Document ID: SEC-2022-0494-0001
Agency: sec
Document Type: Proposed Rule
Title: Enhancement and Standardization of Climate-Related Disclosures for Investors
Posted Date: 2022-04-11T04:00Z

[Federal Register Volume 87, Number 69 (Monday, April 11, 2022)]
[Proposed Rules]
[Pages 21334-21473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-06342]

[[Page 21333]]

Vol. 87

Monday,

No. 69

April 11, 2022

Part III

Securities and Exchange Commission

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17 CFR Part 210, 229, 232, et al.

The Enhancement and Standardization of Climate-Related Disclosures for 
Investors; Proposed Rule

  Federal Register / Vol. 87 , No. 69 / Monday, April 11, 2022 / 
Proposed Rules  

[[Page 21334]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 210, 229, 232, 239, and 249

[Release Nos. 33-11042; 34-94478; File No. S7-10-22]
RIN 3235-AM87

The Enhancement and Standardization of Climate-Related 
Disclosures for Investors

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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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 [email protected]. 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 \1\ and 
the Exchange Act,\2\ 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.
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    \1\ 15 U.S.C. 77a et seq.
    \2\ 15 U.S.C. 78a et seq.
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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

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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.'' \3\ 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.'' \4\
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    \3\ See, e.g., Section 7 of the Securities Act [15 U.S.C. 77g] 
and Sections 12, 13, and 15 of the Exchange Act [15 U.S.C. 78l, 78m, 
and 78o].
    \4\ See, e.g., Section 2(b) of the Securities Act [15 U.S.C. 
77b(b)] and Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)].
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    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.\5\ 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.
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    \5\ S&P Global, Seven ESG Trends to Watch in 2021 (Feb. 7, 
2021), available at https://www.spglobal.com/en/research-insights/featured/seven-esg-trends-to-watch-in-2021. This study found that 
approximately 90% of S&P 500 companies publish sustainability 
reports but only 16% include any reference to ESG factors in their 
Commission filings.
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    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

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companies consider in making investment and voting decisions.\6\ 
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,\7\ 
integration into various valuation models, and credit research and 
assessments.\8\ 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.\9\
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    \6\ See Financial Stability Oversight Council (``FSOC''), Report 
on Climate-Related Financial Risk 2021 (Oct. 2021) (``2021 FSOC 
Report''), available at https://home.treasury.gov/system/files/261/FSOC-Climate-Report.pdf (detailing the myriad ways that climate-
related risks pose financial threats both at the firm level and 
financial system level). See also Managing Climate Risk in the U.S. 
Financial System, Report of the Climate-Related Market Risk 
Subcommittee, Market Risk Advisory Committee of the U.S. Commodity 
Futures Trading Commission (2020), available at https://www.cftc.gov/sites/default/files/2020-09/9-9-20%20Report%20of%20the%20Subcommittee%20on%20Climate-Related%20Market%20Risk%20-%20Managing%20Climate%20Risk%20in%20the%20U.S.%20Financial%20System%20for%20posting.pdf (``CFTC Advisory Subcommittee Report'') (stating 
that climate-related risks pose a major risk to the stability of the 
U.S. financial system and to its ability to sustain the American 
economy).
    \7\ See, e.g., letters from Amalgamated Bank (June 14, 2021); 
and Norges Bank Investment Management (June 13, 2021).
    \8\ See, e.g., letter from Principles for Responsible Investment 
(PRI) (Consultation Response) (June 11, 2021).
    \9\ See, e.g., id. (stating that broadly diversified investors 
evaluating any individual asset for addition to a portfolio need to 
consider its risk and return characteristics not in isolation, but 
in terms of the asset's effect on the portfolio as a whole, and 
providing CalPERS as an example of an asset owner holding a 
diversified growth-oriented portfolio that has integrated climate 
risk assessment into its investment process); see also letter from 
Amalgamated Bank (stating that the principal mitigant of investment 
risk is diversity of exposure and indicating that comprehensive 
climate disclosures help investors assess systemic risk); and Norges 
Bank Investment Management (stating that for sustainability 
information to support investment decisions, risk management 
processes, and ownership activities across a diversified portfolio, 
it must be consistent and comparable across companies and over 
time).
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    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.\10\ 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.\11\ 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.\12\ SEC-reporting 
companies and their investors are an essential component of this 
system.\13\
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    \10\ In 2020 alone, a record 22 separate climate-related 
disasters with at least $1 billion in damages struck across the 
United States, surpassing the previous annual highs of 16 such 
events set in 2011 and 2017. See NOAA, National Center for 
Environmental Information, Billion Dollar Weather and Climate 
Disasters: Summary Stats (3rd Quarter release 2021), available at 
https://www.ncdc.noaa.gov/billions/summary-stats/US/2020. In 2021, 
the United States experienced 20 separate billion-dollar climate-
related disasters. See NOAA, U.S. saw its 4th-warmest year on 
record, fueled by a record-warm December (Jan. 10, 2022), available 
at https://www.noaa.gov/news/us-saw-its-4th-warmest-year-on-record-fueled-by-record-warm-december.
    \11\ See 2021 FSOC Report, Chapter 1: From Climate-Related 
Physical Risks to Financial Risks; From Climate-related Transition 
Risks to Financial Risks. We discuss climate-related physical risks 
and climate-related transition risks in greater detail in Section 
II.B.1.
    \12\ See 2021 FSOC Report, Chapter 1: An Emerging Consensus 
Framework for Climate-related Financial Risks (stating that these 
effects would likely propagate through the financial sector, which 
may experience credit and market risks associated with loss of 
income, defaults and changes in the values of assets, liquidity 
risks associated with changing demand for liquidity, and operational 
risks associated with disruptions to infrastructure). See also 
Financial Stability Board (``FSB''), The Implications of Climate 
Change for Financial Stability (Nov. 2020) (stating that climate-
related effects may be far-reaching in their breadth and magnitude, 
and could affect a wide variety of firms, sectors and geographies in 
a highly correlated manner, indicating that the value of financial 
assets/liabilities could be affected either by the actual or 
expected economic effects of a continuation of climate-related 
physical risks, which could lead to a sharp fall in asset prices and 
increase in uncertainty, or by risks associated with a transition 
towards a low-carbon economy, particularly if the transition is 
disorderly, which could have a destabilizing effect on the global 
financial system). See also Basel Committee on Banking Supervision, 
Climate-related Risk Drivers and Their Transmission Channels (Apr. 
2021), at https://www.bis.org/bcbs/publ/d517.pdf.
    \13\ See, e.g., The Editors, Don't Drag Banks Into the Culture 
Wars, The Washington Post (Mar. 7, 2022) (``No doubt, all 
companies--including those in the financial sector--must do more to 
manage social and environmental risks, in particular those related 
to climate change. To that end, the Securities and Exchange 
Commission is rightly working on climate-risk disclosure rules, so 
investors will have the information they need to make the best 
possible decisions and to hold public companies accountable.'').
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    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.\14\ Transitions to lower carbon products, practices, 
and services, triggered by changes in regulations, consumer 
preferences,\15\ availability of financing, technology and other market 
forces,\16\

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can lead to changes in a company's business model.\17\ 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.\18\ In addition, banking regulators have recently 
launched initiatives to incorporate climate risk in their supervision 
of financial institutions.\19\ 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.
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    \14\ See, e.g., 2021 FSOC Report, Chapter 1: From Climate-
related Physical Risks to Financial Risks.
    \15\ See, e.g., Why the automotive future is electric, McKinsey 
& Company (Sept. 7, 2021), at https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/why-the-automotive-future-is-electric (attributing the shift toward lower emissions forms of 
transportation, such as electric vehicles, to a combination of 
regulation, consumer behavior and technology); A Fifth Of World's 
Largest Companies Committed To Net Zero Target, Forbes (Mar. 24, 
2021), at https://www.forbes.com/sites/dishashetty/2021/03/24/a-fifth-of-worlds-largest-companies-committed-to-net-zero-target/?sh=2a72640f662f; See also, More than 1,000 companies commit to 
science-based emissions reductions in line with 1.5 [deg]C climate 
ambition, Joint Press Release by the United Nations Global Compact 
and the Science Based Targets Initiative (Nov. 9, 2021), at https://finance.yahoo.com/news/more-1-000-companies-commit-000800027.html 
(1,045 companies with more than $23 trillion in market 
capitalization are setting 1.5 [deg]C aligned science based 
targets). See also, Why Engage Suppliers on GHG Emissions?, EPA 
Center for Corporate Climate Leadership, at https://www.epa.gov/climateleadership/why-engage-suppliers-ghg-emissions (``As 
organizations commit to reduce the carbon footprints of the products 
and services they provide, they look to their suppliers to align 
their efforts with the organization's sustainability goals'').
    \16\ See, e.g., World Economic Forum, First Movers Coalition is 
tackling the climate crisis, at https://www.weforum.org/our-impact/
first-movers-coalition-is-tackling-the-climate-crisis/
#:~:text=The%20First%20Movers%20Coalition%2C%20which%20was%20launched
%20at,companies%20that%20use%20steel%20to%20build%20wind%20turbines 
(``The World Economic Forum is partnering with the US Special 
Presidential Envoy for Climate John Kerry and over 30 global 
businesses to invest in innovative green technologies so they are 
available for massive scale-up by 2030 to enable net-zero emissions 
by 2050 at the latest.''); COP26 made net zero a core principle for 
business. Here's how leaders can act, McKinsey & Company (Nov. 12, 
2021), at What COP26 means for business [verbar] McKinsey, at 
https://www.mckinsey.com/business-functions/sustainability/our-insights/cop26-made-net-zero-a-core-principle-for-business-heres-how-leaders-can-act (``The net-zero imperative is no longer in 
question--it has become an organizing principle for business . . . 
leaders who put convincing net-zero plans in place can distinguish 
their companies from peers. To put that another way: the basis of 
competition has changed, and there is now a premium on sound net-
zero planning and execution.''); see also S&P Dow Jones Indices 
Launches Net Zero 2050 Climate Transition and Paris-Aligned Select 
Indices (Nov. 22, 2021), at https://finance.yahoo.com/news/p-dow-jones-indices-launches-090000812.html (The index is designed to 
``bring greater transparency in measuring climate-related risks'' 
and help market participants ``achieve their goals in the path to 
net zero by 2050'').
    \17\ See, e.g., Juan C.Reboredo and Luis A. Otero, Are investors 
aware of climate-related transition risks? Evidence from mutual fund 
flows, 189 Ecological Economics (Nov. 2021), available at https://www.sciencedirect.com/science/article/abs/pii/S0921800921002068#!; 
and BlackRock, Climate risk and the transition to a low-carbon 
economy, available at https://www.blackrock.com/corporate/literature/publication/blk-commentary-climate-risk-and-energy-transition.pdf.
    \18\ See Antony J. Blinken, Secretary of State, The United 
States Officially Rejoins the Paris Agreement, Press Statement, 
(Feb. 19, 2021). 191 countries plus the European Union have now 
signed the Paris Climate Agreement. The central aim of the Paris 
Climate Agreement is to strengthen the global response to the threat 
of climate change by keeping a global temperature rise this century 
to well below 2 [deg]Celsius above pre-industrial levels and to 
pursue efforts to limit the temperature increase even further to 1.5 
[deg] degrees Celsius. See Paris Agreement (Paris, Dec. 12, 2015) 
(entered into force Nov. 4, 2016). Moreover, at the UN Climate 
Change Conference (COP 26), the United States committed to become 
net zero by 2050, China by 2060, and India by 2070. Further, over 
100 countries formed a coalition to reduce methane emissions by 30 
percent by 2030. See Environment+Energy Leader, COP26 Net Zero 
Commitments will Speed Energy Transition, Increase Pressure on 
Industries, According to Moody's Report (Nov. 17, 2021).
    \19\ See, e.g., OCC announcement: Risk Management: Principles 
for Climate-Related Financial Risk Management for Large Banks; 
Request for Feedback [verbar] OCC (treas.gov), available at https://www.occ.treas.gov/news-issuances/bulletins/2021/bulletin-2021-62.html; and Principles for Climate-Related Financial Risk 
Management for Large Banks (treas.gov) (Dec. 16, 2021), available at 
https://www.occ.treas.gov/news-issuances/bulletins/2021/bulletin-2021-62a.pdf.
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    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.\20\
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    \20\ See infra Section I.C.2.
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    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.\21\ 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,\22\ 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.\23\ 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.
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    \21\ See Commission Guidance Regarding Disclosure Related to 
Climate Change, Release No. 33-9106 (Feb. 2, 2010) [75 FR 6290 (Feb. 
8, 2010)]. We discuss the 2010 Guidance in greater detail in Section 
I.A. below.
    \22\ See, e.g., supra notes 6, 10, and 12.
    \23\ See, e.g., Larry Fink, A Fundamental Reshaping of Finance, 
2020 Letter to CEOs, at https://www.blackrock.com/corporate/investor-relations/2020-larry-fink-ceo-letter, available at https://www.blackrock.com/corporate/investor-relations/2020-larry-fink-ceo-letter (stating that climate risk is investment risk and asking the 
companies that BlackRock invests in to, among other matters, 
disclose climate-related risks in line with the recommendations of 
the Task Force on Climate-related Financial Disclosures); see also 
Climate Action 100+, at https://www.climateaction100.org/. Climate 
Action 100+ is an investor-led initiative composed of 615 investors 
who manage $60 trillion in assets (as of Nov. 2021), who aim ``to 
mitigate investment exposure to climate risk and secure ongoing 
sustainable returns for their beneficiaries.'' See also Glasgow 
Financial Alliance for Net Zero (GFANZ), at https://www.gfanzero.com/, a global coalition of leading financial 
institutions focused on promoting the transition to a net zero 
global economy. Formed in Apr. 2021, its membership as of Nov. 2021 
included over 450 financial firms controlling assets of over $130 
trillion. Further, more than 500 investor signatories with assets 
under management of nearly $100 trillion are signatories to the CDP 
climate risk disclosure program, https://cdn.cdp.net/cdp-production/comfy/cms/files/files/000/004/697/original/2021_CDP_Capital_Markets_Brochure_General.pdf. We discuss the 
growing investor demand for climate-related information in greater 
detail in Section I.C below.
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    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.\24\ 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,\25\ a safe harbor 
for certain emissions disclosures,\26\ and an exemption from certain 
emissions reporting requirements for smaller reporting companies.\27\ 
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.\28\
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    \24\ See Acting Chair Allison Herren Lee Public Statement, 
Public Input Welcomed on Climate Change Disclosures (Mar. 15, 2021), 
available at https://www.sec.gov/news/public-statement/lee-climate-change-disclosures. See also, e.g., Concept Release: Business and 
Financial Disclosure Required by Regulation S-K, Release No. 33-
10064 (Apr. 16, 2016), [83 FR 23915 (Apr. 22, 2016)] and related 
comments, available at https://www.sec.gov/rules/concept/conceptarchive/conceptarch2016.shtml.
    \25\ See infra Section II.M.
    \26\ See Section II.G.3.
    \27\ See id.
    \28\ See Securities Act Section 27A [15 U.S.C. 77z-2] and 
Exchange Act Section 21E [15 U.S.C. 78u-5]. We discuss the 
application of the existing forward-looking statement safe harbors 
to the proposed climate-related disclosures primarily in Sections 
II.C.3-4, II.E, II.G.1, and II.I.
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    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

[[Page 21338]]

compliance with environmental laws.\29\ 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.\30\
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    \29\ See Release No. 33-5170 (July 19, 1971) [36 FR 13989]. The 
Commission codified this interpretive position in its disclosure 
forms two years later. See Release 33-5386 (Apr. 20, 1973) [38 FR 
12100] (``1972 Amendments'').
    \30\ See Interpretive Release No. 33-6130 (Sept. 27, 1979) [44 
FR 56924], which includes a brief summary of the National 
Environmental Policy Act of 1969 and the legal and administrative 
actions taken with regard to the Commission's environmental 
disclosure during the 1970s. See also NRDC v. SEC, 606 F.2d 1031, 
1036-42 (DC Cir. 1979) (discussing this history). More information 
relating to the Commission's efforts in this area is chronicled in 
Release No. 33-6315 (May 4, 1981) [46 FR 25638].
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    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.\31\ 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.\32\
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    \31\ See Release No. 33-6383 (Mar. 3, 1982) [47 FR 11380] 
(``1982 Release'') (adopting 17 CFR 229.103, which requires a 
registrant to describe its material pending legal proceedings, other 
than ordinary routine litigation incidental to the business, and 
indicating that administrative or judicial proceedings arising under 
federal, state, or local law regulating the discharge of materials 
into the environment or primarily for the purpose of protecting the 
environment, shall not be deemed ``ordinary routine litigation 
incidental to the business'' and must be described if meeting 
certain conditions). The 1982 Release also moved the information 
called for by the 1973 Amendments to 17 CFR 229.101(c)(1)(xii), 
which, as part of a registrant's business description, required the 
disclosure of the material effects that compliance with Federal, 
State and local provisions regulating the discharge of materials 
into the environment, or otherwise relating to the protection of the 
environment, have had upon the registrant's capital expenditures, 
earnings and competitive position, as well as the disclosure of its 
material estimated capital expenditures for environmental control 
facilities. In 2020, the Commission amended 17 CFR 229.101(c)(1) to 
require, to the extent material to an understanding of the business 
taken as a whole, disclosure of the material effects that compliance 
with government regulations, including environmental regulations, 
may have upon the capital expenditures, earnings, and competitive 
position of the registrant and its subsidiaries. See Modernization 
of Regulation S-K Items 101, 103, and 105, Release No. 33-10825 
(Aug. 26, 2020) [85 FR 63726 (Oct. 8, 2020)] (``2020 Release'').
    \32\ See Release No. 33-9106, Section III.
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    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.'' \33\ 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'').\34\ 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.
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    \33\ See Release No. 33-9106, Section I.
    \34\ The 2010 Guidance also applies to corresponding disclosure 
requirements in Form 20-F by foreign private issuers.
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    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.\35\ The disclosures 
required by our existing rules should reflect these company-specific 
risks.
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    \35\ Our recent amendments to Item 105 of Regulation S-K 
discourage the presentation of generic risks that could apply 
generally to any registrant or offering. The fact that climate risks 
are broad-based does not, in our view, cause them to be generic. For 
example, thousands of companies in Houston were impacted by 
Hurricane Harvey. However, (1) their flood risk varied and some 
companies may have been far more impacted than others (and would be 
more vulnerable to future catastrophic storms); (2) their operations 
were different and some may have been more disrupted as a result 
than others--e.g., a services business on the 10th floor of a 
building may have experienced just a few days of disruption while an 
oil refinery may have been shut down for weeks; and (3) their risk 
management processes may have been different--two similarly situated 
companies may have different continuity of operations plans or may 
have taken steps to mitigate those types of risks. In sum, while the 
source of the risk may be common to many companies, the impact is 
not.
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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.\36\ 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.
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    \36\ See Acting Chair Allison Herren Lee Public Statement, 
Public Input Welcomed on Climate Change Disclosures.
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    The Commission received approximately 600 unique letters and over 
5800 form letters in response to the Acting Chair's request for public 
input.\37\ 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.
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    \37\ The comment letters are available at https://www.sec.gov/comments/climate-disclosure/cll12.htm. Except as otherwise noted, 
references to comments in this release pertain to these comments.
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    Many of these commenters, including investors with trillions of 
dollars of assets under management collectively,\38\

[[Page 21339]]

supported implementation of climate-related disclosure rules. A number 
of commenters \39\ stated that mandated disclosures are necessary 
because climate change poses significant financial risks to registrants 
and their investors.\40\ According to one of the commenters, 68 out of 
77 industries are likely to be significantly affected by climate 
risk.\41\ 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.\42\
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    \38\ See, e.g., letters from BlackRock (June 11, 2021) ($9T); 
Ceres (June 10, 2021) (representing Investor Network on Climate Risk 
and Sustainability) ($37T); Council of Institutional Investors (June 
11, 2021) ($4T); Investment Adviser Association (June 11, 2021) 
($25T); Investment Company Institute (June 4, 2021) ($30.8T); PIMCO 
(June 9, 2021) ($2T); SIFMA (June 10, 2021) ($45T); State Street 
Global Advisors (June 14, 2021) (3.9T); and Vanguard Group, Inc. 
(June 11, 2021) ($7T).
    \39\ See, e.g., letters from AllianceBernstein; Amalgamated 
Bank; Boston Common Asset Management (June 14, 2021); Calvert 
Research and Management (June 1, 2021); Ceres; the Committee on 
Mission Responsibility through Investment by Presbyterian Church 
(June 10, 2021); Katherine DiMatteo (June 1, 2021); Domini Impact 
Investments (June 14, 2021); Felician Sisters of North America (June 
8, 2021); Friends Fiduciary (June 11, 2021); Melanie Bender (May 26, 
2021); Miller/Howard Investments (June 11, 2021); Mercy Investment 
Services, Inc. (June 4, 2021); Parametric Portfolio Associates, LLC 
(June 4, 2021); San Francisco City and County Employees' Retirement 
System (June 12, 2021); Seventh Generation Interfaith, Inc. (May 20, 
2021); State Street Global Advisors; Sustainability Accounting 
Standards Board (SASB) (May 19, 2021); the Sustainability Group 
(June 4, 2021); and Trillium Asset Management (June 9, 2021).
    \40\ Several commenters referred to various reports by the 
Intergovernmental Panel on Climate Change (``IPCC'') to demonstrate 
that there is scientific consensus that climate change is the result 
of global warming caused by human-induced emissions of greenhouse 
gases and poses significant global risks. See, e.g., letters from 
Better Markets (June 14, 2021); Center for Human Rights and 
Environment (June 9, 2021); Commonwealth Climate and Law Initiative 
(June 13, 2021); Charles E. Frye (Apr. 3, 2021); Interfaith Center 
on Corporate Responsibility (June 14, 2021); and Mike Levin and 23 
other Members of Congress (June 15, 2021). IPCC's latest report is 
IPCC, AR6 Climate Change 2021: The Physical Science Basis (Aug. 7, 
2021), available at https://www.ipcc.ch/report/ar6/wg1/.
    \41\ See letter from SASB.
    \42\ See, e.g., letters from Amalgamated Bank; Bank of Finland 
(June 1, 2021); Blueprint Financial (June 11, 2021); Canadian 
Coalition of Good Governance (June 9, 2021); Center for Climate and 
Energy Solutions (June 12, 2021); Clean Yield Asset Management (June 
11, 2021); Coalition for Inclusive Capitalism (June 14, 2021); 
Felician Sisters of North America; First Affirmative Financial 
Network (June 2, 2021); William and Flora Hewitt Foundation (June 9, 
2021); Impact Investors, Inc. (June 2, 2021); Impax Asset Management 
(June 9, 2021); Institute of International Bankers (June 8, 2021); 
Investment Company Institute; Investment Consultants Sustainability 
Working Group (June 11, 2021); Miller/Howard Investments; Norge Bank 
Investment Management (June 13, 2021); Parametric Portfolio 
Associates; Praxis Mutual Funds and Everence Financial (June 10, 
2021); PRI (Consultation Response); Salesforce.com Inc. (June 11, 
2021); San Francisco City and County Employees' Retirement System; 
SASB; Seventh Generation Interfaith, Inc.; S&P Global (June 11, 
2021); Trillium Asset Management; World Business Council for 
Development (WBCSD) (June 11, 2021); Vanguard Group, Inc.; and US 
Impact Investing Alliance (June 14, 2021).
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    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.\43\ 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.\44\ Some commenters also argued that 
mandated climate disclosure rules could violate First Amendment 
rights.\45\
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    \43\ See, e.g., letters from American Enterprise Institute (June 
10, 2021); CO2 Coalition (June 1, 2021); the Heritage 
Foundation (June 13, 2021); Steve Milloy (June 1, 2021); Berkeley T. 
Rulon-Miller (Apr. 9, 2021); and the Texas Public Policy Foundation 
(June 11, 2021).
    \44\ See, e.g., letters from American Enterprise Institute; the 
Cato Institute; the Heritage Foundation; and Texas Public Policy 
Foundation.
    \45\ See, e.g., letters from the Institute for Free Speech (June 
10, 2021); Patrick Morrisey, West Virginia Attorney General (Mar. 
25, 2021); and Texas Public Policy Foundation.
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    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.\46\
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    \46\ The staff of the Division of Corporation Finance has 
developed a sample comment letter for registrants to elicit improved 
disclosure on some of the deficient areas noted in their review of 
filings. See Climate Change Disclosure-Sample Letter, available at 
https://www.sec.gov/corpfin/sample-letter-climate-change-disclosures.
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    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.\47\ 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.\48\ 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.\49\
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    \47\ See, e.g., letter from Pricewaterhouse Coopers.
    \48\ See 17 CFR 240.13a-15 and 17 CFR 240.15d-15.
    \49\ We note that the liability provisions of Section 10(b) and 
Rule 10b-5 of the Exchange Act can apply to statements made in 
filings with the SEC or elsewhere, such as in sustainability reports 
or on company websites. See, e.g., SEC v. Stinson, No. 10-3130, 2011 
U.S. Dist. LEXIS 65723, 2011 WL 2462038, at 12 (E.D. Pa. June 20, 
2011) (finding defendants liable under Section 10(b) when they 
communicated material misstatements and omissions in direct 
solicitations via email, a webinar, and various websites). As such, 
registrants should scrutinize and ensure the accuracy of such 
statements whether or not filed with the Commission. In addition, 
information filed in a Form 10-K is subject to Section 18 of the 
Exchange Act. Further, information filed in an annual report on Form 
10-K (and other current and periodic reports) can be incorporated by 
reference in certain Securities Act registration statements, such as 
those filed on Form S-3, and thereby become subject to the liability 
provisions of the Securities Act. See Securities Act Section 11 (15 
U.S.C. 77k) and Section 12 (15 U.S.C. 77l). See infra Section 
II.C.3-4, II.E, II.G.1, and II.I regarding the application to 
forward-looking climate disclosures of the safe harbor for forward-
looking statements that was added to the Securities Act and Exchange 
Act pursuant to the Private Securities Litigation Reform Act of 
1995.

