market reactions to the disclosed information. This process may provide certain registrants with incentives to search for alternative energy sources or find different suppliers, which could increase costs. Conversely, it could also prompt certain firms to reduce nonessential activities and improve operational efficiency, which could lead to lower operating costs.

The provision requiring assurance of GHG Scopes 1 and 2 emissions disclosures would only apply to accelerated filers. Non-accelerated filers would, instead, be required only to state whether any of their GHG emissions disclosures were subject to third-party assurance, and if so, at what level. By asking all registrants, including non-accelerated filers, to disclose climate-related information within SEC filings, however, the proposed rules may motivate more non-accelerated filers to voluntarily seek assurance over these types of disclosures, than if the same information had been disclosed on companies' websites or sustainability reports. Certain non-accelerated filers may also voluntarily decide to attain assurance over their GHG emission disclosures in order to enhance their reliability and prevent these disclosures from being perceived by investors as less reliable compared to those provided by accelerated filers.

As another example, the proposed rules would require the disclosure of the location (via ZIP code) of firm assets or operations, which could allow investors to assess firms' exposures to physical risk at a more granular level. This may allow investors to more easily diversify these geographic-driven risks or expose themselves to such risks, if they choose to, more deliberately. This may cause some firms to relocate assets or operations to geographical areas less exposed to physical risks and/or give preferences to such areas for future business activity. It may also cause some firms with higher geographic exposures to physical risks to alter overall operational risk and strategies.

The proposed rules might also affect the networks firms choose to operate in. For example, a firm may choose to change some suppliers or disengage with certain clients due to the effect that they may have on the firm's Scope 3 emissions. This may be particularly relevant for certain financial institutions that are impacted by their portfolio firms' emissions or climate-related risks. These financial institutions may be less willing to extend credit to firms for which it is difficult to measure climate risk exposure information, potentially increasing the cost of capital for these firms.

However, there are certain factors that may mitigate this effect. First, the proposed rules establish a phase-in period, which is intended to give financial institutions and their prospective borrowers sufficient time to prepare the required disclosures. Second, analytical tools, data, and related methodologies (such as those related to measuring/reporting GHG emissions) are developing rapidly and increasing in availability. Finally, frameworks like the PCAF to measure financed emissions would allow financial institutions to compute proxies for the emissions of their clients in a systematic and comparable manner even in the absence of actual emissions data.

The proposed rules could also cause some firms to pursue avoidance strategies. The provision on Targets and Goals would require a registrant to disclose whether it has set any climate-related targets or goals and the specific plans in place to achieve those objectives and metrics to monitor progress. This may disincentivize certain firms from making such commitments and providing the associated disclosures in SEC filings. Risk of litigation or enforcement actions, could result in registrants being more cautious in their decision to set climate-related targets. Other firms, however, may find the existence of mandatory disclosures around climate-related targets and goals to be beneficial for signaling credible value-enhancing commitments to investors. More credible and standardized disclosures on climate-related targets and goals could make registrants' communication more effective and facilitate investors' understanding of related progress, hence providing additional incentives for making such commitments.

More generally, if compliance costs with the proposed rules are high, this could influence the marginal firm's decision to exit public markets or refrain from going public in the first place in order to circumvent the disclosure requirements. Firms may choose this strategy if they believe the potential compliance costs from the proposed rules outweigh the benefits of being registered public company. Uptake of this avoidance strategy may widen the transparency gap between public and private firms, negatively affecting capital markets' information efficiency, and potentially reduce the size of the stock market. However, it is unlikely that a significant number of firms would pursue this avoidance strategy given that it would come with significant disadvantages, such as higher costs of capital, limited access to capital markets, and limits to their growth potential. Moreover, recent trends in private markets indicate that industry's top leaders are working toward a standard set of metrics for tracking their portfolio companies' ESG progress. The pressure on private companies to disclose information on climate-related risks is rapidly escalating within the private industry, hence diminishing the potential incentive for registrants to go private in order to avoid climate-related disclosure requirements. For example, since its launch in September 2021, the ESG Data Convergence Project, which seeks to standardize ESG metrics and provide a mechanism for comparative reporting for the private market industry, has announced a milestone commitment of over 100 leading general partners and limited partners to its partnership representing $8.7 trillion USD in AUM and over 1,400 underlying portfolio companies across the globe. The initial data for the project includes, among others, greenhouse gas emissions and renewable energy metrics.

F. Reasonable Alternatives

1. Requirements Limited to Only Certain Classes of Filers

One alternative would be to require the proposed disclosures only from larger registrants, such as large accelerated filers or non-SRCs. While the proposed rules already provide certain exemptions for SRCs ( e.g., Scope 3 emissions disclosures and assurance requirements), this alternative would exempt smaller registrants from the entirety of the proposed rules. The main benefit of this alternative is that it would avoid imposing potentially significant compliance costs on smaller registrants, which are more likely to be resource-constrained. However, considering that SRCs make up approximately 50% of registrants (and registrants that are not large accelerated filers make up approximately 70%), this alternative would also considerably undermine one of the primary objectives of the proposed rules, which is to achieve consistent, comparable, and reliable disclosures of climate-related information. Furthermore, climate-related risks are impacting or are expected to impact every sector of the economy, further highlighting the need for enhanced disclosures from all registrants. In an effort to arrive at an appropriate balance between these costs and benefits, the proposed rules exempt SRCs from some, but not all, disclosure requirements.