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[[Page 21340]]

    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.\50\ 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.\51\ 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.
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    \50\ See supra note 42 and accompanying text.
    \51\ See letters from Jill E. Fisch and 18 other law professor 
signatories (June 11, 2021) (referencing Sections 7, 10, and 19(a) 
of the Securities Act; and Sections 3(b), 12, 13, 14, 15(d), and 
23(a) of the Exchange Act); and Natural Resources Defense Council 
(June 11, 2021).
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    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.\52\ 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.\53\ 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.\54\ 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.
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    \52\ See letters from Eni SpA (June 12, 2021); Jill. E. Fisch et 
al; Natural Resources Defense Council; SASB; and Value Balancing 
Alliance (June 28, 2021); see also infra Section IV.
    \53\ See, e.g., letter from SASB (stating that through the 
``multiple voluntary disclosure frameworks (i.e., the ``alphabet 
soup'' decried by companies) . . . and numerous direct requests to 
companies for information through surveys, the current private 
ordering-led system has increased the burden on companies--and 
investors--while still leaving many companies uncertain as to 
whether they are, in practice, providing the decision-useful 
information required by investors.''); see also letters from 
Americans for Financial Reform Education Fund and Public Citizen 
(June 14, 2021) (stating that ``the proliferation of differing 
frameworks has increased compliance complexities and costs for 
companies''); Eni SpA (stating that the fragmentation of data 
fostered by the proliferation of reporting frameworks has multiplied 
the efforts of companies in satisfying all their requirements); and 
BSR (June 11, 2021) (providing that ``a fragmented environment is 
limiting the impact of reporting and creating undue confusion and 
cost on the part of reporters.'').
    \54\ Providing a more standardized framework for climate-related 
disclosures would be consistent with the Recommendation from the 
Investor-as-Owner Subcommittee of the SEC Investor Advisory 
Committee Relating to ESG Disclosure (May 14, 2020) (``IAC 
Recommendation''), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-of-the-investor-as-owner-subcommittee-on-esg-disclosure.pdf. The term ``ESG'' refers to 
environmental, social, and governance matters, of which climate-
related disclosures is a part. The IAC Recommendation focused on the 
inadequacies of ESG disclosures broadly, and not just on those 
involving climate. The IAC Recommendation stated that, to the extent 
that SEC reporting obligations would require a single standard of 
material, decision-useful ESG information, as relevant to each 
issuer, and based upon data that issuers already use to make their 
business decisions, such an approach would level the playing field 
between well-financed large issuers and capital constrained small 
issuers.
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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.\55\ 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:\56\
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    \55\ See supra note 23.
    \56\ There is some overlap in the signatories to the listed 
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; \57\
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    \57\ See United Nations Climate Change, 631 Institutional 
Investors Managing More than USD 37 Trillion in Assets Urge 
Governments to Step up Climate Ambition (Dec. 9, 2019), available at 
https://unfccc.int/news/631-institutional-investors-managing-more-than-usd-37-trillion-in-assets-urge-governments-to-step-up.
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     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.\58\
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    \58\ See The Investor Agenda, 2021 Global Investor Statement to 
Governments on the Climate Crisis (Oct. 27, 2021), available at 
https://theinvestoragenda.org/wp-content/uploads/2021/09/2021-Global-Investor-Statement-to-Governments-on-the-Climate-Crisis.pdf.
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     The UN Principles for Responsible Investment (``PRI'') 
\59\ 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; \60\
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    \59\ PRI was created by a UN-sponsored small group of large 
global investors in 2006. A stated core goal of the PRI is to help 
investors protect their portfolios from climate-related risks and to 
take advantage of climate-related opportunities associated with a 
shift to a low-carbon global economy. See PRI, Climate Change, 
available at https://www.unpri.org/climate-change.
    \60\ See PRI, CEO quarterly update: Celebrating 4000 signatories 
and supporting the evolution of PRI (July 13, 2021), available at 
https://www.unpri.org/pri-blog/ceo-quarterly-update-celebrating-4000-signatories-and-supporting-the-evolution-of-ri/8033.article.
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     The Net Zero Asset Managers Initiative, which was formed 
by an international group of asset managers, has 128 signatories that 
collectively

[[Page 21341]]

manage $43 trillion in assets as of July 2021; \61\
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    \61\ See Net Zero Asset Managers Initiative, Net Zero Asset 
Managers initiative announces 41 new signatories, with sector seeing 
`net zero tipping point' (July 6, 2021), available at https://www.netzeroassetmanagers.org/net-zero-asset-managers-initiative-announces-41-new-signatories-with-sector-seeing-net-zero-tipping-point.
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     The Climate Action 100+, an investor-led initiative, now 
comprises 617 global investors that together have more than $60 
trillion in assets under management; \62\ and
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    \62\ See Climate Action 100+, About Climate Action 100+, 
available at https://www.climateaction100.org/about/ (indicating 
that the initiative is engaging companies on strengthening climate-
related financial disclosures).
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     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.\63\
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    \63\ See GFANZ, About Us, available at https://www.gfanzero.com/about/. Another organization, the CDP, provides a means for 
investors to request that companies provide climate-related 
disclosures through the CDP. In 2021, over 590 investors with $110 
trillion in assets under management requested that thousands of 
companies disclose climate related information to them through the 
CDP. See CDP, Request Environmental Information, available at 
https://www.cdp.net/en/investor/request-environmental-information#d52d69887a88f63e15931b5db2cbe80d.
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    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'') \64\ 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.\65\
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    \64\ We discuss the TCFD in greater detail in Section I.D.1 
below.
    \65\ See Climate Action 100+, About Climate Action 100+. 
Further, commenters noted their fiduciary obligations to consider 
climate-related risks. See, e.g., letters from PRI (Consultation 
Response); and California Public Employee Retirement System 
(CalPERS) (June 12, 2021).
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    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.\66\ 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.\67\ 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.\68\
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    \66\ According to one publication, two-thirds of S&P 500 
companies had set a carbon reduction target by the end of 2020. See 
Jean Eaglesham, Climate Promises by Businesses Face New Scrutiny, 
The Wall Street Journal (Nov. 5, 2021).
    \67\ See Global Survey Shows Race to Decarbonization is on: 
Johnson Controls finds Delivering Growth and Competitive Advantage 
are Main Drivers for Companies to Commit to Net Zero (Dec. 1, 2021), 
available at https://ih.advfn.com/stock-market/NYSE/johnson-
controls-JCI/stock-news/86696470/global-survey-shows-race-to-
decarbonization-is-
on#:~:text=Global%20Survey%20Shows%20Race%20to%20Decarbonization%20is
%20on%3A,December%2001%202021%20-
%2007%3A01AM%20PR%20Newswire%20%28US%29; and COP26 made net zero a 
core principle for business. Here's how leaders can act, McKinsey 
(Nov. 12, 2021), available at https://www.mckinsey.com/business-functions/sustainability/our-insights/cop26-made-net-zero-a-core-principle-for-business-heres-how-leaders-can-act.
    \68\ See, e.g., letters from Ceres; Investor Adviser Association 
(June 11, 2021); SIFMA Asset Management Group (June 10, 2021); 
Trillium Asset Management; and T. Rowe Price (June 11, 2021); see 
also letters from Boston University Impact Measurement and 
Allocation Program (June 7, 2021); CDP (June 11, 2021); Christopher 
Lish (June 12, 2021); and Pricewaterhouse Coopers (June 10, 2021).
---------------------------------------------------------------------------

    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.\69\ 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.\70\ 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.
---------------------------------------------------------------------------

    \69\ See supra note 42.
    \70\ See IAC Recommendation. The IAC Recommendation noted that 
more than 125 third-party ESG data providers, including ESG ratings 
firms, have emerged to try to meet the informational demands of 
investors. According to the IAC Recommendation, these data providers 
are limited in their ability collectively to provide investors with 
comparable and consistent information as they use different 
information sources and different--frequently opaque--methodologies 
to conduct their analyses, which compromises the usefulness and 
reliability of the information. This current heterogeneity in 
practices and disparate demands from investors and ratings firms 
places a significant burden on companies asked to provide this 
information in a variety of formats. The IAC Recommendation further 
observed that many companies feel compelled to respond to the 
multiple surveys of ESG rating firms because ignoring them or 
refusing to respond can lead to a low rating, which can adversely 
affect stock price and access to capital. While the proposed rules 
would not necessarily eliminate third-party questionnaires, they 
would help to provide standardized information to all investors and 
might reduce the need to obtain the information obtained through 
questionnaires.
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    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''),\71\ CDP (formerly the Carbon Disclosure Project),\72\ 
Climate Disclosure Standards Board (``CDSB''),\73\ Value Reporting 
Foundation (formed through a merger of the Sustainability Accounting 
Standards Board (``SASB'') and the International Integrated Reporting 
Council (``IIRC'')),\74\ and the TCFD.\75\
---------------------------------------------------------------------------

    \71\ See GRI, About GRI, available at https://www.globalreporting.org/about-gri/.
    \72\ See CDP, About Us, available at https://www.cdp.net/en/info/about-us. In 2018, CDP revised its questionnaire to companies 
so that it aligns with the TCFD recommended framework. See letter 
from CDP.
    \73\ See CDSB, About the Climate Disclosure Standards Board, 
available at https://www.cdsb.net/our-story.
    \74\ See Value Reporting Foundation, Understanding the Value 
Reporting Foundation, available at https://www.valuereportingfoundation.org/.
    \75\ See TCFD, About, available at https://www.fsb-tcfd.org/about/.
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    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.\76\ However, because they

[[Page 21342]]

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.\77\ 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.\78\ 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.\79\ 
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.\80\
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    \76\ For example, according to the CDP, over 3,000 companies 
have provided climate-related disclosures through the CDP's platform 
by responding to the CDP's questionnaires that are aligned with the 
TCFD's disclosure recommendations. See letter from CDP. The TCFD has 
similarly reported growth in the number of companies and countries 
supporting its climate-related disclosure recommendations. See TCFD, 
2021 Status Report (Oct. 2021), available at https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Status_Report.pdf">https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Status_Report.pdf 
(stating that, as of Oct. 6, 2021, the TCFD had over 2,600 
supporters globally, including 1,069 financial institutions 
responsible for assets of US $194 trillion).
    \77\ See supra note 42.
    \78\ Dr. Rodney Irwin, Alan McGill, Enhancing the Credibility of 
Non-Financial Information, the Investor Perspective, WBCSD and PwC 
(Oct. 2018).
    \79\ Yale Initiative on Sustainable Finance, Toward Enhanced 
Sustainability Disclosure: Identifying Obstacles to Broader and More 
Actionable ESG Reporting (Sept. 2020), available at https://pages.fiscalnote.com/rs/109-ILL-989/images/YISF%20ESG%20Reporting%20White%20Paper.pdf.
    \80\ See, e.g., TCFD, 2021 Status Report (indicating that there 
is a need to improve companies' climate-related disclosures, 
particularly regarding governance and risk management, to better 
align with the TCFD's recommendations).
---------------------------------------------------------------------------

    The staff has reviewed more than a dozen studies of climate-related 
disclosures conducted by third parties, such as the CDP,\81\ KPMG,\82\ 
TCFD \83\, and Ernst & Young,\84\ 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.\85\ 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.\86\
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    \81\ See CDP, ANALYSIS OF CA100+ COMPANY DATA (2020), available 
at https://cdn.cdp.net/cdp-production/cms/reports/documents/000/005/312/original/Analysis_of_CA100__Data_for_CDP_Investor_Signatories_v5.pdf?1596046258.
    \82\ See KPMG, The Time Has Come-The KPMG Survey of 
Sustainability Reporting 2020 (Dec. 2020), available at https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/11/the-time-has-come.pdf.
    \83\ See TCFD 2020 Status Report (Sept. 2020), available at 
https://assets.bbhub.io/company/sites/60/2020/09/2020-TCFD_Status-Report.pdf.
    \84\ See Ernst & Young, How can climate change disclosures 
protect reputation and value?-The 2019 EY Global Climate Risk 
Disclosure Barometer (Apr. 2020), available at https://www.ey.com/en_us/climate-change-sustainability-services/how-can-climate-change-disclosures-protect-reputation-and-value.
    \85\ For example, the TCFD report found that the average level 
of disclosure across the TCFD's 11 disclosure categories was 40% for 
the energy sector, 30% for the materials and building sector, 18% 
for the consumer goods sector and 13% for the technology sector. The 
level of disclosure varied among categories with only 4% or 
reporting companies disclosing the resilience of their strategies in 
North America and 50% reporting their risks and opportunities (the 
category with the highest level of disclosure). The Ernst & Young 
report found many companies in industries considered to have high 
exposure to climate-related risks lack high quality climate 
disclosures. The Ernst & Young report graded the average quality of 
the disclosures at 27 out of 100.
    \86\ See, e.g., The SEC's Time to Act, Center for American 
Progress (Feb. 19, 2021) (``[T]here is a lack of standardization of 
the data, assumptions, and methodologies companies use to meet the 
standards, with much of this information being opaque. Clearly, the 
current path of climate disclosure will not provide the transparency 
that an increasing number of investors are seeking and, indeed, a 
properly functioning market requires--consistency of disclosures 
across time, comparability of disclosures across companies, and 
reliability of the information that is disclosed.'') See, also, Andy 
Green and Andrew Schwartz, Corporate Long-Termism, Transparency, and 
the Public Interest (Oct. 2, 2018) (``[C]orporate disclosure 
available today is insufficient, not comparable, and unreliable''); 
and Managing Climate Risk in the U.S. Financial System, Report of 
the Climate-Related Market Risk Subcommittee, Market Risk Advisory 
Committee of the U.S. Commodity Futures Trading Commission (2020) 
(``Large companies are increasingly disclosing some climate-related 
information, but significant variations remain in the information 
disclosed by each company, making it difficult for investors and 
others to understand exposure and manage climate risks.'').
---------------------------------------------------------------------------

    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 \87\ 
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; \88\
---------------------------------------------------------------------------

    \87\ The IFRS Foundation refers to the International Financial 
Reporting Standards Foundation, which was established to develop a 
single set of ``high-quality,'' enforceable, and globally accepted 
accounting standards. See IFRS--Who we are, available at https://www.ifrs.org/about-us/who-we-are/. The IFRS Foundation was formed in 
2010 and succeeded the International Accounting Standards 
Foundation, which was formed in 2001.
    \88\ IFRS Foundation, IFRS Foundation Trustees' Feedback 
Statement on the Consultation Paper on Sustainability Reporting 
(Apr. 2021), available at https://www.ifrs.org/content/dam/ifrs/project/sustainability-reporting/sustainability-consultation-paper-feedback-statement.pdf.
---------------------------------------------------------------------------

     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 \89\ 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.\90\
---------------------------------------------------------------------------

    \89\ IOSCO refers to the International Organization of 
Securities Commissions, of which the Commission is a member.
    \90\ IOSCO, Report on Sustainability-related Issuer Disclosures, 
Final Report (June 2021) available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD678.pdf.
---------------------------------------------------------------------------

     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

[[Page 21343]]

standards that an ISSB might eventually develop; \91\
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    \91\ See CDP, CDSB, GRI, IIRC and SASB, Reporting on enterprise 
value Illustrated with a prototype climate-related financial 
disclosure standard (Dec. 2020), available at https://29kjwb3armds2g3gi4lq2sx1-wpengine.netdna-ssl.com/wp-content/uploads/Reporting-on-enterprise-value_climate-prototype_Dec20.pdf; and IFRS 
Foundation, IFRS Foundation announces International Sustainability 
Standards Board, consolidation with CDSB and VRF, and publication of 
prototype disclosure requirements, available at https://www.ifrs.org/news-and-events/news/2021/11/ifrs-foundation-announces-issb-consolidation-with-cdsb-vrf-publication-of-prototypes/.
---------------------------------------------------------------------------

     In November 2021, the IFRS Foundation announced the 
formation of the ISSB.\92\ 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.\93\
---------------------------------------------------------------------------

    \92\ See IFRS Foundation, IFRS Foundation announces 
International Sustainability Standards Board, consolidation with 
CDSB and VRF, and publication of prototype disclosure requirements 
(Nov. 3, 2021), available at https://www.ifrs.org/news-and-events/news/2021/11/ifrs-foundation-announces-issb-consolidation-with-cdsb-vrf-publication-of-prototypes/. At the same time, the IFRS 
Foundation announced the planned consolidation of the Climate 
Disclosure Standards Board and the Value Reporting Foundation into 
the ISSB during 2022. The ISSB is expected to develop reporting 
standards using the Prototype as a starting point and engaging in 
rigorous due process under the oversight of the IFRS Foundation 
Trustees' Due Process Oversight Committee.
    \93\ Id.
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     Several jurisdictions, including the European Union,\94\ 
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.\95\
---------------------------------------------------------------------------

    \94\ Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF 
THE COUNCIL amending Directive 2013/34/EU, Directive 2004/109/EC, 
Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards 
corporate sustainability reporting (Apr. 2021), available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0189. In 
proposing revised corporate sustainability reporting requirements, 
the EU explained that there exists a widening gap between the 
sustainability information, including climate-related data, 
companies report and the needs of the intended users of that 
information, which may mean that investors are unable to take 
sufficient account of climate-related risks in their investment 
decisions.
    \95\ See IOSCO, Report on Sustainability-related Issuer 
Disclosures, Final Report (June 2021) (noting progress in several 
jurisdictions, including Hong Kong, India, Japan, New Zealand and 
the United Kingdom, to incorporate TCFD's disclosure recommendations 
into their legal and regulatory frameworks).
---------------------------------------------------------------------------

    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.\96\ The second involves the Greenhouse Gas 
Protocol (``GHG Protocol''), which has become a leading accounting and 
reporting standard for greenhouse gas emissions.\97\ 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.
---------------------------------------------------------------------------

    \96\ A number of registrants recommended basing the Commission's 
climate-related disclosure rules on the TCFD framework. See, e.g., 
letters from Adobe; Alphabet Inc. et al.; BNP Paribas (June 11, 
2021); bp; Chevron (June 11, 2021; ConocoPhilips; and Walmart. 
Similarly, numerous investors and investor groups recommended the 
TCFD framework. See letters from Alberta Investment Management 
Corporation; BlackRock; CalPERS; CALSTRS (June 4, 2021); Impact 
Investors, Inc.; and San Francisco Employees Retirement System. See 
also infra Section II.A.1 for further discussion of the many 
commenters that recommended basing the Commission's climate-related 
disclosure rules on the TCFD framework.
    \97\ See, e.g., letter from Natural Resources Defense Council 
(stating that most companies providing climate-related information 
do so using the three-part (scope) framework developed by the GHG 
Protocol and noting other organizations, such as the CDP, that use 
the GHG Protocol's framework and methodology); see also GHG 
Protocol, Companies and Organizations, available at https://ghgprotocol.org/companies-and-organizations (stating that 92% of 
companies responding to the CDP in 2016 used the GHG Protocol's 
standards and guidance).
---------------------------------------------------------------------------

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.\98\
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    \98\ See infra Section II.A.1 and notes 145 through 149.
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    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.\99\ 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.\100\ 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.\101\
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    \99\ See TCFD, 2020 Status Report (Oct. 2020). The Group of 20 
(``G20'') is a group of finance ministers and central bank governors 
from 19 countries, including the United States, plus the European 
Union, which was formed in 1999 to promote global economic growth, 
international trade, and regulation of financial markets. According 
to the G20, its members represent more than 80% of world GDP, 75% of 
international trade, and 60% of the world population. See G20, About 
the G20, available at https://g20.org/about-the-g20/.
    \100\ See TCFD, Recommendations of the Task Force on Climate-
related Financial Disclosures (June 2017), available at https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf.
    \101\ See, e.g., Climate Action 100+, The Three Asks, available 
at https://www.climateaction100.org/approach/the-three-asks/ 
(requiring participating investors to ask the companies with which 
they engage to provide enhanced corporate disclosure in line with 
the TCFD's recommendations; and CDP, How CDP is aligned to the TCFD, 
available at https://www.cdp.net/en/guidance/how-cdp-is-aligned-to-the-tcfd (explaining how the CDP has aligned its questionnaires to 
elicit disclosures aligned with the TCFD's recommendations).
---------------------------------------------------------------------------

    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.\102\
---------------------------------------------------------------------------

    \102\ See TCFD, TCFD_Booklet_FNL_Digital_March-2020.pdf 
(bbhub.io) (Mar. 2021), available at https://assets.bbhub.io/company/sites/60/2020/10/TCFD_Booklet_FNL_Digital_March-2020.pdf.

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[[Page 21344]]

    Support for the TCFD's recommendations by companies and other 
reporting frameworks has grown steadily since the TCFD's 
formation.\103\ As of October 2021 more than 2,600 organizations 
globally, with a total market capitalization of $25 trillion have 
expressed support for the TCFD.\104\ Further, 1,069 financial 
institutions, managing assets of $194 trillion, also support the 
TCFD.\105\ 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.\106\ 
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.\107\ The G7 Finance Ministers and Central Bank Governors 
have also endorsed the TCFD.\108\ 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.
---------------------------------------------------------------------------

    \103\ According to the TCFD, ``[for] companies, support is a 
commitment to work toward their own implementation of the TCFD 
recommendations.'' https://www.fsb-tcfd.org/support-tcfd/
    \104\ See TCFD, 2021 Status Report. A recent survey by Moody's 
of over 3,800 companies worldwide indicated that the global average 
disclosure rate of companies that reported across all 11 TCFD's 
recommendations increased to 22% in 2021 from 16% in 2020. See 
Moody's State of TCFD Disclosures 2021, available at https://assets.website-files.com/5df9172583d7eec04960799a/616d36184f3e6431a424b9df_BX9303_MESG_State%20of%20TCFD%20Disclosures%202021.pdf. In addition, according to a recent report by the 
Governance & Accountability Institute, Inc., 70% of companies in the 
Russell 1000 Index published sustainability reports in 2020, and of 
those reporters, 30% mentioned or aligned their disclosures with the 
TCFD framework, and 40% responded to the CDP questionnaires, which 
are aligned with the TCFD. See Governance & Accountability 
Institute, Sustainability Reporting in Focus, 2021, available at 
https://www.ga-institute.com/fileadmin/ga_institute/images/FlashReports/2021/Russell-1000/G_A-Russell-Report-2021-Final.pdf?vgo_ee=NK5m02JiOOHgDiUUST7fBRwUnRnlmwiuCIJkd9A7F3A%3D. We 
discuss the findings of this report, and other similar findings, in 
greater detail in Section IV.A.5.c below.
    \105\ See TCFD, 2021 Status Report.
    \106\ See id.
    \107\ See Climate-related Disclosures Prototype, Developed by 
the Technical Readiness Working Group, chaired by the IFRS 
Foundation, to provide recommendations to the International 
Sustainability Standards Board for consideration (Nov. 2021).
    \108\ HM Treasury, G7 Finance Ministers and Central Bank 
Governors Communique--Policy Paper (June 2021), available at https://www.gov.uk/government/publications/g7-finance-ministers-meeting-june-2021-communique/g7-finance-ministers-and-central-bank-governors-communique (stating their support of mandatory climate-
related financial disclosures based on the TCFD framework because of 
investors' need for high quality, reliable, comparable climate-risk 
data).
---------------------------------------------------------------------------

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.\109\ 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.\110\ Many commenters also recommended that we base any GHG 
emissions disclosure requirement on the GHG Protocol.\111\ These 
commenters indicated that the GHG Protocol has become the most widely-
used global greenhouse gas accounting standard.\112\ 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.\113\
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    \109\ See, e.g., letters from Calvert Research and Management 
(June 1, 2021); Ceres et al (June 10, 2021); NY State Comptroller 
(June 8, 2021); and SASB (May 19, 2021).
    \110\ See infra Section II.G.1 and note 412.
    \111\ See, e.g., letters from Apple, Inc. (June 11, 2021); bp 
(June 11, 2021); Carbon Tracker Initiative (June 14, 2021); Consumer 
Federation of America (June 14, 2021); ERM CVS (June 11, 2021); 
Ethic Inc. (June 11, 2021); First Affirmative Financial Network; 
Regenerative Crisis Response Committee; MSCI, Inc. (June 12, 2021); 
Natural Resources Defense Council; New York State Society of 
Certified Public Accountants(June 11, 2021); Paradice Investment 
Management (June 11, 2021); Stray Dog Capital (June 15, 2021); and 
Huw Thomas (June 16, 2021).
    \112\ See, e.g., letters from ERM CVS; and Natural Resources 
Defense Council; see also Greenhouse Gas Protocol, About Us [verbar] 
Greenhouse Gas Protocol, available at https://ghgprotocol.org/about-us.
    \113\ See, e.g., EPA Center for Corporate Climate Leadership, 
Scope 1 and Scope 2 Inventory Guidance, at https://www.epa.gov/climateleadership/scope-1-and-scope-2-inventory-guidance.
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    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.\114\ 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.
---------------------------------------------------------------------------

    \114\ See Greenhouse Gas Protocol, About Us [verbar] Greenhouse 
Gas Protocol (ghgprotocol.org), available at https://ghgprotocol.org/about-us.
---------------------------------------------------------------------------

    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.\115\ 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.\116\ 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.\117\ 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

[[Page 21345]]

company.\118\ 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.\119\
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    \115\ See id. The Kyoto Protocol, adopted in 1997, implemented 
the United Nations Framework Convention on Climate Change by 
obtaining commitments from industrialized countries to reduce 
emissions of the seven identified gasses according to agreed 
targets. See United Nations Climate Change, What is the Kyoto 
Protocol?, available at https://unfccc.int/kyoto_protocol. The EPA 
includes these seven greenhouse gases in its greenhouse gas 
reporting program. See, e.g., EPA, GHGRP Emissions by GHG, available 
at https://www.epa.gov/ghgreporting/ghgrp-emissions-ghg.
    \116\ See World Business Council for Sustainable Development and 
World Resources Institute, The Greenhouse Gas Protocol, A Corporate 
Accounting and Reporting Standard REVISED EDITION, available at 
https://ghgprotocol.org/corporate-standard.
    \117\ Id.
    \118\ The Scope 3 emissions standard was developed over a three-
year period with participation by businesses, government agencies, 
academics, and NGOs to help companies understand and manage their 
climate-related risks and opportunities in their upstream and 
downstream value chains. See Greenhouse Gas Protocol, Corporate 
Value Chain (Scope 3) Accounting and Reporting Standard, Supplement 
to the GHG Protocol Corporate Accounting and Reporting Standard 
(Sept. 2011), available at https://ghgprotocol.org/sites/default/files/standards/Corporate-Value-Chain-Accounting-Reporing-Standard_041613_2.pdf. This standard identified eight upstream and 
seven downstream emission categories that can give rise to Scope 3 
emissions. The GHG Protocol is developing additional guidance that 
may impact Scope 3 emissions related to land use and land sector 
activities. See Greenhouse Gas Protocol, Update on Greenhouse Gas 
Protocol Carbon Removals and Land Sector Initiative (July 8, 2021), 
available at https://ghgprotocol.org/blog/update-greenhouse-gas-protocol-carbon-removals-and-land-sector-initiative.
    \119\ See Section II.G.1, below, for a more extensive discussion 
of Scope 3 categories and emissions.
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    We have based our proposed GHG emissions disclosure requirement 
primarily on the GHG Protocol's concept of scopes and related 
methodology.\120\ 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.
---------------------------------------------------------------------------

    \120\ See id.
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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.\121\ 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 
\122\ and large accelerated filers \123\ regarding certain proposed GHG 
emissions metrics disclosures.\124\
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    \121\ See infra Sections II.B through E and II.G through I.
    \122\ See 17 CFR 240.12b-2 (defining ``accelerated filer'' as an 
issuer after it first meets the following conditions as of the end 
of its fiscal year: (i) The issuer had an aggregate worldwide market 
value of the voting and non-voting common equity held by its non-
affiliates of $75 million or more, but less than $700 million, as of 
the last business day of the issuer's most recently completed second 
fiscal quarter; (ii) the issuer has been subject to the requirements 
of Section 13(a) or 15(d) of the Exchange Act for a period of at 
least twelve calendar months; (iii) the issuer has filed at least 
one annual report pursuant to Section 13(a) or 15(d) of the Exchange 
Act; and (iv) the issuer is not eligible to use the requirements for 
SRCs under the SRC revenue test).
    \123\ See 17 CFR 240.12b-2 (defining ``large accelerated filer'' 
as an issuer after it first meets the following conditions as of the 
end of its fiscal year: (i) The issuer had an aggregate worldwide 
market value of the voting and non-voting common equity held by its 
non-affiliates of $700 million or more, as of the last business day 
of the issuer's most recently completed second fiscal quarter; (ii) 
the issuer has been subject to the requirements of Section 13(a) or 
15(d) of the Exchange Act for a period of at least twelve calendar 
months; (iii) the issuer has filed at least one annual report 
pursuant to Section 13(a) or 15(d) of the Exchange Act; and (iv) the 
issuer is not eligible to use the requirements for SRCs under the 
SRC revenue test).
    \124\ See infra Section II.H.
---------------------------------------------------------------------------

    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.\125\ 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'').\126\
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    \125\ See infra Section II.F.
    \126\ See infra Sections II.F.2 and 3.
---------------------------------------------------------------------------

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; \127\
---------------------------------------------------------------------------

    \127\ See infra Section II.D.
---------------------------------------------------------------------------

     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; \128\
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    \128\ See infra Sections II.B and C.
---------------------------------------------------------------------------

     How any identified climate-related risks have affected or 
are likely to affect the registrant's strategy, business model, and 
outlook; \129\
---------------------------------------------------------------------------

    \129\ See infra Section II.C.
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     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; \130\
---------------------------------------------------------------------------

    \130\ See infra Section II.E.
---------------------------------------------------------------------------

     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,\131\ and disclosure of financial estimates and 
assumptions impacted by such climate-related events and transition 
activities.\132\
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    \131\ See infra Sections II.F.2 and 3.
    \132\ See infra Sections II.F.4.
---------------------------------------------------------------------------

     Scopes 1 and 2 GHG emissions metrics, separately 
disclosed, expressed:
    [cir] Both by disaggregated constituent greenhouse gases and in the 
aggregate, and
    [cir] In absolute and intensity terms; \133\
---------------------------------------------------------------------------

    \133\ See infra Section II.G.1.
---------------------------------------------------------------------------

     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.\134\
---------------------------------------------------------------------------

    \134\ See infra Section II.I.
---------------------------------------------------------------------------

    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): \135\
---------------------------------------------------------------------------

    \135\ As defined by Commission rules, a foreign private issuer 
is any foreign issuer other than a foreign government except an 
issuer meeting the following conditions as of the last business day 
of its most recently completed second fiscal quarter: More than 50% 
of the outstanding voting securities of such issuer are directly or 
indirectly owned of record by residents of the United States; and 
either the majority of its executive officers or directors are 
United States citizens or residents, more than 50% of the assets of 
the issuer are located in the United States, or the business of the 
issuer is administered principally in the United States. See 17 CFR 
230.405 and 17 CFR 240.3b-4.
---------------------------------------------------------------------------

     To provide the climate-related disclosure in its 
registration statements and Exchange Act annual reports; \136\
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    \136\ See infra Section II.A.2.

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[[Page 21346]]

     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''); \137\
---------------------------------------------------------------------------

    \137\ See id.
---------------------------------------------------------------------------

     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; \138\
---------------------------------------------------------------------------

    \138\ See infra Section II.F.
---------------------------------------------------------------------------

     To electronically tag both narrative and quantitative 
climate-related disclosures in Inline XBRL; \139\ and
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    \139\ See infra Section II.K.
---------------------------------------------------------------------------

     To file rather than furnish the climate-related 
disclosure.\140\
---------------------------------------------------------------------------

    \140\ See infra Section II.L.
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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.\141\ 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.\142\ 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.
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    \141\ See infra Section II.H.
    \142\ See infra Section II.H.1 (providing further details on the 
proposed timing of the minimum attestation requirements).
---------------------------------------------------------------------------

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''); \143\ and
---------------------------------------------------------------------------

    \143\ See infra Section II.G.3. The Commission's rules define a 
smaller reporting company to mean an issuer that is not an 
investment company, an asset-backed issuer, or a majority-owned 
subsidiary of a parent that is not a smaller reporting company and 
that: (1) Had a public float of less than $250 million; or (2) had 
annual revenues of less than $100 million and either: (i) No public 
float; or (ii) a public float of less than $700 million. See 17 CFR 
229.10(f)(1), 230.405, and 17 CFR 240.12b-2.
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     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).\144\
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    \144\ See infra Section II.M.
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    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,\145\ or in conjunction with industry-specific metrics drawn 
from the SASB \146\ or

[[Page 21347]]

other third-party frameworks.\147\ A broad range of commenters, 
including both issuers \148\ and investors,\149\ supported basing new 
climate-related disclosure rules on the TCFD framework.
---------------------------------------------------------------------------

    \145\ See, e.g., letters from Alphabet Inc., Amazon.com Inc., 
Autodesk, Inc., eBay Inc., Facebook, Inc., Intel Corporation, and 
Salesforce.com, Inc. (June 11, 2021) (``Alphabet Inc. et al.); the 
Aluminum Association (June 11, 2021); Amalgamated Bank; Apple, Inc.; 
Bank of Finland; BNP Paribas; Boston Common Asset Management; Ceres 
and other signatories representing NGOs, academics, and investors 
(Ceres et al.) (June 11, 2021); Certified B Corporations (June 11, 
2021); Chevron; Clean Yield Asset Management; Climate Advisers (June 
13, 2021); Climate Governance Initiative (June 12, 2021); Committee 
on Financial and Capital Markets (Keidenren) (June 13, 2021); 
Commonwealth Climate and Law Initiative; Crowe LLP (June 11, 2021); 
E2 (June 14, 2021); ERM CVS; Eumedion (June 11, 2021); Fossil Fuel 
Divest Harvard (June 14, 2021); Impact Investors, Inc.; Impax Asset 
Management; Information Technology Industry Council (June 11, 2021); 
Institutional Limited Partners Association (June 11, 2021); Japanese 
Bankers Association (June 11, 2021); Keramida (June 11, 2021); 
Carolyn Kohoot (June 11, 2021); Legal and General Investment 
Management America (June 11, 2021); Christopher Lish (June 12, 
2021); Manifest Climate (June 13, 2021); Mercy Investment Services, 
Inc.; Miller/Howard Investments; Mirova US LLC (June 14, 2021); M.J. 
Bradley & Associates, on behalf of Energy Strategy Coalition (June 
13, 2021); Morningstar, Inc. (June 9, 2021); MSCI, Inc.; Natural 
Resources Defense Council (June 11, 2021); Persefoni (June 14, 
2021); PRI; S&P Global; Maria Stoica (June 11, 2021); Trillium Asset 
Management; United Nations Environment Programme (UNEP) (June 9, 
2021); Walmart, Inc. (June 11, 2021); and World Business Council for 
Development (June 11, 2021) (WBCSD).
    \146\ See, e.g., letters from Adobe Inc. (June 11, 2021); 
Alberta Investment Management Corporation (June 11, 2021); 
AllianceBernstein; American Chemistry Council (June 11, 2021); 
American Society of Adaptation Professionals (June 11, 2021); 
Baillie Gifford (June 11, 2021); Bank Policy Institute (June 9, 
2021); BlackRock; Bloomberg, LP (June 3, 2021); bp; BSR (June 11, 
2021); Canadian Bankers Association (June 11, 2021); Canadian 
Coalition of Good Governance; Capital Group (June 11, 2021); 
Catavento Consultancy (Apr. 30, 2021); Center for Climate and Energy 
Solutions; Confluence Philanthropy (June 14, 2021); ConocoPhilips, 
Inc. (June 11, 2021); CPP Investments (June 11, 2021); Enbridge, 
Inc. (June 11, 2021); Energy Workforce and Technology Council (June 
11, 2021); Entelligent, Inc. (June 14, 2021); Ethic Inc.; Emmanuelle 
Haack (Apr. 27, 2021); Harvard Management Company (June 11, 2021); 
Hermes Equity Ownership Services Limited (June 14, 2021); Douglas 
Hileman Consulting (June 7, 2021); HP, Inc. (June 14, 2021); 
Virginia Harper Ho (June 12, 2021); IHS Markit (June 13, 2021); 
Institute of International Bankers; Institute of International 
Finance (June 13, 2021); Institute of Management Accountants (June 
12, 2021); Invesco (June 10, 2021); Investment Company Institute; 
Investment Consultants Sustainability Working Group (June 11, 2021); 
Richard Love (May 20, 2021); Manulife Investment Management (June 
11, 2021); NEI Investments (June 11, 2021); Neuberger Berman (June 
11, 2021); New York State Society of Certified Public Accountants; 
Nordea Asset Management (June 11, 2021); Norges Bank Investment 
Management (June 13, 2021); NY State Comptroller; Paradice 
Investment Management (June 11, 2021); Parametric Portfolio 
Associates; PayPal Holdings, Inc. (June 12, 2021); PGIM (June 13, 
2021); Reinsurance Association of America (June 9, 2021); 
Salesforce.com (June 11, 2021); San Francisco Employees Retirement 
System (June 12, 2021); State Street Global Advisors; Summit 
Strategy Group (June 11, 2021); Teachers Insurance and Annuity 
Association of America (June 11, 2021); T Rowe Price (June 11, 
2021); Value Reporting Foundation (June 11, 2021); Wellington 
Management Co. (June 11, 2021); and Westpath Benefits and 
Assessments (June 11, 2021).
    \147\ See, e.g., letters from Gabrielle F. Preiser (Mar. 31, 
2021) and Worldbenchmarking Alliance (June 11, 2021) (recommending 
the Global Reporting Initiative (GRI) standards); letter from Mathew 
Roling and Samantha Tirakian (June 11, 2021) (recommending the CDSB 
standards); and Pricewaterhouse Coopers and Grant Thornton (June 11, 
2021) (recommending the Sustainability Standards Board (SSB) 
standards once the SSB is established by the IFRS Foundation and 
others as a global standard-setter and once it promulgates 
standards).
    \148\ See, e.g., letters from Adobe; Alphabet Inc. et al.; BNP 
Paribas; bp; Chevron; ConocoPhilips; and Walmart.
    \149\ See, e.g., letters from Alberta Investment Management 
Corporation; BlackRock; CalPERS; CALSTRS; Impact Investors, Inc.; 
and San Francisco Employees Retirement System.
---------------------------------------------------------------------------

    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.\150\ 
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.\151\ Third, 
various jurisdictions around the world have announced their intention 
to align their domestic disclosure rules with the TCFD.\152\ Commenters 
stated that by aligning with the TCFD framework, the Commission could 
potentially facilitate higher levels of consistency and comparability 
of disclosures globally.\153\
---------------------------------------------------------------------------

    \150\ See, e.g., letters from BNP Paribas; Deutsche Bank (June 
11, 2021); and Institute of International Bankers.
    \151\ See, e.g., letters from AllianceBernstein; CALSTRS; 
Investment Company Institute; and NY State Comptroller.
    \152\ See supra note 95 and accompanying text.
    \153\ See, e.g., letters from BNP Paribas; bp; and Chevron.
---------------------------------------------------------------------------

    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.\154\ 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.
---------------------------------------------------------------------------

    \154\ Proponents of the TCFD framework include academics (see, 
e.g., letters from Jill Fisch et al., J. Robert Gibson (May 26, 
2021), and Gina-Gail S Fletcher (June 14, 2021)); accounting and 
audit firms (see, e.g., letters from AICPA (June 11, 2021), Center 
for Audit Quality (``CAQ'') (June 11, 2021), and KPMG LLP (June 12, 
2021)); foreign firms (see, e.g., letters from Bank of Finland, BNP 
Paribas, bp, and Deutsche Bank); industry groups (see, e.g., letters 
from American Chemistry Council, Association of American Railroads 
(June 11, 2021), and Information Technology Industry Council (June 
11, 2021)); investor groups (see, e.g., letters from CalPERS; 
CALSTRS; and San Francisco Employees Retirement System); individuals 
(see, e.g., letters from Emmanuelle Haack, Christopher Lish, and 
Maria Stoica); issuers (see, e.g., letters from Adobe, Alphabet Inc. 
et al., Apple, and Chevron); NGOs (see, e.g., letters from Ceres et 
al., Climate Governance Initiative, Natural Resources Defense 
Council, and UNEP); professional climate advisors (see, e.g., 
letters from Catavento Consultancy, Douglas Hileman Consulting, ERM 
CVS, and Ethic Inc.); and professional investment advisors/
investment management companies (see, e.g., letters from 
AllianceBernstein, Impact Investors, Miller/Howard Investments, and 
Neuberger Berman).
---------------------------------------------------------------------------

    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; \155\ any material 
climate-related impacts on its strategy, business model, and outlook; 
\156\ climate-related risk management; \157\ GHG emissions metrics; 
\158\ and climate-related targets and goals, if any.\159\
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    \155\ See proposed 17 CFR 229.1501.
    \156\ See proposed 17 CFR 229.1502.
    \157\ See proposed 17 CFR 229.1503.
    \158\ See proposed 17 CFR 229.1504.
    \159\ See proposed 17 CFR 229.1506.
---------------------------------------------------------------------------

    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.\160\ 
The proposed rules would require disclosure falling under the following 
three categories of information: Financial impact metrics; \161\ 
expenditure metrics; \162\ and financial estimates and 
assumptions.\163\ 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.\164\ 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.\165\
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    \160\ See proposed 17 CFR 210.14-01 and 14-02.
    \161\ See proposed 17 CFR 210.14-02(c) and (d).
    \162\ See proposed 17 CFR 210.14-02(e) and (f).
    \163\ See proposed 17 CFR 210.14-02(g) and (h).
    \164\ See TCFD, Recommendations of the Task Force on Climate-
related Financial Disclosures (June 2017), Section B.3 (Financial 
Impacts).
    \165\ See TCFD, Guidance on Metrics, Targets, and Transition 
Plans (Oct. 2021), Section F (Financial Impacts), available at 
https://assets.bbhub.io/company/sites/60/2021/07/2021-Metrics_Targets_Guidance-1.pdf. For avoidance of doubt, disclosure 
of climate-related opportunities is optional, not required, under 
our proposal.
---------------------------------------------------------------------------

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.\166\ Other commenters

[[Page 21348]]

recommended that the Commission adopt a new stand-alone regulation for 
climate-related disclosure.\167\ 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.
---------------------------------------------------------------------------

    \166\ See, e.g., letters from AllianceBernstein; American 
Society of Adaptation Professionals; Seema Arora (June 22, 2021); 
Associated General Contractors of America (June 11, 2021); Baillie 
Gifford; CalPERS; Cardano Risk Management Ltd. (Apr. 19, 2021); 
Center for American Progress; Ceres et al.; Eni SpA; Jill Fisch 
(June 3, 2021); George S. Georgiev (June 22, 2021); Hannon Armstrong 
(June 15, 2021); Henry Schein, Inc.; Hermes Equity Ownership 
Services Limited; Virginia Harper Ho; Institute for Governance and 
Sustainable Development (June 9, 2021); Institute for Market 
Transformation (June 12, 2021); Interfaith Center on Corporate 
Responsibility; International Corporate Governance Network (June 11, 
2021); Japanese Bankers Association; Morrison & Foerster LLP; 
National Investor Relations Institute (June 11, 2021); Natural 
Resources Defense Council; Newmont Corporation (June 13, 2021); New 
York State Society of Certified Public Accountants; NY State 
Comptroller; PayPal Holdings, Inc.; PRI (Consultation Response); 
PricewaterhouseCoopers LLP; Maria Stoica; Sunrise Bay Area (June 14, 
2021); Teachers Insurance and Annuity Association of America; Vert 
Asset Management LLC (June 14, 2021); WBCSD; and Wespath Benefits 
and Investments (June 11, 2021).
    \167\ See letters from Bank Policy Institute; Andrew Behar (As 
You Sow) (June 14, 2021); Entelligent Inc. (June 14, 2021); Impax 
Asset Management; Information Technology Industry Council; Majedie 
Asset Management (May 25, 2021); David Marriage (June 15, 2021); and 
XBRL US (June 15, 2021).
---------------------------------------------------------------------------

    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.\168\ 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.
---------------------------------------------------------------------------

    \168\ See infra Section II.J for a discussion of the registrants 
and forms to which the proposed rules would apply.
---------------------------------------------------------------------------

    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.\169\ 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.\170\
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    \169\ See 17 CFR 230.411; 17 CFR 240.12b-23; and the applicable 
forms.
    \170\ A registrant that elects to incorporate by reference any 
of the metrics or narrative disclosure that is subject to XBRL 
tagging must comply with the electronic tagging requirement in the 
section of the registration statement or report where the metrics or 
narrative disclosure appears in full. We discuss the XBRL tagging 
requirement in Section II.K.
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    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.\171\ 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.\172\ 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.\173\ 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.
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    \171\ See, e.g., letters from Acadian Asset Management LLC (June 
14, 2021); Actual Systems, Inc. (June 11, 2021); Baillie Gifford; 
Biotechnology Innovation Organization; CDP; ClientEarth US (June 14, 
2021); FAIRR Initiative (June 15, 2021); Jill Fisch (June 3, 2021); 
Hermes Equity Ownership Services Limited; International Corporate 
Governance Network; Japanese Bankers Association; Majedie Asset 
Management; Morningstar, Inc.; NEI Investments; NY State 
Comptroller; Paradice Investment Management; Pre-Distribution 
Initiative (June 14, 2021); PricewaterhouseCoopers LLP; Matthew 
Roling and Samantha Tirakian (June 11, 2021); Terra Alpha 
Investments; Vert Asset Management; and WBCSD.
    \172\ See, e.g., letters from Pricewaterhouse Coopers Ltd.; Vert 
Asset Management; and WBCSD.
    \173\ See, e.g., letters from Canadian Coalition for Good 
Governance; Clean Production Action and Environmental Health Network 
(June 11, 2021); Decatur Capital Management; Dimensional Fund 
Advisors (June 11, 2021); Environmental Industry Group (June 9, 
2021); Institute for Governance and Sustainable Development; PRI 
(Consultation Response); Kenya Rothstein (May 3, 2021); and Maria 
Stoica. But see letter from Sarah Ladin (June 14, 2021) (doubting 
that a ``sustainability discussion and analysis'' requirement would 
achieve the desired results and stating that it would be difficult 
to enforce); and David Marriage (indicating that a discussion and 
analysis requirement for climate-related data would make the data 
difficult for the market to absorb).
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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

[[Page 21349]]

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,\174\ climate events and contingencies can pose 
financial risks to issuers across industrial sectors.\175\ 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.
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    \174\ See supra note 40.
    \175\ The 2020 CFTC Advisory Subcommittee Report found that 
climate change currently impacts or is expected to affect every part 
of the U.S. economy, including agriculture, real estate, 
infrastructure, and the financial sectors. See infra note 361.
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    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; \176\ 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.
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    \176\ A National Climate Taskforce created by the president 
established commitments to reduce economy-wide net greenhouse gas 
emissions by 50-52% by 2030 as compared to 2005 levels, and to reach 
net zero emissions by 2050. See The White House, FACT SHEET: 
President Biden Sets 2030 Greenhouse Gas Pollution Reduction Target 
Aimed at Creating Good-Paying Union Jobs and Securing U.S. 
Leadership on Clean Energy Technologies (Apr. 22, 2021). An 
Executive Order also directs the Federal government to achieve net-
zero emissions from overall Federal operations by 2050, and a 65% 
emissions reduction by 2030. See The White House, FACT SHEET: 
President Biden Signs Executive Order Catalyzing America's Clean 
Energy Economy Through Federal Sustainability (Dec. 8, 2021), at 
https://www.whitehouse.gov/briefing-room/statements-releases/2021/12/08/fact-sheet-president-biden-signs-executive-order-catalyzing-americas-clean-energy-economy-through-federal-sustainability/. A 
growing number of governments and companies have made net zero 
commitments or announced similar carbon-reduction goals or targets. 
See United Nations Climate Change, Commitments to Net Zero Double in 
Less Than a Year (Sept. 21, 2020), available at https://unfccc.int/news/commitments-to-net-zero-double-in-less-than-a-year.
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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.\177\ A registrant may also disclose, as applicable, the 
actual and potential impacts of any climate-related opportunities it is 
pursuing.\178\ The proposed definitions are substantially similar to 
the TCFD's definitions of climate-related risks and climate-related 
opportunities.\179\ 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.
---------------------------------------------------------------------------

    \177\ See proposed 17 CFR 229.1502(a).
    \178\ See id.
    \179\ See TCFD, Recommendations of the Task Force on Climate-
related Financial Disclosures, Appendix 5.
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    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.\180\ ``Value chain'' would mean the 
upstream and downstream activities related to a registrant's 
operations.\181\ 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).\182\ 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.\183\
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    \180\ See proposed 17 CFR 229.1500(c). The reference to 
`negative' impact is intended to refer to the actual or potential 
impact on the registrant's consolidated financial statements, 
business operations, or value chains as a whole, rather than the 
mathematical impacts on a specific financial statement line item. 
See infra Section II.F.2 (discussing the proposed financial impact 
metrics, which focus on the line items in a registrant's 
consolidated financial statements).
    \181\ See proposed 17 CFR 229.1500(t).
    \182\ See id.
    \183\ See, e.g., infra Section II.G.1.
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    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.\184\ 
``Acute risks'' is defined as event-driven risks related to shorter-
term extreme weather events, such as hurricanes, floods, and 
tornadoes.\185\ ``Chronic risks'' is defined as those risks that the 
business may face as a result of longer term weather

[[Page 21350]]

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.\186\ Many of these 
physical risks have already impacted and may continue to impact 
registrants across a wide range of economic sectors.\187\ 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.\188\ 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.\189\
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    \184\ See proposed 17 CFR 229.1500(c)(1).
    \185\ See proposed 17 CFR 229.1500(c)(2).
    \186\ See proposed 17 CFR 229.1500(c)(3). The physical risks 
described are examples, but registrants may be exposed to many other 
types of physical risks from climate change depending on their 
specific facts and circumstances. As such, any reference to certain 
types of risks should be considered as non-exhaustive examples.
    \187\ The IPCC's Sixth Assessment Report noted drought, 
heatwaves, hurricanes, and heavy precipitation. See IPCC, Climate 
Change 2021, The Physical Science Basis Summary for Policymakers.
    \188\ See proposed 17 CFR 229.1500(c)(4).
    \189\ See proposed 17 CFR 229.1502(a)(1)(ii).
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    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 \190\ and 
the registrant's actions or plan to mitigate or adapt to the risk.\191\ 
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.\192\
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    \190\ See proposed 17 CFR 229.1502(a)(1).
    \191\ See, e.g., proposed 17 CFR 229.1502(b)(1) and 
229.1503(c)(1) and (2).
    \192\ See proposed 17 CFR 229.1502(a)(1)(i). In some instances, 
chronic risks might give rise to acute risks. For example, 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. In such instances, a registrant should 
provide a clear and consistent description of the nature of the risk 
and how it may affect a related risk.
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    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.\193\ 
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.\194\ 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.\195\ 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.\196\ 
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.
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    \193\ See id.
    \194\ See proposed 17 CFR 229.1500(k).
    \195\ See letter from Wellington Management Co.
    \196\ See letters from Action Center on Race and Economy (June 
14, 2021); Americans for Financial Reform Education Fund; Confluence 
Philanthropy; Domini Impact Investments; William and Flora Hewlett 
Foundation; Public Citizen; and Revolving Door Project.
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    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.\197\ 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.
---------------------------------------------------------------------------

    \197\ See proposed 17 CFR 229.1502(a)(1)(i)(A).
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    Additional disclosure would be required if a material risk concerns 
the location of assets in regions of high or extremely high water 
stress.\198\ 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,\199\ 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.\200\ 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.
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    \198\ See proposed 1502(a)(1)(i)(B).
    \199\ Registrants in these industry sectors could be 
particularly susceptible to water-stress risks because operations in 
these sectors require large amounts of water. See TCFD, Implementing 
the Recommendations of the Task Force on Climate-Related Financial 
Disclosures, Section E (Oct. 2021), available at https://assets.bbhub.io/company/sites/60/2021/07/2021/TCFD/Implementing_Guidance.pdf (discussing the listed events and other 
risks).
    \200\ See proposed 17 CFR 229.1502(a)(1)(i)(B).
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    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

[[Page 21351]]

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.\201\ 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.\202\ 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.\203\
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    \201\ See, e.g., How Seasonal Temperature Changes Affect the 
Construction Industry (constructconnect.com) (Aug. 15, 2018), 
available at https://www.constructconnect.com/blog/seasonal-temperature-changes-affect-construction-industry.
    \202\ See, e.g., The Impact of Wildfires on Business is Enormous 
[verbarlm] Are You Ready? (alertmedia.com) (Aug. 27, 2020), 
available at https://www.alertmedia.com/blog/the-impact-of-wildfires-on-business/.
    \203\ See, e.g., Climate change and the coming coastal real 
estate crash--Curbed (Oct. 16, 2018), available at https://archive.curbed.com/2018/10/16/17981244/real-estate-climate-change-infrastructure.
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    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.\204\ 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.
---------------------------------------------------------------------------

    \204\ See proposed 17 CFR 229.1502(a)(1)(ii).
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    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.\205\ 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.\206\ By defining 
``climate-related opportunities,'' the proposed rules would promote 
consistency when such opportunities are disclosed, even if such 
disclosure is not required.
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    \205\ See proposed 17 CFR 229.1500(b). The reference to 
`positive' impact is intended to refer to the actual or potential 
impact on the registrant's consolidated financial statements, 
business operations, or value chains as a whole, rather than the 
mathematical impacts on a specific financial statement line item. 
See infra Section II.F.2 (discussing the proposed financial impact 
metrics, which focus on the line items in a registrant's 
consolidated financial statements).
    \206\ Some commenters expressed concern about potential anti-
competitive effects of the Commission's possible climate disclosure 
rules. See, e.g., letters from Association of General Contractors of 
America (June 11, 2021); and Healthy Markets Association (June 14, 
2021).
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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.\207\ 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.\208\
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    \207\ See proposed Item 1502(a) of Regulation S-K.
    \208\ See, e.g., letters from Boston Common Asset Management; 
Christian Brothers Investment Services (June 11, 2021); Clean Yield 
Asset Management; and Miller/Howard Investments; see also American 
Institute of CPAs (AICPA) (June 11, 2021).
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    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.\209\ As the 
Commission has previously indicated, the materiality determination is 
largely fact specific and one that requires both quantitative and 
qualitative considerations.\210\ 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.\211\
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    \209\ See 17 CFR 240.12b-2 (definition of ``material''). See 
also Basic Inc. v. Levinson, 485 U.S. 224, 231, 232, and 240 (1988) 
(holding that information is material if there is a substantial 
likelihood that a reasonable investor would consider the information 
important in deciding how to vote or make an investment decision; 
and quoting TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438, 
449 (1977) to further explain that an omitted fact is material if 
there is ``a substantial likelihood that the disclosure of the 
omitted fact would have been viewed by the reasonable investor as 
having significantly altered the `total mix' of information made 
available.'').
    \210\ See Release No. 33-10064, Business and Financial 
Disclosure Required by Regulation S-K (Apr. 13, 2016), [81 FR 23915 
(Apr. 22, 2016)] (discussing materiality in the context of, among 
other matters, restating financial statements). See also Staff 
Accounting Bulletin No. 99 (Aug. 12, 1999), available at https://www.sec.gov/interps/account/sab99.htm (emphasizing that a registrant 
or an auditor may not substitute a percentage threshold for a 
materiality determination that is required by applicable accounting 
principles). Staff accounting bulletins are not rules or 
interpretations of the Commission, nor are they published as bearing 
the Commission's official approval. They represent interpretations 
and practices followed by the Division of Corporation Finance and 
the Office of the Chief Accountant in administering the disclosure 
requirements of the Federal securities laws.
    \211\ See Basic, Inc. v. Levinson, 485 U.S. 224, 238 (1988). 
When considering the materiality of different climate-related risks, 
a registrant might, for example, determine that certain transition 
risks and chronic physical risks are material when balancing their 
likelihood and impact. It also might determine that certain acute 
physical risks are material even if they are less likely to occur if 
the magnitude of their impact would be high.

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[[Page 21352]]

    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.\212\ 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.\213\
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    \212\ See 17 CFR 229.303(a).
    \213\ See Release No. 33-10890, Management's Discussion and 
Analysis, Selected Financial Data, and Supplementary Financial 
Information (Nov. 19, 2020), [86 FR 2080, 2089 (Jan. 11, 2021)].
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    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.\214\ Some insurance companies have withdrawn from 
certain wildfire prone areas after concluding the risk is no longer 
insurable.\215\ 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.
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    \214\ See, e.g., Daoping Wang, Dabo Guan, Shupeng Zhu, et al., 
Economic footprint of California wildfires in 2018, Nature 
Sustainability (Dec. 2020) (stating that the frequency and size of 
wildfires in the western United States has been increasing for 
several decades, driven by decreases in precipitation and related 
changes in the moisture in vegetation, which, together with land use 
and fire management practices, has dramatically increased wildfire 
risks, culminating in a series of enormously damaging fires in 
California in 2017, 2018 and 2020); Andrew Freedman, California 
wildfires prompt new warnings amid record heat, erratic winds, the 
Washington Post (Oct. 1, 2020) (reporting that the ``Glass Fire'' 
forced about 80,000 to evacuate from Napa and Sonoma Counties and 
took a heavy toll on the wine industry).
    \215\ See Shelby Vittek, California Farmers Struggle to Secure 
Wildfire Insurance Coverage, Modern Farmer (Aug. 2, 2021), available 
at https://modernfarmer.com/2021/08/california-farmers-struggle-to-secure-wildfire-insurance-coverage/
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    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.\216\ 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,\217\ the forward-
looking statement safe harbors pursuant to the Private Securities 
Litigation Reform Act (``PSLRA'') \218\ would apply, assuming the 
conditions specified in those safe harbor provisions are met.\219\ 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.
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    \216\ See, e.g., letters from AIR Worldwide (June 11, 2021); 
Coastal Risk Consulting (May 3, 2021); CoreLogic (June 12, 2021); 
Datamaran (June 14, 2021); Dynamhex, Inc. (June 15, 2021); EC-Map 
(June 12, 2021); FutureProof Technologies, Inc. (June 7, 2021); and 
right.based on science GmbH (June 12, 2021).
    \217\ See, e.g., infra Sections II.C.4 and II.I.
    \218\ Pub. Law 104-67, 109 Stat. 737.
    \219\ See Securities Act Section 27A and Exchange Act Section 
21E. The statutory safe harbors by their terms do not apply to 
forward-looking statements included in financial statements prepared 
in accordance with generally accepted accounting principles 
(``GAAP''). The statutory safe harbors also would not apply to 
forward-looking statements made: (i) In connection with an initial 
public offering; a tender offer; an offering by, or relating to the 
operations of, a partnership, limited liability company, or a direct 
participation investment program, an offering of securities by a 
blank check company; a roll-up transaction; or a going private 
transaction; or (ii) by an issuer of penny stock. See Section 27A(b) 
of the Securities Act and Section 21E(b) of the Exchange Act. Also, 
the statutory safe harbors do not, absent a rule, regulation, or 
Commission order, apply to forward-looking statements by certain 
``bad actor'' issuers under Section 27A(b)(1)(A) of the Securities 
Act and Section 21E(b)(1)(A) of the Exchange Act.
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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?

[[Page 21353]]

    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.\220\ 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.\221\ 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.\222\ Because information about how climate-related 
risks have impacted or are likely to impact a registrant's strategy,

[[Page 21354]]

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.
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    \220\ See proposed 17 CFR 229.1502(b).
    \221\ See, e.g., letters from CALSTRS; Cardano Risk Management 
Ltd.; Climate Risk Disclosure Lab (June 14, 2021); and Colorado PERA 
(June 11, 2021).
    \222\ See TCFD, 2021 Status Report, Section B (Oct. 2021) 
(stating that, based on a review of reports of 1,651 public 
companies from 2018-2020, while 38-52% of companies surveyed 
described climate-related risks and opportunities during 2018-2020, 
only 26-39% disclosed the impacts of those risks and opportunities 
during this period).
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    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.\223\
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    \223\ See proposed 17 CFR 229.1502(b)(1).
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    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).\224\
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    \224\ See proposed 17 CFR 229.1502(b)(2).
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    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.\225\ A registrant would be 
required to provide both current and forward-looking disclosures \226\ 
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.\227\ 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.\228\
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    \225\ See proposed 17 CFR 229.1502(c).
    \226\ See infra Sections II.C.3 and 4, II.E, II.G.1, and II.I 
regarding the application to forward-looking climate disclosures of 
the PSLRA safe harbor for forward-looking statements.
    \227\ See id.
    \228\ See infra Sections II.F and II.G for a discussion of the 
proposed metrics and targets.
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    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 \229\ 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.
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    \229\ See supra Section I.D.2 and infra Section II.G for a 
discussion of Scopes 1 and 2 emissions.
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    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.\230\ The discussion should include 
any of the financial statement metrics disclosed pursuant to proposed 
Regulation S-X Rule 14-02.\231\ 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.\232\ 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.
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    \230\ See proposed 17 CFR 229.1502(d). To the extent that the 
proposed narrative discussion is provided in its MD&A, a registrant 
could incorporate by reference that part of the MD&A into the 
Climate-Related Disclosure section of the registration statement or 
report. See supra Section II.A.2.
    \231\ See infra Section II.F.
    \232\ See supra note 171.
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    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

[[Page 21355]]

should cover more than just short-term impacts. For example, if a 
registrant has a transition plan \233\ 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.
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    \233\ See infra Section II.E for proposed disclosure 
requirements regarding the use of a transition plan.
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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.\234\ 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.\235\ 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.\236\ While both carbon offsets and RECs 
represent commonly used GHG emissions mitigation options for companies, 
they are used for somewhat different purposes.\237\
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    \234\ See proposed 17 CFR 229.1502(c).
    \235\ See proposed 17 CFR 229.1500(a).
    \236\ See proposed 17 CFR 229.1500(n). See, e.g., EPA, Offsets 
and RECs: What's the Difference?, available at https://www.epa.gov/sites/default/files/2018-03/documents/gpp_guide_recs_offsets.pdf.
    \237\ A company may purchase carbon offsets to address its 
direct and indirect GHG emissions (i.e., its Scopes 1, 2, and 3 
emissions) by verifying global emissions reductions at additional, 
external projects. The reduction in GHG emissions from one place 
(``offset project'') can be used to ``offset'' the emissions taking 
place somewhere else (at the company's operations). See, e.g., EPA, 
Offsets and RECs: What's the Difference?, available at https://www.epa.gov/sites/default/files/2018-03/documents/gpp_guide_recs_offsets.pdf. In contrast, a company may purchase a 
REC in renewable electricity markets solely to address its indirect 
GHG emissions associated with purchased electricity (i.e., Scope 2 
emissions) by verifying the use of zero- or low-emissions renewable 
sources of electricity. Each REC provides its owner exclusive rights 
to the attributes of one megawatt-hour of renewable electricity 
whether that renewable electricity has been installed on the 
company's facilities or produced elsewhere. See id.
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    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,\238\ 
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.
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    \238\ Science Based Targets Initiative (``SBTi'') is a 
partnership between CDP, the United Nations Global Compact, World 
Resources Institute (WRI) and the World Wide Fund for Nature (WWF), 
which defines and promotes best practice in emissions reductions and 
net-zero targets in line with climate science. SBTi provides 
technical assistance and its expertise to companies who voluntarily 
set science-based targets in line with the latest climate science. 
See SBTi, Who We Are/What We Do, available at https://sciencebasedtargets.org/about-us#who-we-are. The SBTi does not 
permit offsets to be counted toward a company's emission reduction 
targets to meet its science-based targets but does permit offsets by 
companies that wish to finance additional emission reductions beyond 
their science-based targets. See SBTi Criteria and Recommendations 
(Apr. 2020), available at https://sciencebasedtargets.org/resources/legacy/2019/03/SBTi-criteria.pdf.
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    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.\239\ 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:
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    \239\ See proposed 17 CFR 229.1500(j).
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     The price in units of the registrant's reporting currency 
per metric ton of carbon dioxide equivalent (``CO2e''); 
\240\
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    \240\ See infra Section II.G for a discussion of our proposal to 
use CO2e as a unit of measurement in the proposed 
requirements.
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     The total price, including how the total price is 
estimated to change over time, if applicable;
     The boundaries for measurement of overall CO2e 
on which the total price is based (if different from the GHG emission 
organizational boundary required pursuant to 17 CFR 229.1504(e)(2); 
\241\ and
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    \241\ See infra Section II.G.2 for a discussion of the proposed 
requirements for determining the GHG emission organizational 
boundary.
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     The rationale for selecting the internal carbon price 
applied.\242\
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    \242\ See proposed 17 CFR 229.1502(e)(1).
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    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

[[Page 21356]]

manage climate-related risks.\243\ 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.\244\ 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.\245\
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    \243\ See proposed 17 CFR 229.1502(e)(2).
    \244\ See proposed 17 CFR 229.1502(e)(3).
    \245\ See infra Section II.C.4 for the proposed disclosure 
required if a registrant uses scenario analysis.
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    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.\246\ 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.\247\ 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.'' \248\ 
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.\249\ 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.
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    \246\ See, e.g., letters from Rob Bonta, California Attorney 
General, on behalf of several state attorney generals (June 14, 
2021); Catavento; Center for Climate and Energy Solutions; Ceres; 
Climate Risk Disclosure Lab; Hermes Equity Ownership Services 
Limited; Majedie Asset Management; Managed Funds Association; Norges 
Bank Investment Management; Open Source Climate; PRI (Consultation 
Response); Regenerative Crisis Response Committee; Total Energies 
(June 13, 2021); and Trillium Asset Management. But see Edison 
Electric Institute (stating that a ```robust carbon market' does not 
exist today'' and disclosures based on that market would be 
``fraught with risk'').
    \247\ Letter from Ceres.
    \248\ Letter from PRI.
    \249\ See Edison Electric Institute.
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    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 CO2e 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.\250\
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    \250\ We also note, based on current voluntary reporting, an 
increasing trend among public companies to use internal carbon 
pricing. See CDP, Putting a Price on Carbon (2021), available at 
https://cdn.cdp.net/cdp-production/cms/reports/documents/000/005/651/original/CDP_Global_Carbon_Price_report_2021.pdf?1618938446.
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    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.\251\ Scenario analysis is a process for identifying and 
assessing a potential range of outcomes of future events under 
conditions of uncertainty.\252\ 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 [deg]C, 2 [deg]C, 
and 1.5 [deg]C above pre-industrial levels.\253\
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    \251\ See proposed 17 CFR229.1502(f).
    \252\ See, e.g., the definition of ``scenario analysis'' in 
TCFD, Recommendations of the Task Force on Climate-related Financial 
Disclosures.
    \253\ See proposed 17 CFR 229.1500(o).
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    Many commenters recommended that we require a registrant to conduct 
scenario analysis and disclose the results of such analysis.\254\ 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.\255\
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    \254\ See, e.g., letters from AllianceBernstein; Americans for 
Financial Reform Education Fund; R. Ted Atwood (June 23, 2021); 
BlackRock; Bloomberg, LP; Boston Common Asset Management; Cardano 
Risk Management Ltd.; Certified B Corporations; Climate Governance 
Initiative; Climate Risk Disclosure Law and Policy Lab (June 14, 
2021); Consumer Federation of America; CPP Investments; E2; ERM CVS; 
FAIRR Initiative; Forum for Sustainable and Responsible Investment 
(June 11, 2021); Friends of the Earth et al.; George Georgiev; 
Global Equity Strategy (June 14, 2021); Impax Asset Management; 
Invesco; Christopher Lish; NY State Comptroller; PRI (Consultation 
Response); Revolving Door Project; RMI; Trillium Asset Management; 
UNEP; and Sens. Elizabeth Warren and Rep. Sean Casten (June 11, 
2021).
    \255\ See letter from Bloomberg.
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    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

[[Page 21357]]

Swan'' scenarios related to possible climate transition pathways.\256\ 
Alternatively, the commenter suggested that a company take into account 
three scenarios: A smooth economic transition to +1.5 [deg]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 [deg]C; 
and a higher temperature scenario outcome of +3 [deg]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.\257\
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    \256\ See letter from Climate Governance Initiative.
    \257\ See id.
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    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.\258\ 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.\259\
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    \258\ See letter from Ceres. The CDP similarly reported that, 
although 54% of the 9,600+ companies that responded to their 
questionnaires in 2020 reported engaging in scenario analysis, 14% 
of the companies only considered one scenario with many others 
considering only slight variations of one scenario. See CDP, 3 
common pitfalls of using scenario analysis--and how to avoid them 
(Mar. 10, 2021), available at https://www.cdp.net/en/articles/companies/3-common-pitfalls-companies-make-when-using-scenario-analysis-and-how-to-avoid-them.
    \259\ See TCFD, 2021 Status Report, Section B (indicating that, 
during 2018-2020, only 5-13% of the surveyed companies disclosed the 
resilience of their strategies using scenario analysis).
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    Some commenters recommended providing certain accommodations in 
connection with a scenario analysis requirement, such as creating a 
safe harbor for scenario analysis disclosure \260\ or permitting 
scenario analysis to be furnished in a separate report that would not 
be subject to the same liability as Commission filings.\261\ Other 
commenters stated that they opposed a scenario analysis requirement 
because of the lack of a common methodology for scenario analysis; 
\262\ a belief that the underlying methodology would be too difficult 
for investors to understand; \263\ the need for further development of 
scenario analysis as a discipline; \264\ or a belief that the focus of 
climate-related disclosure should be on historical data, and not on 
forward-looking information.\265\
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    \260\ See letter from J. Robert Gibson.
    \261\ See letter from NEI Investments.
    \262\ See letter from Information Technology Industry Council.
    \263\ See letter from Dimensional Fund Advisors.
    \264\ See letter from bp.
    \265\ See letter from Nareit (June 11, 2021).
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    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.\266\ 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.
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    \266\ See proposed 17 CFR 229.1502(f). One commenter recommended 
requiring the disclosure of the results of scenario analysis if a 
registrant has engaged in such analysis. See letter from E3G.
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    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[deg], 2[deg], or 1.5 [deg]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.\267\ 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''),\268\ or 
Network of Central Banks and Supervisors for Greening the Financial 
System (``NGFS'').\269\ 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.
---------------------------------------------------------------------------

    \267\ See TCFD, Technical Supplement, The Use of Scenario 
Analysis in Disclosure of Climate-Related Risks and Opportunities 
(June 2017), available at https://assets.bbhub.io/company/sites/60/2020/09/2020-TCFD_Guidance-Scenario-Analysis-Guidance.pdf.
    \268\ The TCFD has summarized a number of publicly available 
scenario analysis models, with particular emphasis on the transition 
scenarios developed by the IEA and the physical risk scenarios 
developed by the IPCC. See id. at Appendix 1: IEA and IPCC Climate 
Scenarios.
    \269\ See NGFS, Scenarios Portal, available at https://www.ngfs.net/ngfs-scenarios-portal/.
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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

[[Page 21358]]

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 CO2e;
     The total price;
     The boundaries for measurement of overall CO2e 
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[deg], 2[deg], or 
1.5 [deg]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

[[Page 21359]]

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.\270\ Many commenters asserted 
that climate-related issues should be subject to the same level of 
board oversight as other financially material matters.\271\ 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.\272\
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    \270\ See proposed 17 CFR 229.1501.
    \271\ See, e.g., letters from Americans for Financial Reform 
Education Fund; Baillie Gifford; Andrew Behar; Bloomberg, LP; 
Canadian Coalition for Good Governance; Cardano Risk Management 
Ltd.; CDP NA (June 11, 2021); Center for American Progress; CAQ; 
Ceres et al.; Climate Disclosure Standards Board (June 14, 2021); 
Climate Governance Initiative; Climate Risk Disclosure Lab; Eni SpA; 
ERM CVS; Friends of the Earth, Amazon Watch, and Rainforest Action 
Network (June 11, 2021); Regenerative Crisis Response Committee; 
Hermes Equity Ownership Limited; William and Flora Hewlett 
Foundation (June 9, 2021); Impax Asset Management; Institute of 
Internal Auditors (May 23, 2021); Institutional Shareholder Services 
(June 14, 2021); Interfaith Center on Corporate Responsibility; 
International Corporate Governance Network; Morningstar, Inc.; 
International Organization for Standardization (June 11, 2021); 
Natural Resources Defense Council; NEI Investments; NY City 
Comptroller (June 14, 2021); NY State Comptroller; NY State 
Department of Financial Services (June 14, 2021); Oregon State 
Treasury (June 4, 2021); PRI (Consultation Response); 
Pricewaterhouse Coopers; Revolving Door Project (June 11, 2021); 
George Serafeim (June 9, 2021); Maria Stoica; TotalEnergies (June 
13, 2021); Value Balancing Alliance; WBCSD; and World Benchmarking 
Alliance.
    \272\ See, e.g., letters from Baillie Gifford; Bloomberg, LP; 
Ceres et al.; Climate Disclosure Standards Board; Climate Governance 
Initiative; Climate Risk Disclosure Lab; Eni SpA; William and Flora 
Hewlett Foundation; Impax Asset Management; Institute for Governance 
and Sustainable Development; International Corporate Governance 
Network; Richard Love; Morningstar, Inc.; Natural Resources Defense 
Council; NEI Investments; NY State Comptroller; Maria Stoica; 
TotalEnergies; and WBCSD. But see letter from Amanda Rose (stating 
that federalizing aspects of corporate governance could inhibit the 
ability of states to compete for corporate charters).
---------------------------------------------------------------------------

    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.\273\ 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.\274\ 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.\275\
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    \273\ See, e.g., letters from Bloomberg, LP; and Natural 
Resources Defense Council.
    \274\ See TCFD, 2021 Status Report (Oct. 2021) (finding that 9% 
of surveyed companies provided TCFD-recommended board disclosure in 
2018, which increased to 25% in 2020; and 9% provided TCFD-
recommended management disclosure in 2018, which increased to 18% in 
2020).
    \275\ See, e.g., 17 CFR 229.401 and 229.407.
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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.\276\ 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.\277\
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    \276\ See proposed 17 CFR 229.1501(a)(1)(i).
    \277\ See proposed 17 CFR 229.1501(a)(1)(ii).
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    Another proposed item would require a description of the processes 
and frequency by which the board or board committee discusses climate-
related risks.\278\ 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.\279\
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    \278\ See proposed 17 CFR 229.1501(a)(1)(iii).
    \279\ See, e.g., letters from Bloomberg, LP; NY State 
Comptroller; and Vanguard Group, Inc.
---------------------------------------------------------------------------

    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.\280\ 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.
---------------------------------------------------------------------------

    \280\ See proposed 17 CFR 229.1501(a)(1)(iv).
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    Finally, the proposed rule would require disclosure about whether 
and how the board sets climate-related targets or goals and how it 
oversees

[[Page 21360]]

progress against those targets or goals, including the establishment of 
any interim targets or goals.\281\ 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.
---------------------------------------------------------------------------

    \281\ See proposed 17 CFR 229.1501(a)(1)(v).
---------------------------------------------------------------------------

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.\282\ 
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.
---------------------------------------------------------------------------

    \282\ See proposed 17 CFR 229.1501(b)(1)(i).
---------------------------------------------------------------------------

    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.\283\ 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.
---------------------------------------------------------------------------

    \283\ See proposed 17 CFR 229.1501(b)(1)(ii).
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    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.\284\ 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.
---------------------------------------------------------------------------

    \284\ See proposed 17 CFR 229.1501(b)(1)(iii).
---------------------------------------------------------------------------

    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.\285\ 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 \286\ or connect 
executive remuneration with climate-related achievements as a 
discretionary matter for the registrant.\287\ 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.\288\
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    \285\ See, e.g., letters from Baillie Gifford; Andrew Behar; 
CDP; Climate Governance Initiative; E3G (June 14, 2021); Interfaith 
Center on Corporate Responsibility; Majedie Asset Management; NEI 
Investments; NY State Comptroller; PRI (Consultation Response); RMI 
(June 11, 2021); Maria Stoica; and Value Balancing Alliance.
    \286\ See letter from Richard Love.
    \287\ See letter from Western Energy Alliance (June 12, 2021).
    \288\ See 17 CFR 229.402(b) (requiring disclosure of all 
material elements of a registrant's executive compensation, 
including the objectives of the registrant's compensation programs 
and what each compensation program is designed to reward). Further, 
the Commission recently decided to reopen the comment period on 
rules to implement section 953(a) of the Dodd-Frank Act, which 
requires disclosure of the relationship between executive 
compensation and the performance of the issuer. See Release No. 34-
94074, Reopening of Comment Period for Pay Versus Performance (Jan. 
27, 2021).
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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

[[Page 21361]]

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.\289\ Risk disclosure is a long-standing 
disclosure concept under our regulations.\290\ Several commenters 
recommended that we adopt decision-useful disclosure requirements 
concerning a registrant's climate-related risk management 
practices.\291\ 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.\292\
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    \289\ See proposed 17 CFR 229.1503(a).
    \290\ Risk factor disclosure has been part of the Commission's 
Securities Act disclosure requirements since prior to and from 
adoption of its integrated disclosure system. See Release No. 33-
6383, Adoption of Integrated Disclosure System (Mar. 3, 1982). The 
Commission added risk factor disclosure to its Exchange Act 
registration and annual reporting requirements in 2005. See Release 
No. 33-8591, Securities Offering Reform (July 19, 2005) [70 FR 44722 
(Aug. 3, 2005)].
    \291\ See, e.g., letters from Rob Bonta, California Attorney 
General et al.; Boston Common Asset Management; Carbon Tracker 
Initiative; Confluence Philanthropy; Hermes Equity Ownership 
Services Ltd.; The Institute for Policy Integrity (``Policy 
Integrity'') at New York University School of Law, Environmental 
Defense Fund (``EDF''), the Initiative on Climate Risk and 
Resilience Law (``ICRRL''), and Professors Madison Condon, Jim 
Rossi, and Michael Vandenbergh (June 14, 2021) (``Institute for 
Policy Integrity, Environmental Defense Fund, Initiative on Climate 
Risk & Resilience Law''); and Total Energies.
    \292\ See TCFD, 2021 Status Report, Section B (indicating that, 
during 2018-2020, 16-30% of surveyed public companies disclosed 
their climate risk identification and assessment processes, 14-29% 
disclosed their risk management processes, and 10-27% disclosed 
whether their climate risk management processes were integrated into 
their overall risk management).
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    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.\293\
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    \293\ See proposed 17 CFR 229.1503(a)(1).
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    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.\294\
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    \294\ See proposed 17 CFR 229.1503(a)(2).
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    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.\295\
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    \295\ To the extent loss of insurance coverage or increases in 
premiums is reasonably likely to have a material impact on the 
registrant, the registrant would be required to disclose that risk 
pursuant to proposed Item 1502(a).
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    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.\296\ 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.\297\ 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.
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    \296\ See proposed 17 CFR 229.1503(b).
    \297\ See id.
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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.\298\
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    \298\ See, e.g., letters from As You Sow; BlackRock; Clean Yield 
Asset Management; Climate Advisers; Climate Governance Initiative; 
Fiends of the Earth et al.; Institute for Governance and Sustainable 
Development; Miller/Howard Investments; Trillium Asset Management; 
and World Benchmarking Alliance.
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    The proposed rules would define a ``transition plan'' to mean a 
registrant's strategy and implementation plan to reduce climate-related 
risks.\299\ 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.\300\ 
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.\301\ 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.

[[Page 21362]]

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.\302\
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    \299\ See proposed 17 CFR 229.1500(s).
    \300\ See id.
    \301\ See proposed 17 CFR 229.1503(c)(1).
    \302\ See supra note 219.
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    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.\303\ 
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.\304\
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    \303\ See proposed 17 CFR 229.1503(c)(2)(i).
    \304\ A registrant would be required to disclose the expected 
impact of any potential reduction on its results of operations or 
financial condition pursuant to proposed 17 CFR 229.1502 to the 
extent it believes the likely impact would be material. Such 
quantified disclosure may be eligible for the PSLRA safe harbors if 
the conditions of the safe harbors are met.
---------------------------------------------------------------------------

    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:
    [cir] Restrict GHG emissions or products with high GHG footprints, 
including emissions caps; \305\ or
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    \305\ See proposed 17 CFR 229.1503(c)(2)(ii)(A)(1).
---------------------------------------------------------------------------

    [cir] Require the protection of high conservation value land or 
natural assets; \306\
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    \306\ See proposed 17 CFR 229.1503(c)(2)(ii)(A)(2).
---------------------------------------------------------------------------

     Imposition of a carbon price; \307\ and
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    \307\ See proposed 17 CFR 229.1503(c)(2)(ii)(B).
---------------------------------------------------------------------------

     Changing demands or preferences of consumers, investors, 
employees, and business counterparties.\308\
---------------------------------------------------------------------------

    \308\ See proposed 17 CFR 229.1503(c)(2)(ii)(C).
---------------------------------------------------------------------------

    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.\309\ 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.
---------------------------------------------------------------------------

    \309\ See proposed 17 CFR 229.1503(c)(1).
---------------------------------------------------------------------------

    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.\310\
---------------------------------------------------------------------------

    \310\ See proposed 17 CFR 229.1503(c)(3)(i) through (v).
---------------------------------------------------------------------------

    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.\311\
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    \311\ A registrant would be required to disclose the expected 
impact of any transition opportunity on its results of operations or 
financial condition, e.g., increased costs or expenditures, pursuant 
to proposed 17 CFR 229.1502 to the extent it believes they would be 
reasonably likely to have a material impact.
---------------------------------------------------------------------------

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

[[Page 21363]]

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:
    [cir] Restrict GHG emissions or products with high GHG footprints, 
including emissions caps; or
    [cir] 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,\312\ 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.\313\ In particular, the 
proposed rules would require disclosure falling under the following 
three categories of information:
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    \312\ For example, the climate-related note to the financial 
statements would not be required in a Form 10-Q filing. See proposed 
17 CFR 210.14-01(a). See infra note 690 and accompanying text, which 
discusses the applicability of the proposed rules to foreign private 
issuers.
    \313\ See FASB Concepts Statement No. 8, Chapter 8, par. D8 
(``[T]he primary purpose of notes to financial statements is to 
supplement or further explain the information on the face of 
financial statements by providing financial information relevant to 
existing and potential investors, lenders, and other creditors for 
making decisions about providing resources to an entity.'').
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     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.\314\
---------------------------------------------------------------------------

    \314\ See proposed 17 CFR 210.14-02(a). Inputs and assumptions 
may include the estimation methodology used to disaggregate the 
amount of impact on the financial statements between the climate-
related events and activities and other factors. Policy decisions 
referenced herein may include a registrant's election to disclose 
the impacts from climate-related opportunities. See also infra 
Section II.F.2 for an example of contextual information that would 
be required.
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    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.\315\ 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.\316\
---------------------------------------------------------------------------

    \315\ See FASB Staff Educational Paper, Intersection of 
Environmental, Social, and Governance Matters with Financial 
Accounting Standards (Mar. 2021), available at https://fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176176379917. See also IFRS, 
Effects of climate-related matters on financial statements (Nov. 
2020), available at https://www.ifrs.org/content/dam/ifrs/
supporting-implementation/documents/effects-of-climate-related-
matters-on-financial-
statements.pdf#:~:text=IFRS%20Standards%20do%20not%20refer%explicitly
%20to%20climate-
related,significant%20judgements%20and%20estimates%20that%20%20has%20
made.
    \316\ The Commission has broad authority to set accounting 
standards and principles. See, e.g., 15 U.S.C. 77s; 15 U.S.C. 
7218(c); and Policy Statement: Reaffirming the Status of the FASB as 
a Designated Private-Sector Standard Setter, Release No. 33-8221 
(Apr. 25, 2003) [68 FR 23333 (May 1, 2003)], at 23334 (``While the 
Commission consistently has looked to the private sector in the past 
to set accounting standards, the securities laws, including the 
Sarbanes-Oxley Act, clearly provide the Commission with authority to 
set accounting standards for public companies and other entities 
that file financial statements with the Commission.''). See also 
FASB Accounting Standards Codification (``FASB ASC'') Topic 105-10-
10-1 (``Rules and interpretive releases of the Securities and 
Exchange Commission . . . are also sources of authoritative GAAP for 
SEC registrants.'').

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[[Page 21364]]

    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.\317\ Therefore, registrants would have to include in any such 
calculation financial information from consolidated subsidiaries.\318\
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    \317\ See proposed 17 CFR 210.14-01(c)(1).
    \318\ See, e.g., 17 CFR 210.3-01(a) (``There shall be filed, for 
the registrant and its subsidiaries consolidated, audited balance 
sheets as of the end of each of the two most recent fiscal 
years.'').
---------------------------------------------------------------------------

    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.\319\ 
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.\320\
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    \319\ See proposed 17 CFR 210.14-01(c)(2). Foreign private 
issuers that file consolidated financial statements under home 
country GAAP and reconcile to U.S. GAAP, would be required to use 
U.S. GAAP (including the provisions of the proposed rules) as the 
basis for calculating and disclosing the proposed climate-related 
financial statement metrics. Foreign private issuers that file 
consolidated financial statements under IFRS as issued by the IASB, 
would apply IFRS and the proposed rules as the basis for calculating 
and disclosing the proposed climate-related financial statement 
metrics. For simplicity, we do not refer to the corresponding IFRS 
in each instance where we refer to a FASB ASC. Accordingly, 
references in this release to a FASB ASC should be read to also 
refer to the corresponding IFRS for foreign private issuers applying 
those standards. See also infra note 690 which discusses proposed 
amendments to Form 20-F.
    \320\ See also 17 CFR 210.4-01(a)(2) (discussing the application 
of U.S. GAAP, IFRS, and the use of other comprehensive sets of 
accounting principles (with reconciliation to U.S. GAAP)).
---------------------------------------------------------------------------

    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.\321\ 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'') \322\ or SRC, 
only two years would be required.\323\
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    \321\ See proposed 17 CFR 210.14-01(d).
    \322\ An EGC is a registrant that had total annual gross 
revenues of less than $1.07 billion during its most recently 
completed fiscal year and has not met the specified conditions for 
no longer being considered an EGC. See 17 CFR 230.405; 17 CFR 
240.12b-2; 15 U.S.C. 77b(a)(19); 15 U.S.C. 78c(a)(80); and Inflation 
Adjustments and Other Technical Amendments under Titles I and III of 
the JOBS Act, Release No. 33-10332 (Mar. 31, 2017) [82 FR 17545 
(Apr. 12, 2017)].
    \323\ An EGC is only required to provide audited statements of 
comprehensive income and cash flows for each of the two fiscal years 
preceding the date of the most recent audited balance sheet (or such 
shorter period as the registrant has been in existence). See 17 CFR 
210.3-02(a). A similar accommodation is provided to SRCs. See 17 CFR 
210.8-02.
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    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.\324\
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    \324\ See supra Section II.C.
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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

[[Page 21365]]

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.\325\ 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.\326\ ``Climate-related risks'' would also be defined to 
include physical risks, such as extreme weather events, and transition 
risks.\327\ 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,\328\ unless such impact is below a specified 
threshold.
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    \325\ See proposed 17 CFR 229.1502(d).
    \326\ See supra Section II.B.1 (discussing the definition of 
``climate-related risks'').
    \327\ See proposed 17 CFR 229.1500(c) (defining ``climate 
related risks'' to include ``physical risks'' and ``transition 
risks'').
    \328\ For example, the impact on the income statement line items 
for the periods presented in the financial statements in a 
registrant's Form 10-K.
---------------------------------------------------------------------------

    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.\329\ 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.\330\ 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.\331\ 
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.
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    \329\ See proposed 17 CFR 210.14-02(i).
    \330\ See, e.g., 2010 Guidance, 26 (``Significant physical 
effects of climate change, such as effects on the severity of 
weather (for example, floods or hurricanes), [and] sea levels . . . 
have the potential to affect a registrant's operations and 
results.''). Temperature extremes and drought are also discussed in 
the 2010 Guidance. See, e.g., id. at 6-7.
    \331\ See, e.g., Aurora A. Gutierrez et al., Wildfire response 
to changing daily temperature extremes in California's Sierra 
Nevada, Science Advances, Vol. 7, Issue 47 (Nov. 17, 2021) (``Our 
work supports the conclusion that considerable potential exists for 
an increase in fire activity as a consequence of climate warming in 
the absence of changes in fire and ecosystem management.''); U.S. 
Geological Survey, Will global warming produce more frequent and 
more intense wildfires? (``[R]esearchers have found strong 
correlations between warm summer temperatures and large fire years, 
so there is general consensus that fire occurrence will increase 
with climate change.''), available at https://www.usgs.gov/faqs/will-global-warming-produce-more-frequent-and-more-intense-wildfires.
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    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.\332\
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    \332\ See proposed 17 CFR 210.14-02(c).
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    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.\333\ The 2010 
Guidance also points to credit risks for banks driven by borrowers with 
assets located in high risk coastal areas.\334\ 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).\335\ The TCFD, in a recent publication, also discusses the 
potential financial impacts of such climate-related events.\336\ 
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.\337\
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    \333\ See 2010 Guidance, 6.
    \334\ See id.
    \335\ See, e.g., 2021 FSOC Report, Chapter 1: From Climate-
related Physical Risks to Financial Risks (discussing the listed 
events and other risks).
    \336\ TCFD, Implementing the Recommendations of the Task Force 
on Climate-related Financial Disclosures (Oct. 2021), Section A.4 
Assessing Financial Impacts of Climate-Related Risks and 
Opportunities.
    \337\ See, e.g., TCFD, Guidance on Metrics, Targets, and 
Transition Plans (Oct. 2021), 23 (Figure C6), Appendix 2, available 
at https://assets.bbhub.io/company/sites/60/2021/07/2021-Metrics_Targets_Guidance-1.pdf (providing examples, mostly from 
sustainability (or equivalent) reports, that illustrate the 
feasibility of some of the disclosures that would be required by the 
proposed rules).
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    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.

[[Page 21366]]

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.\338\ 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.\339\ 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.\340\ A registrant that is engaged in 
transition activities may experience business losses or, conversely, 
may benefit from such transition activities.\341\ 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.\342\ 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.\343\
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    \338\ See supra Section I.C.1.
    \339\ See supra Section II.B.
    \340\ See, e.g., 2021 FSOC Report, Chapter 1, From Climate-
related Transition Risks to Financial Risks.
    \341\ See id.
    \342\ See, e.g., TCFD, Guidance on Metrics, Targets, and 
Transition Plans (Oct. 2021), Appendix 2.
    \343\ See proposed 17 CFR 210.14-02(d).
---------------------------------------------------------------------------

    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.\344\ 
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.\345\
---------------------------------------------------------------------------

    \344\ See proposed 17 CFR 210.14-02(j).
    \345\ See id.
---------------------------------------------------------------------------

    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.\346\ 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.\347\ 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.\348\
---------------------------------------------------------------------------

    \346\ See proposed 17 CFR 210.14-02(b). The registrant would be 
required to evaluate the impact on a line-by-line basis consistent 
with the line items presented in its consolidated financial 
statements. See proposed 17 CFR 210.14-02(c) and (d).
    \347\ The Commission currently uses a 1% threshold in other 
contexts for disclosure of certain items within the financial 
statements and without. See, e.g., 17 CFR 210.5-03.1(a) (stating 
that if the total of sales and revenues reported under this caption 
includes excise taxes in an amount equal to 1% or more of such 
total, the amount of such excise taxes shall be shown on the face of 
the statement parenthetically or otherwise); 17 CFR 210.12-13 
(requiring disclosure of open option contracts by management 
investment companies using a 1% of net asset value threshold, based 
on the notional amounts of the contracts); and 17 CFR 229.404(d) 
(requiring disclosure of transactions between a SRC and related 
persons in which the amount involved exceeds the lesser of $120,000 
or 1% of the average of the SRC's total assets at year-end for the 
last two completed fiscal years).
    \348\ See 17 CFR 229.103(b)(2), (c)(3)(iii) and 17 CFR 
229.404(a).
---------------------------------------------------------------------------

    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.\349\ 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.\350\ 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.\351\
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    \349\ Examples of such line items include revenue, cost of 
revenue, selling, general and administrative expenses, sale of 
property, plant, and equipment (in statement of cash flows), 
inventories, intangible assets, long-term debt, or contingent 
liabilities.
    \350\ See proposed 17 CFR 210.14-02(c) and (d).
    \351\ See proposed 17 CFR 210.14-02(b).
---------------------------------------------------------------------------

    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.\352\
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    \352\ This example illustrates a situation where the registrant 
has elected to include impacts from transition opportunities.

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[[Page 21367]]

    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:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            F/S balance
                                                               (from                                         Impact of
                      F/S line-item                        consolidated      Impact of       Impact of      transition    Absolute value    Percentage
                                                             financial    events A and B      event C       activity D      of impacts        impact
                                                            statements)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cost of revenue.........................................     $10,000,000       -$300,000        +$70,000        +$90,000        $460,000            4.6%
--------------------------------------------------------------------------------------------------------------------------------------------------------

    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:

----------------------------------------------------------------------------------------------------------------
                                                                             Total negative     Total positive
                                                                               impact from   impact from climate-
                                      Total negative       Total positive       climate-      related transition
          F/S line-item            impact from climate- impact from climate-     related        activities and
                                      related events       related events      transition      climate-related
                                                                               activities      opportunities *
----------------------------------------------------------------------------------------------------------------
Cost of revenue..................  (Debit) $300,000...  (Credit) $70,000...  ..............  (Credit) $90,000
----------------------------------------------------------------------------------------------------------------
* As discussed earlier, a registrant may elect to include the impact of climate-related opportunities when
  calculating its climate-related financial impact metrics. This example illustrates a situation where the
  registrant has elected to include impacts from transition opportunities.

    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): \353\
---------------------------------------------------------------------------

    \353\ The examples below, like all of the examples in this 
release (including examples in the text of the proposed rules), are 
non-exclusive and should not be interpreted as a checklist for 
compliance with any proposed rule.
---------------------------------------------------------------------------

     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.\354\
---------------------------------------------------------------------------

    \354\ See proposed 17 CFR 210.14-02(c)(1) through (4).
---------------------------------------------------------------------------

    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.\355\
---------------------------------------------------------------------------

    \355\ See proposed 17 CFR 210.14-02(d)(1) through (4).
---------------------------------------------------------------------------

    Many commenters stated that climate-related financial disclosure is 
material and should be reflected separately in the financial 
statements.\356\ 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.\357\
---------------------------------------------------------------------------

    \356\ See, e.g., letters from Americans for Financial Reform 
Education Fund et al.; BlackRock; CalPERS; Ceres; Climate Accounting 
Project; Climate Governance Initiative; Eni SpA; Friends of the 
Earth, Amazon Watch and RainForest Coalition; Initiative on Climate 
Risk and Resilience Law; International Corporate Governance Network; 
Investment Company Institute; Natural Resources Defense Council; 
Policy Working Group; Sens. Brian Schatz and Sheldon Whitehouse 
(June 10, 2021); Ted Atwood; The Forum for Sustainable and 
Responsible Investment; The Revolving Door Project; The Washington 
State Investment Board; UNEP--FI; Union of Concerned Scientists; and 
WBCSD.
    \357\ See letter from Bloomberg.
---------------------------------------------------------------------------

    Other commenters, however, generally expressed the view that if 
such disclosures are material, they would already be required by 
existing financial statement disclosure requirements.\358\ 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

[[Page 21368]]

affect the issuer's financial condition and results of operations.\359\
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    \358\ See, e.g., letters from the American Fuel Petrochemical 
Manufacturers (June 13, 2021); Environmental Bankers Association; 
Heritage Foundation; National Mining Association (June 11, 2021); 
Society for Mining, Metallurgy, & Exploration (June 13, 2021); and 
The Associated General Contractors of America.
    \359\ See letters from American Fuel Petrochemical 
Manufacturers; Environmental Bankers Association; and The Associated 
General Contractors of America.
---------------------------------------------------------------------------

    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.\360\ 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.
---------------------------------------------------------------------------

    \360\ Certain commenters, in response to FASB's 2021 Agenda 
Consultation, were also supportive of more disaggregated disclosures 
within the financial statements. See, e.g., letters from CalPERS 
(Sept. 22, 2021); CFA Institute (Oct. 7, 2021); and CII (Sept. 16, 
2021). Comment letters in response to FASB's invitation to comment 
are available at https://www.fasb.org/jsp/FASB/CommentLetter_C/CommentLetterPage&cid=1218220137090&project_id=2021-004&page_number=1.
---------------------------------------------------------------------------

    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.\361\ 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.\362\ 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.\363\ 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.'' \364\
---------------------------------------------------------------------------

    \361\ See, e.g., Madison Condon, Market Myopia's Climate Bubble, 
2022 Utah L. Rev. 63 (2021). See also 2020 CFTC Advisory 
Subcommittee Report (``Climate change is expected to affect multiple 
sectors, geographies, and assets in the United States, sometimes 
simultaneously and within a relatively short timeframe. As mentioned 
earlier, transition and physical risks--as well as climate and non-
climate-related risks--could interact with each other, amplifying 
shocks and stresses. This raises the prospect of spillovers that 
could disrupt multiple parts of the financial system 
simultaneously.'').
    \362\ The analogies presented are not intended to imply that 
FASB ASC Topic 280, IFRS 8 or other concepts would have to be 
applied when accounting for and disclosing the climate-related 
financial statement metrics. The analogies are also not intended to 
imply that the determination of when disclosure may be required and 
how that determination is made is the same across all of these 
concepts. See, e.g., infra note 363 (discussing management's 
evaluation under FASB ASC Topic 280 Segment Reporting and IFRS 8 
Operating Segments) and the discussion below of FASB ASC Topic 606, 
IFRS 15, and Article 5 of Regulation S-X.
    \363\ See FASB ASC Topic 280 Segment Reporting and IFRS 8 
Operating Segments (requiring segment reporting disclosures to be 
included in the audited financial statements). FASB ASC 280-10-10-1 
states that the objective of segment reporting is to provide 
information about the different types of business activities in 
which a registrant engages and the different economic environments 
in which it operates to help users of financial statements: (i) 
Better understand the public entity's performance; (ii) better 
assess its prospects for future net cash flows; and (iii) make more 
informed judgments about the public entity as a whole. FASB ASC 
Topic 280 and IFRS 8 focus on the chief operating decision maker's 
view when evaluating the registrant and prescribes certain 
qualitative and quantitative considerations when determining what 
constitutes an operating segment. Similarly, the proposed rule would 
require an initial determination by the registrant of the relevant 
climate-related events and transition activities, and their impact 
on the registrant's financial statements.
    \364\ See Industry and Homogenous Geographic Segment Reporting, 
Release No. 33-6514 (Feb. 15, 1984) [49 FR 6737-01 (Feb. 23, 1984)], 
at 6738. Robust segment reporting disclosures are important as they 
can provide crucial transparency to investors that are reviewing 
financial statements. See also Gary Buesser, For the Investor: 
Segment Reporting, FASB OUTLOOK (Apr. 2019) (``[I]nvestors normally 
model a company at the segment level rather than at the consolidated 
level. More segments and greater information about an operating 
segment improve an analyst's ability to forecast a company's 
revenue, margins and assets--which serves as the basis for valuing a 
company.'').
---------------------------------------------------------------------------

    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.\365\ 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.
---------------------------------------------------------------------------

    \365\ See supra note 347 for examples of the Commission's use of 
a 1% threshold in other contexts.
---------------------------------------------------------------------------

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

[[Page 21369]]

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.\366\ 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.\367\ 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).\368\ The registrant may also choose to disclose the 
impact of efforts to pursue climate-related opportunities associated 
with transition activities.\369\ 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.\370\
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    \366\ See proposed 17 CFR 210.14-02(e), (f), and (i).
    \367\ See id. These metrics are focused on expenditures 
(spending) incurred in each reported fiscal year(s). We therefore 
believe the number of periods of the expenditure metrics should 
correspond to the number of years of income statement or cash flow 
statement presented in the consolidated financial statements.
    \368\ See id.
    \369\ See proposed 17 CFR 210.14-02(j).
    \370\ See 17 CFR 210.4-01(a)(1) and (2).
---------------------------------------------------------------------------

    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

[[Page 21370]]

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:

----------------------------------------------------------------------------------------------------------------
                                  Current fiscal
                                   year balances
                                       (from                                                        Percentage
      Expenditure category         consolidated       Event D       Activity E        Event F         impact
                                     financial
                                   statements) *
----------------------------------------------------------------------------------------------------------------
Capitalized costs (total              $8,000,000        $200,000        $100,000  ..............        ** 3.85%
 expenditure incurred during the
 year that was capitalized).....
Expense (total expenditure            $3,000,000  ..............  ..............         $25,000            0.8%
 incurred during the year that
 was expensed)..................
----------------------------------------------------------------------------------------------------------------
* As expenditures capitalized and expensed are recorded in various financial statement line items, we expect the
  ``total'' to be used for disclosure threshold calculation purposes for each category to represent the
  aggregated expenditures capitalized during the fiscal year and aggregated expenditures expensed during the
  fiscal year. See below for additional discussion regarding associated contextual information that may be
  required.
** Calculated based on total impact on capitalized costs from Event D ($200,000), Activity E ($100,000), and
  Event F ($0): $300,000/$8,000,000.

    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:

------------------------------------------------------------------------
                                                          Expenditure
                                      Expenditure        incurred for
                                     incurred for       climate-related
                                    climate-related       transition
                                        events            activities
------------------------------------------------------------------------
Capitalized costs...............           $200,000            $100,000
------------------------------------------------------------------------

    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.\371\ 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.\372\
---------------------------------------------------------------------------

    \371\ See proposed 17 CFR 210.14-02(e).
    \372\ See proposed 17 CFR 210.14-02(f).
---------------------------------------------------------------------------

    Several commenters recommended taking a similar approach, stating 
that we should require disclosure of climate-related capital 
expenditure (i.e., capitalized assets),\373\ or both climate-related 
expenses and capitalized assets.\374\ 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

[[Page 21371]]

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.\375\
---------------------------------------------------------------------------

    \373\ See, e.g., letters from Amalgamated Bank; Interfaith 
Center on Corporate Responsibility; and Natural Resources Defense 
Council.
    \374\ See, e.g., letters from Calvert; Climate Risk Disclosure 
Lab; and World Benchmarking Alliance.
    \375\ See supra Section II.C, which discusses our proposals to 
require the registrant to describe the actual and potential impacts 
of the identified climate-related risks (and climate-related 
opportunities if the registrant elects to do so) on its strategy, 
business model, and outlook. Further, such disclosure could also 
provide additional context to other narrative disclosures such as 
the discussion of risk factors required by 17 CFR 229.105.
---------------------------------------------------------------------------

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.\376\ 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).\377\ 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.\378\
---------------------------------------------------------------------------

    \376\ See proposed 17 CFR 210.14-02(g) and (i).
    \377\ See proposed 17 CFR 210.14-02(h) and (i).
    \378\ See proposed 17 CFR 210.14-02(j).
---------------------------------------------------------------------------

    If the estimates and assumptions a registrant used to produce the 
consolidated financial statements were

[[Page 21372]]

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,\379\ 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,\380\ 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.\381\
---------------------------------------------------------------------------

    \379\ See proposed 17 CFR 229.1506.
    \380\ See FASB Staff Educational Paper, Intersection of 
Environmental, Social and Governance Matters with Financial 
Accounting Standards (Mar. 2021), available at https://fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176176379917. See also IFRS, 
Effects of climate-related matters on financial statements (Nov. 
2020), available at https://www.ifrs.org/content/dam/ifrs/
supporting-implementation/documents/effects-of-climate-related-
matters-on-financial-
statements.pdf#:~:text=IFRS%20Standards%20do%20not%20refer%explicitly
%20to%20climate-
related,significant%20judgements%20and%20estimates%20that%20%20has%20
made. We also remind registrants of the requirements under FASB ASC 
Topic 250-10-50-4 for disclosures of changes in accounting 
estimates, including the requirement that if a change in estimate 
does not have a material effect in the period of change, but is 
reasonably certain to have a material effect in later periods, a 
description of that change in estimate must be disclosed whenever 
the financial statements of the period of change are presented.
    \381\ See letter from Carbon Tracker (stating that some 
companies in the European Union and United Kingdom (several of which 
are registrants) are already providing this information and 
providing examples).
---------------------------------------------------------------------------

    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.\382\ 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.\383\ 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.'' \384\
---------------------------------------------------------------------------

    \382\ See, e.g., letters from Carbon Tracker; Climate Accounting 
Project; ICCR; and Institute for Policy Integrity, Environmental 
Defense Fund, Initiative on Climate Risk & Resilience Law.
    \383\ See letter from Carbon Tracker.
    \384\ See letter from ICCR.
---------------------------------------------------------------------------

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

[[Page 21373]]

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.\385\ 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.
---------------------------------------------------------------------------

    \385\ See supra Section II.F.2 for additional discussion of 
shared characteristics that the financial statement metrics have 
with existing financial statement disclosures and commenters' views.
---------------------------------------------------------------------------

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.\386\ 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; \387\ it can be used to evaluate the progress 
in meeting net-zero commitments and assessing any associated risks; 
\388\ 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

[[Page 21374]]

its carbon footprint in the face of regulatory, policy, and market 
constraints.\389\ 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.
---------------------------------------------------------------------------

    \386\ See proposed 17 CFR 229.1504(a). As discussed below, the 
proposed rules would also require a registrant to disclose its GHG 
emissions for the historical fiscal years included in its 
consolidated financial statements.
    \387\ See, e.g., infra note 432 and accompanying text.
    \388\ See, e.g., infra, note 433 and accompanying text.
    \389\ See, e.g., infra note 455 and accompanying text.
---------------------------------------------------------------------------

    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.\390\ 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.\391\ Similarly, to the extent that registrants elect 
to follow GHG Protocol standards and methodologies, investors already 
familiar with the GHG Protocol may also benefit.
---------------------------------------------------------------------------

    \390\ See supra note 112 and accompanying text.
    \391\ In addition, as discussed in Section II.G.2.d, the 
proposed rules would permit 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. See 
proposed 17 CFR 229.1504(e)(4)(i). This proposed provision should 
also help mitigate the GHG emissions compliance burden for 
registrants.
---------------------------------------------------------------------------

    The proposed rules would define ``greenhouse gases'' as carbon 
dioxide (``CO2''); methane (``CH4''); nitrous 
oxide (``N2O''); nitrogen trifluoride (``NF3''); 
hydrofluorocarbons (``HFCs''); perfluorocarbons (``PFCs''); and sulfur 
hexafluoride (``SF6'').\392\ 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,\393\ 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.\394\
---------------------------------------------------------------------------

    \392\ See proposed 17 CFR 229.1500(g).
    \393\ In Feb. 2013 the GHG Protocol amended the required 
greenhouse gas inventory list to align with the seven gases required 
by the Kyoto Protocol (consistent with the proposed definition of 
greenhouse gases). See GHG Protocol, Required Greenhouse Gases in 
Inventories: Accounting and Reporting Standard Amendment (Feb. 
2013), available at https://www.ghgprotocol.org/sites/default/files/ghgp/NF3-Amendment_052213.pdf. Nevertheless, the GHG Protocol's 
Corporate Accounting and Reporting Standard, which was updated in 
2015, continues to refer to only six greenhouse gases. We believe 
the common understanding of the GHG Protocol's Corporate Accounting 
and Reporting Standard is that the earlier amendment (reflecting 
seven gases) applies despite the subsequent 2015 update to the 
standard.
    \394\ See UN Framework Convention on Climate Change 
(``UNFCCC'')--Reporting requirements (last visited Nov. 4, 2021), 
available at https://unfccc.int/process-and-meetings/transparency-and-reporting/reporting-and-review-under-the-convention/greenhouse-gas-inventories-annex-i-parties/reporting-requirements. The Kyoto 
Protocol is the international agreement linked to the UNFCCC. See 
also U.S. Energy Information Administration--Where greenhouse gases 
come from (last updated May 21, 2021), available at https://www.eia.gov/energyexplained/energy-and-the-environment/where-greenhouse-gases-come-from.php; and EPA--Overview of Greenhouse 
Gases (last visited Nov. 4, 2021), available at https://www.epa.gov/ghgemissions/overview-greenhouse-gases.
---------------------------------------------------------------------------

    The proposed rules would define GHG emissions to mean direct and 
indirect emissions of greenhouse gases.\395\ Pursuant to the proposed 
definition of GHG emissions, direct emissions are GHG emissions from 
sources that are owned or controlled by a registrant,\396\ 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.\397\ Similar to the GHG Protocol, the proposed rules would 
define: \398\
---------------------------------------------------------------------------

    \395\ See proposed 17 CFR 229.1500(h).
    \396\ See proposed 17 CFR 229.1500(h)(1).
    \397\ See proposed 17 CFR 229.1500(h)(2).
    \398\ Sources of emissions can include transportation, 
electricity production, industrial processes, commercial and 
residential use, agriculture, and land use changes (including 
deforestation). See, e.g., EPA, Sources of Greenhouse Gas Emissions, 
available at https://www.epa.gov/ghgemissions/sources-greenhouse-gas-emissions.).
---------------------------------------------------------------------------

     Scope 1 emissions as direct GHG emissions from operations 
that are owned or controlled by a registrant; \399\
---------------------------------------------------------------------------

    \399\ See proposed 17 CFR 229.1500(p).
---------------------------------------------------------------------------

     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; \400\ and
---------------------------------------------------------------------------

    \400\ See proposed 17 CFR 229.1500(q).
---------------------------------------------------------------------------

     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.\401\ 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.
---------------------------------------------------------------------------

    \401\ See proposed 17 CFR 229.1500(r).
---------------------------------------------------------------------------

    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.\402\ 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.
---------------------------------------------------------------------------

    \402\ See supra note 113. The EPA requires the disclosure of 
direct GHG emissions primarily from large industrial sources as well 
as emissions from fuel and industrial gas suppliers and 
CO2 injection sites in the United States. See EPA, 
Greenhouse Gas Reporting Program, available at https://www.epa.gov/ghgreporting.
---------------------------------------------------------------------------

    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.\403\ 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.\404\ 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

[[Page 21375]]

(CO2), methane (CH4), nitrous oxide 
(N2O), nitrogen trifluoride (NF3), 
hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur 
hexafluoride (SF6)) and in the aggregate.\405\ 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.\406\ 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.
---------------------------------------------------------------------------

    \403\ See proposed 17 CFR 229.1504(b)(1). We discuss the setting 
of a registrant's organizational and operational boundaries in 
Section II.G.2. below.
    \404\ See proposed 17 CFR 229.1504(c)(1). As discussed in 
greater detail below, for many companies, these emissions may be 
material for assessing the companies' exposure to climate-related 
risks, particularly transition risks, and their strategy to reduce 
their carbon footprint in the face of regulatory, policy, and market 
constraints. See infra Section II.G.1.b.
    \405\ See proposed 17 CFR 229.1504(a)(1).
    \406\ For example, the White House has recently launched an 
initiative to reduce methane emissions in the United States. See the 
White House Office of Domestic Climate Policy, U.S. Methane 
Emissions Reductions Action Plan (Nov. 2021), available at https://www.whitehouse.gov/wp-content/uploads/2021/11/US-Methane-Emissions-Reduction-Action-Plan-1.pdf.
---------------------------------------------------------------------------

    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 (``CO2e'').\407\ CO2e 
is the common unit of measurement used by the GHG Protocol to indicate 
the global warming potential (``GWP'') \408\ of each greenhouse gas, 
expressed in terms of the GWP of one unit of carbon dioxide 
(CO2).\409\ 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.
---------------------------------------------------------------------------

    \407\ See id.
    \408\ The proposed rules would define global warming potential 
to mean a factor describing the global warming impacts of different 
greenhouse gases. It is a measure of how much energy will be 
absorbed in the atmosphere over a specified period of time as a 
result of the emission of one ton of a greenhouse gas, relative to 
the emissions of one ton of carbon dioxide (CO2). See 
proposed 17 CFR 229.1500(f).
    \409\ See proposed 17 CFR 229.1500(d).
---------------------------------------------------------------------------

    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.\410\ 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.\411\
---------------------------------------------------------------------------

    \410\ See proposed 17 CFR 229.1504(a)(2). The proposed rules 
would define carbon offsets to 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. See proposed 17 
CFR 229.1500(a).
    \411\ See GHG Protocol, Corporate Accounting and Reporting 
Standard, Chapter 9.
---------------------------------------------------------------------------

    Commenters generally supported requiring disclosure of a 
registrant's Scope 1 and Scope 2 emissions, with many also supporting 
disclosure of Scope 3 emissions.\412\ 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.\413\ 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.\414\ 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.\415\
---------------------------------------------------------------------------

    \412\ See, e.g., letters from Actual Systems, Inc.; Adobe Inc.; 
AICPA; Curt Albright (June 13, 2021); AllianceBernstein; Alphabet et 
al.; Amalgamated Bank; Americans for Financial Reform Education 
Fund; Andrew Behar; Apple; Ted Atwood; Baillie Gifford; Bank of 
America Corporation; BlackRock; Bloomberg, LP; Blueprint Financial; 
BNP Paribas; Rob Bonta, California Attorney General et al.; Boston 
Common Asset Management; BSR; CalPERS; CALSTRS; Calvert Research and 
Management; Carbon4 Finance (June 14, 2021); Carbon180 (June 13, 
2021); Carbon Tracker Initiative; Cardano Risk Management Ltd.; 
Carolyn Kohoot; CDP NA; Center for American Progress; Center for 
Climate and Energy Solutions; Center for Law and Social Policy and a 
New Deal for Youth (June 15, 2021); Ceres et al.; Certified B 
Corporations; Chevron; Christopher Lish; Clean Yield Asset 
Management; Climate Advisers; Climate Governance Initiative Climate 
Risk Disclosure Law and Policy Lab; Climate Policy Ocean Conservancy 
(June 14, 2021); Coalition on Material Emissions Transparency 
(COMET) (June 10, 2021); Confluence Philanthropy; Consumer 
Federation of America; Crake Asset Management (June 4, 2021); Credit 
Suisse (June 11, 2021); Daniel Cain; Katherine DiMatteo; Domini 
Impact Investments LLC; Douglas Hileman Consulting, LLC; Dow (June 
4, 2021); Dynamhex Inc.; Energy Infrastructure Council (June 14, 
2014); Environmental Bankers Association; E2; E3G; ERM CVS; Etsy, 
Inc.; FAIRR Initiative; First Affirmative Financial Network; 
Regenerative Crisis Response Committee; the Forum for Sustainable 
and Responsible Investment; Friends of the Earth, Amazon Watch, and 
RainForect Action Network; Generation Investment Management LLP 
(June 14, 2021); Georgetown Climate Center (June 14, 2021); George 
S. Georgiev; Emmanuelle Haack; Hannon Armstrong; Hermes Equity 
Ownership Services Limited; HP, Inc.; IHS Markit; Impact Investors, 
Inc.; Impax Asset Management; Institute for Governance and 
Sustainable Development; Institute for Market Transformation; 
Interfaith Center on Corporate Responsibility; International 
Corporate Governance Network; Invesco; Investment Consultants 
Sustainability Working Group-U.S.; Investor Advocates for Social 
Justice (June 14, 2021); Janice Shade (June 22, 2021); Japanese 
Bankers Association; Keramida et al.; Majedie Asset Management; 
Manifest Climate; Mercy Investment Services, Inc.; Microsoft 
Corporation; Miller/Howard Investments; Mirova US LLC; Morningstar, 
Inc.; MSCI Inc.; Natural Resources Defense Council; NEI Investments; 
Newground Social Investment (June 14, 2021); New York City 
Comptroller; New York State Society of Certified Public Accountants; 
Nia Impact Capital (June 14, 2021); Norges Bank Investment; NY State 
Comptroller; Oxfam America (June 13, 2021); Paradice Investment 
Management; PayPal Holdings, Inc.; Pension Investment Association of 
Canada (June 14, 2021); Michael S. Pieciak, Vermont Commissioner of 
Financial Regulation (June 14, 2021); PRI (Consultation Response); 
Private Equity Stakeholder Project (June 14, 2021); Public Citizen 
and 57 other signatories (June 14, 2021); Publish What you Pay (US) 
(June 13, 2021); Revolving Door Project; RMI; Salesforce.com, Inc.; 
SASB; Schroder Investment Management North America (June 14, 2021); 
Seventh Generation Interfaith, Inc.; State Street Global Advisors; 
Maria Stoica; Stray Dog Capital; Sunrise Bay Area; Sustainable 
Inclusive Solutions (June 13, 2021); Terra Alpha Investor Group; the 
organization Green America and 14,600 Individual Americans (June 14, 
2021); TotalEnergies; Trillium Asset Management; Union of Concerned 
Scientists (June 14, 2021); Unovis Asset Management (June 11, 2021); 
Value Balancing Alliance; Vert Asset Management LLC; Wellington 
Management Co.; Wespath Benefits and Investments; William and Flora 
Hewlett Foundation; W.K. Associates, Inc. (June 14, 2021); World 
Benchmarking Alliance; and WBCSD.
    \413\ See, e.g., letters from Calvert Research and Management; 
Ceres et al.; NY State Comptroller; and SASB.
    \414\ See, e.g., letters from Bloomberg, LP (stating that GHG 
emissions are critical components of any climate-related financial 
disclosure scheme, and that understanding the emissions 
contributions of a company is an important factor for understanding 
how financially vulnerable they may be to shifts in regulation, 
technology, and markets during any transition to a lower-carbon 
economy); CalPers (indicating the use of GHG emissions data by asset 
managers to evaluate potential transition risks); and Credit Suisse 
(supporting mandatory disclosure of Scopes 1, 2, and 3 emissions for 
key industries as such information is critical for financial market 
participants to have a better understanding of their total climate-
related exposure to the highest emitting sectors).
    \415\ See, e.g., letters from CALSTRS (indicating the use by 
asset managers of third-party derived climate data, the expense and 
lack of consistency regarding such data, and the need for publicly 
available climate data so that the commenter may more efficiently 
and cost-effectively allocate capital to lower climate risk assets 
in line with its investment objectives); Credit Suisse (stating that 
the lack of consistent and reliable climate-related data has created 
significant challenges in the ability of financial market 
participants to adequately assess and compare the performance of 
reporting companies, as well as efficiently allocate capital towards 
low-carbon solutions); and Norges Bank Investment Management 
(indicating their reliance on companies' climate-related data to 
assess their exposure to the effects of climate and how they manage 
climate-related risks and opportunities, and stating that the scope 
and quality of companies' climate-related disclosures varies 
significantly and that their climate-related data is often 
incomplete and/or not comparable).

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[[Page 21376]]

    Some of these commenters supported requiring disclosure of Scope 1 
emissions at the individual greenhouse gas level.\416\ 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.\417\
---------------------------------------------------------------------------

    \416\ See, e.g., letters from Amazon Watch and Rainforest Action 
Network; Dimensional; Friends of the Earth; and ICCR.
    \417\ See, e.g., letters from Ceres (``In land-intensive 
sectors, deforestation, forest degradation, and land-use change are 
important financial risks associated with climate change. In these 
sectors--for example food and forest management--currently Scope 3 
GHG emissions are not regularly disclosed, despite comprising 
upwards of 90% of emissions from companies.''); see also letters 
from Apple (stating that Scope 3 emissions ``represent the 
overwhelming majority of most companies' carbon footprint and are 
therefore critical to include''); Natural Resources Defense Council; 
NY State Comptroller; and Teachers Insurance and Annuity Association 
of America.
---------------------------------------------------------------------------

    Many commenters recommended basing any GHG emissions disclosure 
requirement on the GHG Protocol.\418\ 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.\419\ 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.\420\ Some commenters also stated that 
mandating GHG emissions pursuant to a standardized approach, such as 
the GHG Protocol, would help mitigate instances of greenwashing.\421\
---------------------------------------------------------------------------

    \418\ See, e.g., letters from Apple; bp; Carbon Tracker 
Initiative; Consumer Federation of America; ERM CVS; Ethic Inc.; 
First Affirmative Financial Network; Regenerative Crisis Response 
Committee; MSCI, Inc.; Natural Resources Defense Council; New York 
State Society of Certified Public Accountants; Paradice Investment 
Management; Stray Dog Capital; and Huw Thomas.
    \419\ See, e.g., letters from ERM CVS; and Natural Resources 
Defense Council.
    \420\ See, e.g., letters from BNP Paribas; Natural Resources 
Defense Council; and New York State Society of Certified Public 
Accountants.
    \421\ See, e.g., letters from BNP Paribas; Center for Law and 
Social Policy (June 15, 2021); and Dimensional Fund Advisors. See 
also Section IV.C below for further discussion of the practice of 
greenwashing.
---------------------------------------------------------------------------

    Some commenters indicated that the Commission should mandate 
disclosure of only Scopes 1 and 2 emissions.\422\ Other commenters 
suggested limiting the mandatory disclosure of Scope 3 emissions to 
registrants in certain industries,\423\ larger registrants, or when a 
registrant's Scope 3 emissions comprise 40 percent of its total 
emissions.\424\ 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.\425\
---------------------------------------------------------------------------

    \422\ See, e.g., letters from Acadian Asset Management LLC; 
American Bankers Association; American Exploration Production 
Council (June 11, 2021); Seema Arora; Bank Policy Institute; 
Biotechnology Innovation Organization; Business Roundtable (June 11, 
2021); Cisco (June 11, 2021); Conning (June 11, 2021); CPP 
Investments; Decatur Capital Management; Dimensional Fund Advisors; 
Ethic Inc.; Freeport-McMoran (June 11, 2021); Harvard Management 
Company; Information Technology Industry Council; Institute of 
International Bankers; Investment Adviser Association; Manulife 
Investment Management; PGIM; PIMCO; Real Estate Roundtable (June 9, 
2021); Matthew Roling and Samantha Tirakian; SIFMA Asset Management 
Group; the Vanguard Group, Inc.; and Walmart, Inc.
    \423\ See, e.g., letters from Teachers Insurance and Annuity 
Association of America (recommending requiring Scope 3 disclosure 
from issuers in the financial, energy, transportation, materials and 
buildings, and agriculture, food, and forest products sectors; and 
Sens. Schatz and Whitehouse (recommending requiring Scope 3 
disclosure for financed emissions).
    \424\ See letter from Catavento Consultancy.
    \425\ See, e.g., letters from Uber Technologies (Apr. 27, 2021); 
and Americans for Financial Reform Education Fund. See also TCFD, 
Guidance on Metrics, Targets, and Transition Plans (stating that 47% 
of respondents surveyed supported disclosure of Scope 3 GHG 
emissions independent of a materiality assessment).
---------------------------------------------------------------------------

    A few commenters stated that the Commission should require the 
disclosure of only Scope 1 emissions.\426\ 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.'' \427\ 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.\428\
---------------------------------------------------------------------------

    \426\ See letters from American Petroleum Institute; Virginia 
Harper Ho; and David Marriage.
    \427\ See letter from American Petroleum Institute.
    \428\ See letter from Richard Love.
---------------------------------------------------------------------------

    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.\429\ 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.\430\
---------------------------------------------------------------------------

    \429\ See supra notes 412 and 413.
    \430\ See supra Section II.C and infra Section II.I.
---------------------------------------------------------------------------

    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.\431\ 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.\432\ 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.
---------------------------------------------------------------------------

    \431\ See, e.g., letters from PIMCO; State Street Global 
Advisors; Trillium Asset Management; and Wellington Management Co.
    \432\ See Wellington Management Co.
---------------------------------------------------------------------------

    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.\433\ 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

[[Page 21377]]

associated potential asset devaluation or loan default risks.\434\ 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.
---------------------------------------------------------------------------

    \433\ See supra Section I.C.1 (discussing, in particular, 
Climate Action 100+ and GFANZ).
    \434\ See, e.g., Climate Action 100+, The Three Asks.
---------------------------------------------------------------------------

    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.\435\ 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.\436\
---------------------------------------------------------------------------

    \435\ See supra note 420.
    \436\ See, e.g., Kauffmann, C., C. T[eacute]bar Less and D. 
Teichmann (2012), Corporate Greenhouse Gas Emission Reporting: A 
Stocktaking of Government Schemes, OECD Working Papers on 
International Investment, 2012/01, OECD Publishing, at 8, available 
at http://dx.doi.org/10.1787/5k97g3x674lq-en (``For example, the use 
of scope 1, 2, 3 to classify emissions as defined by the GHG 
Protocol has become common language and practice today.'').
---------------------------------------------------------------------------

    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.\437\ 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.
---------------------------------------------------------------------------

    \437\ See infra Section II.G.2 (discussing the proposed 
treatment for determining ownership or control for the purpose of 
setting a registrant's organizational boundaries when measuring its 
Scopes 1 and 2 emissions).
---------------------------------------------------------------------------

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.\438\ 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.\439\
---------------------------------------------------------------------------

    \438\ See EPA, Direct Emissions from Stationary Combustion 
Sources (Dec. 2020), available at https://www.epa.gov/sites/default/files/2020-12/documents/stationaryemissions.pdf.
    \439\ See EPA, Indirect Emissions from Purchased Electricity 
(Dec. 2020), available at https://www.epa.gov/sites/default/files/2020-12/documents/electricityemissions.pdf.
---------------------------------------------------------------------------

    Unlike Scopes 1 and 2 emissions, Scope 3 emissions typically result 
from the activities of third parties in a registrant's value chain 
\440\ 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.\441\
---------------------------------------------------------------------------

    \440\ As previously mentioned, the proposed rules would define a 
registrant's value chain to mean the upstream and downstream 
activities related to a registrant's operations. Upstream activities 
include activities that relate to the initial stages of producing a 
good or service (e.g., materials sourcing, materials processing, and 
supplier activities). Downstream activities include activities 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). See proposed 17 CFR 229.1500(t).
    \441\ See, e.g., letter from Wellington Management Co.
---------------------------------------------------------------------------

    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.\442\ 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.
---------------------------------------------------------------------------

    \442\ See, e.g., letter from Apple (referencing its 2021 
Environmental Progress Report, available at https://www.apple.com/environment/pdf/Apple_Environmental_Progress_Report_2021.pdf, which 
states that 109 suppliers across 24 countries have committed to 
manufacturing Apple products with 100 percent renewable energy, and 
indicating Apple's development of detailed life cycle assessment 
models, which help the company identify its top product component 
contributors of carbon emissions and facilitate its providing a 
comprehensive account of its relevant Scope 3 emissions).
---------------------------------------------------------------------------

    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

[[Page 21378]]

Scope 3 emissions.\443\ 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.\444\
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    \443\ See proposed 17 CFR 229.1504(c)(1). As explained below, we 
are also proposing a safe harbor for Scope 3 disclosures. See infra 
Section II.G.3.
    \444\ See infra note 461 and accompanying text.
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    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.\445\ 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.\446\
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    \445\ See supra note 209.
    \446\ TSC Industries, Inc. v Northway, 426 U.S. at 448.
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    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.\447\ 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,\448\ and whether they have developed a strategy to 
reduce their carbon footprint in the face of regulatory, policy, and 
market constraints.\449\
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    \447\ See, e.g., letters from Apple; and WK Associates.
    \448\ See, e.g., letter from Wellington Management Co.
    \449\ See Eric Rosenbaum, Climate experts are worried about the 
toughest carbon emissions for companies to capture (Aug. 18, 2021) 
(``Scope 3 carbon emissions, or those not part of operations or 
under direct control, represent the majority of the carbon footprint 
for most companies, in some cases as high as 85% to 95%''), 
available at https://www.cnbc.com/2021/08/18/apple-amazon-exxon-and-
the-toughest-carbon-emissions-to-
capture.html#:~:text=Scope%203%20carbon%20 
emissions%2C%20or,as%2085%25%to%2095%25. See also MSCI, Emissions: 
Seeing the Full Picture (Sept. 17, 2020) (``For some companies and 
industries, Scope 3 emissions dominate the overall carbon footprint. 
For example, 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.''), available at https://www.msci.com/www/blog-posts/scope-3-carbon-emissions-seeing/02092372761; letter from WK 
Associates, Inc. (June 14, 2021) (stating that Scope 3 emissions 
account for approximately 70-90% of lifecycle emissions from oil 
products and 60-85% of those from natural gas, according to the 
International Energy Agency).
---------------------------------------------------------------------------

    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.\450\ There is already a transition underway to 
reduce tailpipe emissions through the adoption of stricter fuel 
efficiency regulations \451\ and by governmental initiatives that 
encourage the manufacture and demand for electric vehicles.\452\ Demand 
for electric vehicles is increasing in the United States and 
globally,\453\ 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.\454\ 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.
---------------------------------------------------------------------------

    \450\ See, e.g., TCFD, Guidance on Metrics, Targets, and 
Transition Plans (Oct. 2021), Appendix 1, Figure A1-1 (Importance of 
Scope 3 GHG Emissions in Certain Sectors) (showing that, for the 
automobiles and components sector, the majority of GHG emissions 
result from downstream product use), available at https://assets.bbhub.io/company/sites/60/2021/07/2021-Metrics_Targets_Guidance-1.pdf.
    \451\ See, e.g., Coral Davenport, E.P.A. Announces Tightest-Ever 
Auto Pollution Rules, N.Y. Times, Dec. 20, 2021, available at 
https://www.nytimes.com/2021/12/20/climate/tailpipe-rules-climate-biden.html?searchResultPosition=25 (reporting that the EPA announced 
strengthened limits on pollution from automobile tailpipes). In 
addition, more than a dozen states have adopted low emission vehicle 
standards. See California Air Resources Board, States that have 
Adopted California's Vehicle Standards under Section 177 of the 
Federal Clean Air Act, available at https://ww2.arb.ca.gov/resources/documents/states-have-adopted-californias-vehicle-standards-under-section-177-federal.
    \452\ See, e.g., Catherine Lucey and Andrew Duehren, Biden Touts 
Build Back Better in Meeting With CEOs, Wall Street Journal, Jan. 
26, 2022, available at https://www.wsj.com/articles/biden-touts-build-back-better-in-meeting-with-ceos-11643227677?mod=Searchresults_pos1&page= (reporting efforts to 
obtain Federal tax incentives to promote the use of electric and 
hydrogen-power vehicles).
    \453\ See Jack Ewing, Sales of Electric Vehicles Surpass Diesel 
in Europe, a First, N.Y. Times, Jan. 17, 2022 (stating that sales of 
battery-powered cars soared in Europe, the United States, and China 
in 2021), available at https://www.nytimes.com/2022/01/17/business/electric-vehicles-europe.html?searchResultPosition=1.
    \454\ See, e.g., Tom Krisher and Aamer Madhani, US automakers 
pledge huge increase in electric vehicles, AP News, Aug. 5, 2021, 
available at https://apnews.com/article/technology-joe-biden-business-environment-and-nature-economy-88fe6ca8e333f3d00f6d2e98c6652cea (reporting that General Motors 
aspires to sell only electric passenger vehicles by 2035 and Ford 
and Stellantis (formerly Fiat Chrysler) each expect that 40% of 
global sales to be electric vehicles by 2030); see also https://www.caranddriver.com/news/g35562831/ev-plans-automakers-timeline/; 
and Jim Motavalli, Every Automaker's EV Plans Through 2035 And 
Beyond, Forbes, Oct. 4, 2021, available at https://www.forbes.com/wheels/news/automaker-ev-plans/.
---------------------------------------------------------------------------

    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.\455\ 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

[[Page 21379]]

understanding of a registrant's climate-related risks.
---------------------------------------------------------------------------

    \455\ See supra Section I.C.1.
---------------------------------------------------------------------------

    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.\456\ 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.'' \457\ 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.
---------------------------------------------------------------------------

    \456\ See, e.g., letter from Uber Technologies; see also TCFD, 
Guidance on Metrics, Targets, and Transition Plans, at note 40, 
citing SBTi, SBTi Criteria and Recommendations (Oct. 2021), 
available at https://sciencebasedtargets.org/resources/files/SBTi-criteria.pdf.
    \457\ TSC Industries v. Northway, 426 U.S. at 449.
---------------------------------------------------------------------------

    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.\458\ 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.\459\ 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.\460\
---------------------------------------------------------------------------

    \458\ See, e.g., letters from Confluence Philanthropy; Forum for 
Sustainable and Responsible Investment; Mirova US LLC; NY City 
Comptroller; and Wellington Management Co.
    \459\ See id.
    \460\ For example, registrants that choose to mitigate climate-
related risks by undertaking research and development activities to 
source inputs involving less GHG emissions might incur expenses in 
the short-term but could achieve potential long-term cost savings by 
implementing more energy-efficient production processes and avoiding 
potential penalties imposed by regulation.
---------------------------------------------------------------------------

    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.\461\ 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.
---------------------------------------------------------------------------

    \461\ See proposed 17 CFR 229.1504(c)(1).
---------------------------------------------------------------------------

    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

[[Page 21380]]

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,\462\ 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:
---------------------------------------------------------------------------

    \462\ See WBCSD and World Resources Institute, Greenhouse Gas 
Protocol Corporate Value Chain (Scope 3) Accounting and Reporting 
Standard (Sept. 2011).
---------------------------------------------------------------------------

     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.\463\
---------------------------------------------------------------------------

    \463\ See proposed 17 CFR 229.1500(r).
---------------------------------------------------------------------------

    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.\464\
---------------------------------------------------------------------------

    \464\ See id. The ``investments'' category would capture what 
are commonly referred to as ``financed emissions.''
---------------------------------------------------------------------------

    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.\465\ 
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.
---------------------------------------------------------------------------

    \465\ See proposed 17 CFR 229.1504(c)(1).
---------------------------------------------------------------------------

    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,\466\ as reported by 
parties in the registrant's value chain; and
---------------------------------------------------------------------------

    \466\ Activity data refers to a quantitative measure of a level 
of activity that results in GHG emissions. Depending on the 
activity, such data could be expressed, for example, as: Liters of 
fuel consumed; kilowatt-hours of electricity consumed; kilograms of 
material consumed; kilometers of distance traveled; hours of time 
operated; square meters of area occupied; kilograms of waste 
generated; kilograms of product sold; or quantity of money spent. 
See GHG Protocol, Corporate Value Chain (Scope 3) Accounting and 
Reporting Standard, Chapter 7.
---------------------------------------------------------------------------

     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.\467\
---------------------------------------------------------------------------

    \467\ See proposed 17 CFR 229.1504(c)(2).
---------------------------------------------------------------------------

    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

[[Page 21381]]

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 \468\ 
framework and the GHG Protocol,\469\ 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.\470\ We have attempted to calibrate our proposal 
to balance investors' demand for this information with the current 
limitations of the Scope 3 emissions data.
---------------------------------------------------------------------------

    \468\ See, e.g., TCFD, Guidance on Metrics, Targets, and 
Transition Plans (Oct. 2021), Appendix 1.
    \469\ See, e.g., GHG Protocol, Corporate Value Chain (Scope 3) 
Accounting and Reporting Standard.
    \470\ See, e.g., TCFD, Guidance on Metrics, Targets, and 
Transition Plans (Oct. 2021), Appendix 1; and letters from Apple; NY 
City Comptroller; and Wellington Investment Co.
---------------------------------------------------------------------------

    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 \471\ 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.
---------------------------------------------------------------------------

    \471\ See, e.g., letter from Catavento Consultancy (stating that 
Scope 3 emissions disclosure should be mandatory for larger 
companies and for those in which Scope 3 emissions account for more 
than 40% of total emissions).
---------------------------------------------------------------------------

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 
CO2e, 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

[[Page 21382]]

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.\472\ 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.\473\ 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 CO2e 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.
---------------------------------------------------------------------------

    \472\ See proposed 17 CFR 229.1504(d)(1).
    \473\ See proposed 17 CFR 229.1504(d)(2). The proposed safe 
harbor for Scope 3 emissions disclosure would apply to this proposed 
GHG intensity metric for Scope 3 emissions. See infra Section 
II.C.3.
---------------------------------------------------------------------------

    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 CO2e per 
unit of total revenues, using the registrant's reporting currency) or 
per unit of production (e.g., metric tons of CO2e per unit 
of product produced).\474\ 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 CO2e 
per unit of total revenue and per unit of production for the fiscal 
year.\475\ 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

[[Page 21383]]

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.
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    \474\ See proposed 17 CFR 229.1500(i). We derived this proposed 
definition from the GHG Protocol. See GHG Protocol, A Corporate 
Accounting and Reporting Standard, Chapter 9.
    \475\ See proposed 17 CFR 229.1504(d)(1).
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    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.\476\
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    \476\ See proposed 17 CFR 229.1504(d)(3).
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    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.\477\ In all cases, the registrant would be required to 
disclose the methodology and other information required pursuant to the 
proposed GHG emissions metrics instructions.\478\
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    \477\ See proposed 17 CFR 229.1504(d)(4).
    \478\ See proposed 17 CFR 229.1504(e)(1) and infra Section 
II.G.2 for the proposed disclosure requirements pertaining to GHG 
emissions methodology.
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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 CO2e 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 CO2e per unit of 
total assets?
    111. Should we require the disclosed GHG intensity to be expressed 
in terms of metric tons of CO2e 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 CO2e 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 CO2e 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.\479\ 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.\480\ 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.
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    \479\ See proposed 17 CFR 229.1504(a).
    \480\ See supra Section II.C for a discussion of proposed 17 CFR 
229.1502.
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    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.\481\ If the registrant is a SRC,

[[Page 21384]]

only two years of Scopes 1 and 2 emissions metrics would be 
required.\482\
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    \481\ Alternatively, if a registrant has no revenue, and it 
decides to calculate GHG intensity using total assets, we believe it 
would be appropriate for that registrant to provide its GHG 
intensity for the same number of years as are required on its 
balance sheets (i.e., two years if not a SRC).
    \482\ We are proposing to exempt SRCs from Scope 3 disclosures. 
See infra Section II.G.3.
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    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.\483\
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    \483\ See Securities Act Rule 409 and Exchange Act Rule 12b-21.
---------------------------------------------------------------------------

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.\484\ 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.\485\ 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.\486\ 
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.\487\ 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.
---------------------------------------------------------------------------

    \484\ See proposed 17 CFR 229.1504(e)(1).
    \485\ See id.
    \486\ See proposed 17 CFR 229.1500(m).
    \487\ See proposed 17 CFR 229.1500(l).
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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.\488\ An initial step for many registrants 
may be to set their organizational boundaries.\489\ Those boundaries 
determine the business operations owned or controlled by a registrant 
to be included in the calculation of its GHG emissions.\490\ 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.
---------------------------------------------------------------------------

    \488\ See proposed 17 CFR 229.1504(b)(1).
    \489\ See GHG Protocol, Corporate Accounting and Reporting 
Standard, Chapter 3.
    \490\ See proposed 17 CFR 229.1500(m).
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    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.\491\ 
A company following the GHG Protocol would base its organizational 
boundaries on either an equity share approach or a control 
approach.\492\ 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.\493\
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    \491\ See supra note 111.
    \492\ Under the GHG Protocol's equity share approach, a company 
accounts for GHG emissions from operations according to its share of 
equity in the operation. Under the GHG Protocol's control approach, 
a company accounts for 100% of the GHG emissions from operations 
over which it has control. A company can choose to define control 
either in financial or operational terms. See GHG Protocol, 
Corporate Accounting and Reporting Standard, Chapter 3.
    \493\ See proposed 17 CFR 229.1504(e)(2).
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    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.\494\ 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.
---------------------------------------------------------------------------

    \494\ Foreign private issuers that file consolidated financial 
statements under IFRS as issued by the IASB would apply IFRS under 
the proposed rules as the basis for setting its organizational 
boundaries for the purpose of providing the proposed GHG emissions 
disclosure.
---------------------------------------------------------------------------

    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.\495\ Therefore, under the proposed 
rules a registrant would be required to include all of the emissions 
from an entity that it consolidates.\496\ For an equity method investee 
or an

[[Page 21385]]

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.\497\ 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.\498\ 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.\499\
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    \495\ Issuers that are permitted to, and do, apply IFRS issued 
by the International Accounting Standards Board would apply the 
IASB's equivalent standards. See, e.g., IFRS 10 Consolidated 
Financial Statements, IFRS 11 Joint Arrangements and International 
Accounting Standards (``IAS'') 28 Investments in Associates and 
Joint Ventures. See supra note 319, which states that foreign 
private issuers that file consolidated financial statements under 
home country GAAP and reconcile to U.S. GAAP, would be required to 
use U.S. GAAP as the basis for calculating and disclosing the 
proposed climate-related financial statement metrics. The same 
requirement would apply for the purpose of determining the proposed 
GHG emissions metrics.
    \496\ See proposed 17 CFR 229.1504(e)(2).
    \497\ See id.
    \498\ See id.
    \499\ See proposed 17 CFR 229.1504(b)(2).
---------------------------------------------------------------------------

    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).\500\ 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.\501\
---------------------------------------------------------------------------

    \500\ See proposed 17 CFR 229.1500(m) (defining organizational 
boundaries as the boundaries that determine the operations owned or 
controlled by a registrant) and 17 CFR 229.1504(b)(1) (requiring the 
disclosure of Scopes 1 and 2 emissions separately after calculating 
them from all sources included in a registrant's organizational and 
operational boundaries).
    \501\ See proposed 17 CFR 229.1504(e)(2).
---------------------------------------------------------------------------

    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 \502\ 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.\503\ 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.\504\ This proposed provision should help investors 
track and compare a registrant's GHG emissions over time.
---------------------------------------------------------------------------

    \502\ See proposed 17 CFR 229.1504(e)(3).
    \503\ See id.
    \504\ See id.
---------------------------------------------------------------------------

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.\505\ 
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:
---------------------------------------------------------------------------

    \505\ See proposed Item 1504(e)(1).
---------------------------------------------------------------------------

     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).\506\
---------------------------------------------------------------------------

    \506\ This non-exclusive list of possible emissions sources is 
based on categories of emissions sources provided in the GHG 
Protocol. See GHG Protocol, Corporate Accounting and Reporting 
Standard, Chapter 6.
---------------------------------------------------------------------------

    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.\507\
---------------------------------------------------------------------------

    \507\ See id.
---------------------------------------------------------------------------

    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.\508\ 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.\509\ 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.
---------------------------------------------------------------------------

    \508\ See proposed 17 CFR 229.1504(e)(1).
    \509\ See id.
---------------------------------------------------------------------------

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.\510\ 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

[[Page 21386]]

derive absolute GHG emissions.\511\ 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.\512\ If no activity data is 
available, a registrant may use an emission factor based on economic 
data.\513\ 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).\514\
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    \510\ See, e.g., GHG Protocol, Corporate Accounting and 
Reporting Standard, Chapter 6.
    \511\ See proposed 17 CFR 229.1500(e).
    \512\ See id.
    \513\ See id.
    \514\ See, e.g., Greenhouse Gas Protocol, Corporate Value Chain 
(Scope 3) Accounting and Reporting Standard, Supplement to the GHG 
Protocol Corporate Accounting and Reporting Standard, Chapter 1 
(describing the ``spend-based method'' for calculating emissions 
from purchased 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).\515\ The GHG Protocol's own set of GHG 
emission calculation tools are based in part on the EPA's emission 
factors.\516\ Whatever set of emission factors a registrant chooses to 
use, it must identify the emission factors and its source.\517\
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    \515\ See EPA, Emission Factors for Greenhouse Gas Inventories 
(Apr. 2021), available at https://www.epa.gov/sites/default/files/2021-04/documents/emission-factors_apr2021.pdf.
    \516\ See, e.g., The Greenhouse Gas Protocol, GHG Emission 
Calculation Tool (Mar. 2021), available at https://ghgprotocol.org/calculation-tools.
    \517\ See proposed 17 CFR 229.1504(e)(1).
---------------------------------------------------------------------------

    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.\518\ Finally, a registrant would 
gather and report GHG emissions up to the corporate level.
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    \518\ See, e.g., GHG Protocol, Corporate Accounting and 
Reporting Standard, Chapter 6 (providing an overview of calculation 
tools by type of source (e.g., for stationary combustion, mobile 
combustion, and air conditioning and refrigeration use) and by 
sector (e.g., for aluminum production, iron and steel production, 
cement manufacturing, and pulp and paper production), which are 
available on the GHG Protocol website at https://ghgprotocol.org/. 
The EPA also has published a Simplified GHG Emissions Calculator 
that is designed as a simplified calculation tool to help small 
businesses and low emitter organizations estimate and inventory 
their annual GHG emissions. See EPA, Simplified GHG Emissions 
Calculator (2021), available at https://www.epa.gov/climateleadership/simplified-ghg-emissions-calculator.
---------------------------------------------------------------------------

    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 CO2e. 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 CO2e 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.\519\
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    \519\ As noted earlier, a registrant that is required to report 
its direct emissions to the EPA may be able to use the EPA-provided 
data, together with data for any direct emissions not reported to 
the EPA, to help fulfill the Commission's proposed Scope 1 emission 
disclosure requirement.
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    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.\520\ 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.\521\ 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.\522\ 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.\523\ The 
registrant would then calculate the amount of CO2e from 
purchased steam/heat, if any, by applying the appropriate emission 
factor for that type of energy source to the total amount 
consumed.\524\ The registrant would report the sum of its 
CO2e from purchased electricity and steam/heat as its total 
Scope 2 emissions for the fiscal year.
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    \520\ See World Resources Institute, GHG Protocol Scope 2 
Guidance (2015), Chapter 4, available at https://ghgprotocol.org/sites/default/files/standards/Scope%202%20Guidance_Final_Sept26.pdf.
    \521\ See id.
    \522\ We note that, pursuant to the GHG Protocol, and as 
referenced by the EPA, a company that determines its Scope 2 
emissions using a market-based approach would also calculate those 
emissions using the location-based method to provide a more complete 
picture of the company's Scope 2 emissions. See World Resources 
Institute, GHG Protocol Scope 2 Guidance, Chapter 7; and EPA Center 
for Corporate Climate Leadership, Scope 1 and Scope 2 Inventory 
Guidance.
    \523\ See, e.g., EPA, Emission Factors for Greenhouse Gas 
Inventories, Table 6, which provides emission factors for regional 
electrical grids.
    \524\ See, e.g., EPA, Emission Factors for Greenhouse Gas 
Inventories, Table 7, which provides emission factors for steam and 
heat.
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    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.\525\ 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

[[Page 21387]]

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.
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    \525\ See proposed 17 CFR 229.1504(e)(1).
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    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.\526\ 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.\527\ 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.\528\
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    \526\ See PCAF, Global GHG Accounting & Reporting Standard for 
the Financial Industry (2020), available at https://carbonaccountingfinancials.com/files/downloads/PCAF-Global-GHG-Standard.pdf.
    \527\ See id. See also GHG Protocol Press Release, New Standard 
Developed to Help Financial Industry Measure and Report Emissions 
(Mar. 2021), available at https://ghgprotocol.org/blog/new-standard-developed-help-financial-industry-measure-and-report-emissions.
    \528\ While the guidance provided by the PCAF Standard for each 
asset class differs in certain respects, the PCAF Standard applies a 
common set of principles across the various asset classes. A key 
principle is that the GHG emissions from a client's activities 
financed by loans or investments attributable to the reporting 
financial institution should be allocated to that institution based 
on its proportional share of lending or investment in the borrower 
or investee through the application of an ``attribution factor.'' 
See PCAF, Global GHG Accounting & Reporting Standard for the 
Financial Industry (2020), Sections 4.2 and 5.
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    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.\529\ 
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.
---------------------------------------------------------------------------

    \529\ See proposed 17 CFR 229.1504(e)(4).
---------------------------------------------------------------------------

    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.\530\ 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.\531\ 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.\532\
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    \530\ See, e.g., letters from Cisco; Dow; Energy Infrastructure 
Council; National Mining Association; Newmont Corporation; and 
United Airlines Holdings, Inc.
    \531\ See proposed 17 CFR 229.1504(e)(4)(i). One commenter made 
a similar recommendation when stating that a registrant should be 
required to follow the same timeline for disclosure of its GHG 
emissions as for its Exchange Act annual reporting obligations. See 
letter from Pricewaterhouse Coopers.
    \532\ See supra note 530.
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    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.\533\ 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.\534\ 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.
---------------------------------------------------------------------------

    \533\ See proposed 17 CFR 229.1504(e)(5).
    \534\ See id.
---------------------------------------------------------------------------

    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.\535\ 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).
---------------------------------------------------------------------------

    \535\ See proposed 17 CFR 229.1504(e)(6).
---------------------------------------------------------------------------

    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.\536\ 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

[[Page 21388]]

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.\537\ 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.
---------------------------------------------------------------------------

    \536\ See proposed 17 CFR 229.1504(e)(7).
    \537\ See id.
---------------------------------------------------------------------------

    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.\538\ 
This proposed approach, which is consistent with the GHG Protocol,\539\ 
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.
---------------------------------------------------------------------------

    \538\ See proposed 17 CFR 229.1504(e)(8).
    \539\ See Greenhouse Gas Protocol, Corporate Value Chain (Scope 
3) Accounting and Reporting Standard, Supplement to the GHG Protocol 
Corporate Accounting and Reporting Standard, Chapter 6.
---------------------------------------------------------------------------

    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.\540\ 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.
---------------------------------------------------------------------------

    \540\ See proposed 17 CFR 229.1504(e)(9).
---------------------------------------------------------------------------

    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.\541\ 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.
---------------------------------------------------------------------------

    \541\ See proposed 17 CFR 229.1504(e)(4)(ii).
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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

[[Page 21389]]

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

[[Page 21390]]

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.\542\ 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.
---------------------------------------------------------------------------

    \542\ See, e.g., letter from Dimensional Fund Advisors; see also 
supra note 422.
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    Depending on the size and complexity of a company and its value 
chain, the task of calculating Scope 3 emissions could be 
challenging.\543\ 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,\544\ 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.\545\ 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.
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    \543\ While there may be less challenging approaches, such as 
using industry averages or proxies for activity data (such as 
economic data), the result may be less accurate and could obscure 
the impact of choices that companies may make to reduce their Scope 
3 emissions. For example, if a company uses industry averages to 
calculate Scope 3 emissions from shipping its products, it may have 
difficulty communicating to investors how its selection of a 
shipping company that runs on lower emissions fuel or picks more 
efficient routes has lowered its Scope 3 emissions.
    \544\ See, e.g., Apple, Environmental Social Governance Report 
(2021), available at https://s2.q4cdn.com/470004039/files/doc_downloads/2021/08/2021_Apple_ESG_Report.pdf (stating that Apple 
works with its suppliers to help address Apple's environmental 
commitments, such as becoming carbon neutral by 2030 across its 
entire product footprint).
    \545\ See, e.g., PCAF, The Global GHG Accounting and Reporting 
Standard for the Financial Industry. In addition, the American 
Petroleum Institute has developed an overview of Scope 3 
methodologies to inform oil and gas companies about Scope 3 
estimation approaches. See API and IPIECA, Estimating petroleum 
industry value chain (Scope 3) greenhouse gas emissions, available 
at https://www.api.org/~/media/Files/EHS/climate-change/Scope-3-
emissions-reporting-guidance-2016.pdf. Finally, an initiative 
launched by food and beverage companies, Danone and Mars, together 
with the Science Based Targets Initiative, aims to provide Scope 3 
guidance to companies in difference industries, starting with the 
food and beverage industry. See SB, Serious About Scope 3: 
Pioneering Companies Embracing Complexity, Reaping the Benefits, 
available at https://sustainablebrands.com/read/supply-chain/serious-about-scope-3-pioneering-companies-embracing-complexity-reaping-the-benefits.
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    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; \546\
---------------------------------------------------------------------------

    \546\ See 17 CFR 229.1504(f).
---------------------------------------------------------------------------

     An exemption for smaller reporting companies (``SRCs'') 
from the Scope 3 emissions disclosure provision; \547\ and
---------------------------------------------------------------------------

    \547\ See proposed 17 CFR 229.1504(c)(3).
---------------------------------------------------------------------------

     A delayed compliance date for Scope 3 emissions 
disclosure.\548\
---------------------------------------------------------------------------

    \548\ See infra Section II.M.
---------------------------------------------------------------------------

    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.\549\ 
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),\550\ or forward-looking statements generally.\551\ 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.\552\
---------------------------------------------------------------------------

    \549\ See, e.g., letters from ACCO Brands Corp.; American 
Bankers Association; American Petroleum Institute; American Property 
Casualty Insurance Association; Associated General Contractors of 
America; Bank of America Corporation; Biotechnology Innovation 
Organization; ConocoPhillips; Delta Airlines, Inc. (June 16, 2021); 
Deutsches Bank AG; Dow; Enbridge Inc.; Energy Infrastructure 
Council; Etsy, Inc.; Freeport-McMoran; KPMG LLP; Managed Funds 
Association; Nacco Industries; National Investor Relations 
Institute; National Ocean Industries Association; Neuberger Berman; 
NIRI Los Angeles; Oshkosh Corporation; Salesforce.com; SASB; SIFMA 
(June 10, 2021); Society for Corporate Governance; United Airlines 
Holdings, Inc. (June 11, 2021); and Wachtell Rosen Lipton & Katz.
    \550\ See, e.g., letters from Business Council for Sustainable 
Energy; Dimensional Fund Advisors; and Independent Community Bankers 
of America.
    \551\ See, e.g., letters from AICPA; BlackRock; Center for 
Climate and Energy Solutions; Crowe LLP; Energy Strategy Coalition; 
Institute of Management Accountants; Japanese Bankers Association; 
Nareit; National Mining Association; and Newmont Corporation.
    \552\ See, e.g., letters from Dimensional Fund Advisors; and 
International Capital Markets Association (June 15, 2021).
---------------------------------------------------------------------------

    While we are not proposing a broad safe harbor for all climate-
related disclosures, many of which are similar

[[Page 21391]]

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.\553\ 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.\554\ 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.\555\ 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.
---------------------------------------------------------------------------

    \553\ See proposed 17 CFR 229.1504(f)(1).
    \554\ See proposed 17 CFR 229.1504(f)(2).
    \555\ See proposed 17 CFR 229.1504(f)(3). This definition is 
based on the definition of fraudulent statement in 17 CFR 230.175.
---------------------------------------------------------------------------

    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.\556\ Several commenters recommended that the Commission phase-in 
or scale down the climate-related disclosure requirements for smaller 
registrants.\557\
---------------------------------------------------------------------------

    \556\ See, e.g., letters from Elisha Doerr (May 24, 2021); 
Freedomworks Foundation (June 14, 2021); Roger Hawkins (May 24, 
2021); and Jonathan Skee (May 26, 2021).
    \557\ See, e.g., letters from American Bankers Association (June 
11, 2021); Biotechnology Innovation Organization (June 15, 2021); 
BNP Paribas; Cardano Risk Management Ltd.; Catavento Consultancy; 
Chamber of Commerce (June 11, 2021); Credit Roundtable (June 11, 
2021); Douglas Hileman Consulting; Environmental Bankers Association 
(June 9, 2021); Grant Thornton; Virginia Harper Ho; Manulife 
Investment Management; Mirova US; Morrison & Foerster; NEI 
Investments (June 11, 2021); New York State Society of Certified 
Public Accountants; PIMCO; and SIFMA.
---------------------------------------------------------------------------

    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.\558\ 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.
---------------------------------------------------------------------------

    \558\ See proposed 17 CFR 229.1504(c)(3). We also are proposing 
a later compliance date for SRCs. See infra Section II.M.
---------------------------------------------------------------------------

    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.\559\ 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.\560\
---------------------------------------------------------------------------

    \559\ See 17 CFR 230.409 and 17 CFR 240.12b-21.
    \560\ See id. We expect, however, that a registrant that 
requires emissions data from another registrant in its value chain 
would be able to obtain that data without unreasonable effort or 
expense because of the increased availability of Scopes 1 and 2 
emissions data for registrants following the effectiveness of the 
proposed rules.
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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

[[Page 21392]]

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 \561\ and to provide 
certain related disclosures about the service provider.\562\ 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:\563\
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    \561\ See proposed 17 CFR 229.1505(a). In order to attest to the 
Scopes 1 and 2 emissions disclosure, we believe a GHG emissions 
attestation provider would need to include in its evaluation 
relevant contextual information. In particular, the attestation 
provider would be required to evaluate the registrant's compliance 
with (i) proposed Item 1504(a), which includes presentation 
requirements (e.g., disaggregation by each constituent greenhouse 
gas), (ii) the calculation instructions included in proposed Item 
1504(b), and (iii) the disclosure requirements in proposed Item 
1504(e) regarding methodology, organizational boundary, and 
operational boundary. See infra Section II.H.3 for further 
discussion of the criteria against which the Scopes 1 and 2 
emissions disclosure are measured or evaluated.
    \562\ See proposed 17 CFR 229.1505(d).
    \563\ See proposed 17 CFR 229.1505(a)(1).

------------------------------------------------------------------------
             Limited assurance                  Reasonable  assurance
------------------------------------------------------------------------
Fiscal Years 2 and 3 after Scopes 1 and 2   Fiscal Years 4 and beyond
 emissions disclosure compliance date.       after Scopes 1 and 2
                                             emissions disclosure
                                             compliance date.
------------------------------------------------------------------------

    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:

----------------------------------------------------------------------------------------------------------------
                                          Scopes 1 and 2 GHG
              Filer type                disclosure compliance      Limited assurance       Reasonable assurance
                                                date *
----------------------------------------------------------------------------------------------------------------
Accelerated Filer....................  Fiscal year 2024 (filed  Fiscal year 2025 (filed  Fiscal year 2027 (filed
                                        in 2025).                in 2026).                in 2028).
Large Accelerated Filer..............  Fiscal year 2023 (filed  Fiscal year 2024 (filed  Fiscal year 2026 (filed
                                        in 2024).                in 2025).                in 2027).
----------------------------------------------------------------------------------------------------------------
* See infra Section II.M for a discussion of the proposed disclosure compliance dates for Scopes 1 and 2 GHG
  emissions disclosure. If the accelerated filer or the large accelerated filer has a non-calendar-year fiscal
  year-end date that results in its 2024 or 2023 fiscal year, respectively, commencing before the compliance
  dates of the rules, it would not be required to comply with proposed GHG emissions disclosure requirements
  until the following fiscal year (as discussed below in Section II.M). Accordingly, for such filers, the time
  period for compliance with the corresponding attestation requirements under proposed Item 1505 would be one
  year later than illustrated above.

    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.\564\ 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.\565\
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    \564\ Reasonable assurance is equivalent to the level of 
assurance provided in an audit of a registrant's consolidated 
financial statements included in a Form 10-K. Limited assurance is 
equivalent to the level of assurance (commonly referred to as a 
``review'') provided over a registrant's interim financial 
statements included in a Form 10-Q.
    \565\ We refer to ``assurance'' broadly when describing the 
level and scope of assurance to which climate-related disclosures 
should be subject. Our proposed approach to assurance has been 
guided by ``attestation'' standards published by organizations 
including the PCAOB, AICPA, and the International Auditing and 
Assurance Standards Board (``IAASB''). Such attestation standards 
apply to engagements other than audit and review of historical 
financial statements and have been widely used in the current 
voluntary ESG and GHG assurance market for a number of years.
---------------------------------------------------------------------------

    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.\566\ 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).
---------------------------------------------------------------------------

    \566\ See proposed 17 CFR 229.1505(a)(2). If the accelerated 
filer or large accelerated filer was required to obtain reasonable 
assurance over its Scope 1 and Scope 2 emissions disclosures and the 
attestation provider chose to follow, for example, the AICPA 
attestation standards, the accelerated filer or large accelerated 
filer could voluntarily obtain limited assurance over its GHG 
intensity metric or Scope 3 emissions disclosures, and the 
attestation provider would be required to follow the AICPA's 
attestation standard for providing limited assurance.
---------------------------------------------------------------------------

    Many commenters recommended that we require climate-related 
disclosures to be subject to some level of assurance to enhance the 
reliability of the disclosures.\567\ Commenters noted that companies 
are increasingly seeking some type of third-party assurance or

[[Page 21393]]

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.\568\ Several commenters 
recommended that we require climate-related disclosures to be subject 
to limited assurance,\569\ 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.\570\
---------------------------------------------------------------------------

    \567\ See, e.g., letters from AICPA; Americans for Financial 
Reform Education Fund et al; Andrew Behar; Baillie Gifford; Carbon 
Tracker Initiative; Cardano Risk Management Ltd.; CDP; Center for 
American Progress; Center for Audit Quality; Ceres et al.; Climate 
Disclosure Standards Board; Climate Governance Initiative; 
Emmanuelle Haack; Eni SpA; ERM CVS (recommending limited assurance); 
George Serafeim; Regenerative Crisis Response Committee; Friends of 
the Earth, Amazon Watch, and Rainforest Action Network; Hermes 
Equity Ownership Limited; Impax Asset Management; Institutional 
Shareholder Services; Interfaith Center on Corporate Responsibility 
(recommending reasonable assurance); International Corporate 
Governance Institute; International Organization for 
Standardization; Morningstar, Inc.; Natural Resources Defense 
Council; NY City Comptroller; NY State Comptroller; Oxfam America; 
PRI ; Pricewaterhouse Coopers; Revolving Door Project; TotalEnergies 
(recommending limited assurance); Value Balancing Alliance; WBCSD; 
William and Flora Hewlett Foundation; and World Benchmarking 
Alliance.
    \568\ See letter from CAQ; see also CAQ, S&P 500 and ESG 
Reporting (Aug. 9, 2021), available at https://www.thecaq.org/sp-500-and-esg-reporting/ (stating that more than half of S&P 500 
companies had some form of assurance or verification over ESG 
metrics, including GHG emissions metrics).
    \569\ See, e.g., letters from Credit Suisse; ERM CVS; PayPal 
Holdings, Inc.; TotalEnergies; and Walmart.
    \570\ See letter from Energy Infrastructure Council; see also 
CAQ, S&P 500 and ESG Reporting (Aug. 9, 2021).
---------------------------------------------------------------------------

    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.\571\ 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.\572\ 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.\573\ Other commenters 
recommended that we require climate-related disclosures to be audited 
at the reasonable assurance level.\574\
---------------------------------------------------------------------------

    \571\ See letter from PayPal Holdings, Inc.
    \572\ See letter from CAQ.
    \573\ See letter from Credit Suisse.
    \574\ See, e.g., letters from Ceres et al.; and Interfaith 
Center on Corporate Responsibility.
---------------------------------------------------------------------------

    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.\575\ 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.\576\
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    \575\ See, e.g., letters from American Petroleum Institute; 
Investment Company Institute; and National Association of 
Manufacturers.
    \576\ See, e.g., letters from American Petroleum Institute; and 
Investment Company Institute. We agree that registrants should 
develop their DCP to include their GHG emissions disclosures. When 
the proposed GHG emissions disclosures are included in Form 10-K and 
Form 20-F annual reports, our rules governing DCP would apply to 
those disclosures. See 17 CFR 240.13a-15 and 240.15d-15.
---------------------------------------------------------------------------

    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.\577\
---------------------------------------------------------------------------

    \577\ See 17 CFR 229.1302 (requiring a registrant's disclosure 
of exploration results, mineral resources, or mineral reserves to be 
based on and accurately reflect information and supporting 
documentation prepared by a qualified person, which, pursuant to 17 
CFR 229.1300, is defined to mean a mineral industry professional 
with at least five years of relevant experience in the type of 
mineralization and type of deposit under consideration who meets 
certain additional criteria); and 17 CFR 229.1202(a)(7) (requiring a 
registrant to disclose the qualifications of the technical person 
primarily responsible for overseeing the preparation of the oil and 
gas reserves estimates or reserves audit).
---------------------------------------------------------------------------

    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.\578\ 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.\579\ 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.\580\ 
Accordingly, to enhance its reliability, we believe it is appropriate 
to require that GHG emissions disclosure be subject to third-party 
attestation.
---------------------------------------------------------------------------

    \578\ See PCAOB AS 2710 Other Information in Documents 
Containing Audited Financial Statements (requiring an auditor to 
read the other information (included in an annual report with the 
audited financial statements) and consider whether such information, 
or the manner of its presentation, is materially inconsistent with 
information, or the manner of its presentation, appearing in the 
financial statements). For example, disclosure pursuant to 17 CFR 
229.303 (Item 303 of Regulation S-K--MD&A) is derived in part from 
the same books and records that are subject to ICFR and used to 
generate a registrant's audited financial statements and 
accompanying notes (e.g., the liquidity and capital resources 
disclosures are anchored to the audited cash flows information 
disclosed in the financial statements).
    \579\ Although GHG emission disclosure would generally not be 
directly derived 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, GHG emission 
disclosure, as proposed, would be required to use the same 
organizational and operational boundaries as the registrant's 
financial statement disclosures. See proposed 17 CFR 229.1504(e)(2).
    \580\ See Modernization of Property Disclosures for Mining 
Registrants, Release No. 33-10570 (Oct. 31, 2018), [83 FR 66344 
(Dec. 26, 2018)].
---------------------------------------------------------------------------

    For similar reasons, we also considered proposing to require that 
management assess and disclose the effectiveness of controls over GHG

[[Page 21394]]

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.\581\ Relatedly, studies suggest that investors have greater 
confidence in information that has been assured, particularly when it 
is assured at the reasonable assurance level.\582\ Although a limited 
assurance engagement provides a lower level of assurance than a 
reasonable assurance engagement,\583\ 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.\584\ 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.\585\
---------------------------------------------------------------------------

    \581\ See Qualifications of Accountants, Release No. 33-10876 
(Oct. 16, 2020) [85 FR 80508 (Dec. 11, 2020)], at 80508. See also 
Statement of Paul Munter, Acting Chief Accountant, The Importance of 
High Quality Independent Audits and Effective Audit Committee 
Oversight to High Quality Financial Reporting to Investors (Oct. 26, 
2021), available at https://www.sec.gov/news/statement/munter-audit-2021/10/26.
    \582\ See, e.g., Carol Callaway Dee, et al., Client Stock Market 
Reaction to PCAOB Sanctions against a Big Four Auditor, 28 Contemp. 
Acct. Res. 263 (Spring 2011) (``Audits are valued by investors 
because they assure the reliability of and reduce the uncertainty 
associated with financial statements.''); Center for Audit Quality, 
2019 Main Street Investor Survey (``[I]nvestors continue to register 
high degrees of confidence in the ability of public company auditors 
to fulfill their investor-protection roles. Eighty-three percent of 
US retail investors view auditors as effective in their investor-
protection role within the US capital markets, up from 81% in 2018); 
and CFA Institute, CFA Institute Member Survey Report--Audit Value, 
Quality, and Priorities (2018).
    \583\ See infra note 604 for a discussion of the key differences 
between limited and reasonable assurance engagements.
    \584\ See, e.g., Ryan J. Casey, et al., Understanding and 
Contributing to the Enigma of Corporate Social Responsibility (CSR) 
Assurance in the United States, 34 Auditing: A Journal of Practice 
and Theory 97, 122 (Feb. 2015) (finding that corporate social 
responsibility (``CSR'') assurance results in lower cost-of-capital 
along with lower analyst forecast errors and dispersion, and that 
financial analysts find related CSR reports to be more credible when 
independently assured). See also infra note 592 for statistics 
illustrating that limited assurance is more commonly obtained 
voluntarily in the current market than reasonable assurance over 
ESG-related information.
    \585\ See, e.g., letter from Institute for Policy Integrity, 
Environmental Defense Fund, Initiative on Climate Risk & Resilience 
Law (``Voluntary frameworks typically lack independent auditing 
requirements, which is one reason many investors perceive current 
disclosures to be unreliable or uneven.''). See also EVORA Global 
and SIERA, Investor Survey 2021: Part 2 ESG Data Challenge (2021), 
7, available at https://evoraglobal.com/wp-content/uploads/2021/12/ESG-Data-Challenge-Investor-Survey-Part-2.pdf (``Investors are 
integrating ESG across the investment lifecycle, for the purposes of 
strategy, reporting, peer benchmarking, etc., however the majority 
(86%) are not sure of their ESG data quality. About 52% of the 
investors consider that their ESG data is partially investment-
grade.''); State Street Global Advisors, The ESG Data Challenge 
(Mar. 2019), available at https://www.ssga.com/investment-topics/environmental-social-governance/2019/03/esg-data-challenge.pdf.
---------------------------------------------------------------------------

    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.\586\ 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.\587\ 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.
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    \586\ See CAQ, S&P 500 and ESG Reporting (Aug. 9, 2021).
    \587\ See KPMG, The KPMG Survey of Sustainability Reporting 
2020, available at https://home.kpmg/xx/en/home/insights/2020/11/the-time-has-come-survey-of-sustainability-reporting.html.
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    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,\588\ 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.'' 
\589\ 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

[[Page 21395]]

developed by accreditation bodies with notice and public comment and 
other robust due process procedures \590\ for standard setting, while 
other service providers may use privately developed ``verification'' 
standards.\591\
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    \588\ International Federation of Accountants, The State of Play 
in Sustainability Assurance (June 23, 2021), available at https://www.ifac.org/knowledge-gateway/contributing-global-economy/discussion/state-play-sustainability-assurance; Lawrence Heim, 
International Federation of Accountants, IFAC: Poor ESG Assurance an 
``Emerging Financial Stability Risk'' (July 1, 2021), available at 
https://practicalesg.com/2021/07/ifac-poor-esg-assurance-an-emerging-financial-stability-risk/.
    \589\ IOSCO, Report on Sustainability-related Issuer Disclosures 
(June 2021).
    \590\ See infra Section II.H.3.
    \591\ See, e.g., CAQ, S&P 500 and ESG Reporting (Aug. 9, 2021) 
(pointing to the use of assurance methodologies developed by 
individual service providers, which in some cases were based on 
IAASB International Standard on Assurance Engagements (ISAE) 3000 
with modifications).
---------------------------------------------------------------------------

    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.\592\ Furthermore, larger issuers generally bear 
proportionately lower compliance costs than smaller issuers due to the 
fixed cost components of such compliance.\593\
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    \592\ See, e.g., CAQ, S&P 500 and ESG Reporting (Aug. 9, 2021) 
(providing statistics on limited assurance versus reasonable 
assurance obtained voluntarily in the current market (e.g., at least 
26 of 31 companies that obtained assurance from public company 
auditors obtained limited assurance; at least 174 of 235 companies 
that obtained assurance or verification from other service providers 
(non-public company auditors) obtained limited assurance)). For 
similar information on the S&P 100, see CAQ, S&P 100 and ESG 
Reporting (Apr. 29, 2021), available at https://www.thecaq.org/sp-100-and-esg-reporting/. Based on an analysis by Commission staff on 
Mar. 3, 2022, a substantial number of the S&P 500 companies (460+) 
are large accelerated filers and therefore would be subject to the 
proposed assurance requirements.
    \593\ See infra note 955 in Section IV.C of the Economic 
Analysis for further discussion on proportionate costs between 
different types of filers.
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    The proposed transition periods would also provide existing 
accelerated filers and large accelerated filers one fiscal year to 
transition to limited assurance \594\ and two additional fiscal years 
to transition to reasonable assurance.\595\ 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.
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    \594\ See infra note 604 for a discussion of the key differences 
between limited and reasonable assurance engagements.
    \595\ By limiting the assurance requirements to accelerated 
filers and large accelerated filers, a new registrant would not be 
required to provide assurance until it has been subject to the 
requirements of Section 13(a) or 15(d) of the Exchange Act for a 
period of at least twelve calendar months and it has filed at least 
one annual report pursuant to Section 13(a) or 15(d) of the Exchange 
Act. See 17 CFR 240.12b-2. Therefore, no registrant would be 
required to provide assurance covering its GHG emissions disclosure 
during an initial public offering. However, any registrant that 
voluntarily includes an attestation report for GHG emissions 
disclosure would be required to comply with proposed Item 1505(e).
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    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

[[Page 21396]]

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),\596\ 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.\597\ 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.
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    \596\ For specific examples, see, e.g., Etsy, Inc. FY 2021 Form 
10-K, available at https://s22.q4cdn.com/941741262/files/doc_financials/2021/q4/ETSY-12.31.2021-10K.pdf (external third-party 
attestation report available at https://s22.q4cdn.com/941741262/files/doc_financials/2021/q4/PwC/Limited-Assurance-Report-Assertion-Etsy-FY21_2.24.22_final-signed_final.pdf); Johnson Controls 
International plc 2021 Sustainability Report, available at https://www.johnsoncontrols.com/2021sustainability (external third-party 
verification report available at https://www.johnsoncontrols.com/-/media/jci/corporate-sustainability/reporting-and-policies/gri/2020/ghg-jci-fy-2020-verification-statement.pdf); Norfolk Southern 
Corporation 2021 GHG Emissions Report, available at http://www.nscorp.com/content/dam/nscorp/get-to-know-ns/about-ns/environment/2020-GHG-Emissions-Report.pdf; Koninklijke Philips NV 
(Royal Philips) Annual Report 2021, at 269, available at https://www.results.philips.com/publications/ar21/downloads/pdf/en/Philips/English.pdf?v=20220225104533; Starbucks Coffee Company FY 2020 GHG 
emissions inventory assurance report, at 2, available at https://stories.starbucks.com/uploads/2021/04/StaFY20/Third-Party-Independent-Verification-and-Assurance-Reports.pdf; and Vornado 
Realty Trust FY 2020 ESG report, available at https://books.vno.com/books/idpn/#p=1. See also supra note 592 for S&P 100 and S&P 500 
related statistics.
    \597\ See supra Section II.G.3 for further discussion of the 
unique challenges presented by the disclosure of Scope 3 emissions.
---------------------------------------------------------------------------

    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).\598\ In such engagements, the conclusion is 
expressed in the form of negative assurance regarding whether any 
material misstatements have been identified.\599\ 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.\600\
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    \598\ See, e.g., AICPA's Statement on Standards for Attestation 
Engagements (SSAE) No.22, AT-C Section 210.
    \599\ See infra Section II.H.3 for further discussion of the 
attestation report requirements, including the difference between a 
conclusion and an opinion.
    \600\ See, e.g., AICPA SSAE No. 21, AT-C Sections 205 and 206.
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    Reasonable assurance is feasible whenever limited assurance can be 
provided on a subject,\601\ and as noted above the voluntary 
attestation obtained by some registrants has been at the reasonable 
assurance level.\602\ We understand, however, that a limited assurance 
engagement is less extensive and is currently the level of assurance 
most commonly provided \603\ in the voluntary assurance market for 
climate-related disclosure.\604\ 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.\605\ 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.
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    \601\ Under commonly used attestation standards, both a 
reasonable assurance engagement and a limited assurance engagement 
have the same requirement that the subject matter (e.g., Scope 1 and 
Scope 2 emissions) of the engagement be appropriate as a 
precondition for providing assurance. Thus, if the subject matter is 
appropriate for a limited assurance engagement, it is also 
appropriate for a reasonable assurance engagement. See AICPA SSAE 
No. 18 (Apr. 2016); and IAASB ISAE 3000 (Revised) (Dec. 2013).
    \602\ For example, some registrants have voluntarily sought 
reasonable assurance over certain information, including Scopes 1, 
2, and 3 emissions, for which others have voluntarily sought limited 
assurance. See, e.g., Apple, Inc. Environmental Progress Report 
(Mar. 2021), at 88-90, available at https://www.apple.com/environment/pdf/Apple_Environmental_Progress_Report_2021.pdf; United 
Parcel Service, Inc. (UPS) FY 2020 GRI Content Index, at 72, 
available at https://about.ups.com/content/dam/upsstories/assets/reporting/sustainability-2021/2020_UPS_GRI_Content_Index_081921v2.pdf; and Guess?, Inc. FY2020-
2021 Sustainability Report, at 91, available at https://static1.squarespace.com/static/609c10ed49db5202181d673f/t/6faf8af82418f5da4778f6f/1627060411937/GUESS+FY20-21+Sustainability+Report.pdf.
    \603\ See supra note 592 (providing statistics on limited 
assurance obtained voluntarily in the current market).
    \604\ The scope of work in a limited assurance engagement is 
substantially less than a reasonable assurance engagement. The 
primary difference between the two levels of assurance relates to 
the nature, timing, and extent of procedures required to obtain 
sufficient, appropriate evidence to support the limited assurance 
conclusion or reasonable assurance opinion. Limited assurance 
engagements primarily include procedures such as inquiries and 
analytical procedures and do not necessarily include a consideration 
of whether internal controls have been effectively designed, whereas 
reasonable assurance engagements require the assurance service 
provider to consider and obtain an understanding of internal 
controls. More extensive testing procedures beyond inquiries and 
analytical procedures, including recalculation and verification of 
data inputs, are also required in reasonable assurance engagements, 
such as inspecting source documents that support transactions 
selected on a sample basis. Driven by these differences, the cost of 
limited assurance is generally lower than that of reasonable 
assurance.
    \605\ See letters from CAQ and Energy Infrastructure Council; 
supra note 592 (providing statistics on voluntary assurance obtained 
by S&P 100 and S&P 500 companies).
---------------------------------------------------------------------------

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

[[Page 21397]]

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?\606\ 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,\607\ which includes a separate determination for 
initial registration statements, but using higher public float and 
annual revenue amounts?
---------------------------------------------------------------------------

    \606\ See 17 CFR 230.405 (defining ``well-known seasoned 
issuer'').
    \607\ See, e.g., 17 CFR 240.12b-2.
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    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

[[Page 21398]]

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.\608\ The proposed rules would define a GHG 
emissions attestation provider to mean a person or a firm that has all 
of the following characteristics:
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    \608\ See proposed 17 CFR 229.1505(b).
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     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.\609\
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    \609\ See proposed 17 CFR 229.1505(b)(1).
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     Is independent with respect to the registrant, and any of 
its affiliates,\610\ for whom it is providing the attestation report, 
during the attestation and professional engagement period.\611\
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    \610\ ``Affiliates,'' for purposes of proposed 17 CFR 229.1505 
has the meaning provided in 17 CFR 210.2-01, except references to 
``audit'' are deemed to be references to the attestation services 
provided pursuant to this section. See proposed 17 CFR 
229.1505(b)(2)(iii).
    \611\ See proposed 17 CFR 229.1505(b)(2) and 229.1505(b)(2)(iv) 
(defining the term ``attestation and professional engagement 
period'').
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    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

[[Page 21399]]

specialists, if needed.\612\ The proposed expertise requirement would 
apply to the person or the firm signing the GHG emissions attestation 
report.\613\
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    \612\ Independent auditors and accountants are already required 
to comply with similar quality control and management standards when 
providing audit and attest services under the PCAOB, AICPA, or IAASB 
standards. See, e.g., PCAOB, Quality Control (QC) Standards Section 
20 System of Quality Control for a CPA Firm's Accounting and 
Auditing Practice and Section 40 The Personnel Management Element of 
a Firm's System of Quality Control--Competencies Required by a 
Practitioner-in-Charge of an Attest Engagement, available at https://pcaobus.org/oversight/standards/qc-standards; AICPA, QC Section 10, 
A Firm's System of Quality Control, available at https://us.aicpa.org/content/dam/aicpa/research/standards/auditattest//qc-00010.pdf; and IAASB, International Standard on Quality Management 
1, Quality Management for Firms that Perform Audits or Reviews of 
Financial Statements, or Other Assurance or Related Services 
Engagements, available at https://www.ifac.org/system/files/publications/files/IAASB-Quality-Management-ISQM-1-Quality-Management-for-Firms.pdf.
    \613\ We have adopted similar expertise requirements in the past 
to determine eligibility to prepare a mining technical report. 
Although also relating to technical, specialized disclosures, the 
mining technical report requirements differ in that such an 
engagement is not an assurance engagement. See Modernization of 
Property Disclosures for Mining Registrants, Release No. 33-10570 
(Oct. 31, 2018), [83 FR 66344 (Dec. 26, 2018)].
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    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.\614\ 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.
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    \614\ See Mark Defond & Jieying Zhang, A Review of Archival 
Auditing Research, 58 J. Acct. & Econ., 275 (2014); Qualifications 
of Accountants, Release No. 33-10876 (Oct. 16, 2020) [85 FR 80508 
(Dec. 11, 2020)], at 80508 (``The Commission has long recognized 
that an audit by an objective, impartial, and skilled professional 
contributes to both investor protection and investor confidence''). 
See also Statement of Paul Munter, Acting Chief Accountant, The 
Importance of High Quality Independent Audits and Effective Audit 
Committee Oversight to High Quality Financial Reporting to Investors 
(Oct. 26, 2021).
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    Similar to Rule 2-01 of Regulation S-X,\615\ 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.\616\ 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.\617\
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    \615\ See 17 CFR 210.2-01(b).
    \616\ See proposed 17 CFR 229.1505(b)(2)(i).
    \617\ See proposed 17 CFR 229.1505(b)(2)(iv).
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    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); \618\ and
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    \618\ See proposed 17 CFR 229.1505(b)(2)(ii)(A).
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     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.\619\
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    \619\ See proposed 17 CFR 229.1505(b)(2)(ii)(B).
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    These proposed provisions are modeled on the factors used by the 
Commission in determining whether an accountant is independent.\620\ 
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.
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    \620\ See 17 CFR 210.2-01. For the avoidance of doubt, we note 
that if the independent accountant who audits the registrant's 
consolidated financial statements is also engaged to perform the GHG 
emissions attestation for the same filing, the fees associated with 
the GHG emissions attestation engagement would be considered 
``Audit-Related Fees'' for purposes of Item 9(e) of 17 CFR 240.14a-
101, Item 14 of Form 10-K, Item 16C of Form 20-F, or any similar 
requirements.
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    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,\621\ the corresponding rule requiring the written consents of such 
experts,\622\ 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.\623\ 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.
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    \621\ 15 U.S.C. 77g.
    \622\ See 17 CFR 230.436.
    \623\ See 17 CFR 229.601(b)(23).
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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

[[Page 21400]]

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

[[Page 21401]]

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.\624\ 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.\625\ 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.
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    \624\ See proposed 17 CFR 229.1505(a)(2) and (c).
    \625\ See 17 CFR 240.13a-15(c) and 240.15d-15(c) (stating that 
the ``framework on which management's evaluation of the issuer's 
internal control over financial reporting is based must be a 
suitable, recognized control framework that is established by a body 
or group that has followed due-process procedures, including the 
broad distribution of the framework for public comment'').
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    In our view, the attestation standards, for example, of the 
PCAOB,\626\ AICPA,\627\ and IAASB \628\ 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.
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    \626\ See PCAOB AT Section 101, Attest Engagements, available at 
https://pcaobus.org/oversight/standards/attestation-standards/details/AT101.
    \627\ See AICPA SSAE No. 18 (general attestation standard), 
available at https://us.aicpa.org/content/dam/aicpa/research/standards/auditattest/downloadabledocuments/ssae-no-18.pdf; SSAE No. 
22, Review Engagements (limited assurance standard, effective for 
reports dated on or after June 15, 2022), available at https://us.aicpa.org/content/dam/aicpa/research/standards/auditattest/downloadabledocuments/ssae-22.pdf; and SSAE No. 21, Direct 
Examination Engagements (reasonable assurance standard, effective 
for reports dated on or after June 15, 2022 and will amend SSAE No. 
18), available at https://us.aicpa.org/content/dam/aicpa/research/standards/auditattest/downloadabledocuments/ssae-21.pdf.
    \628\ See IAASB ISAE 3000 (Revised), Assurance Engagements Other 
than Audits or Reviews of Historical Financial Information, 
available at https://www.ifac.org/system/files/publications/files/ISAE%203000%20Revised%20-%20for%20IAASB.pdf. See also IAASB ISAE 
3410, Assurance Engagements on Greenhouse Gas Statements, available 
at https://www.ifac.org/system/files/publications/files/Basis%20for%20Conclusions%20-%20ISAE%203410%20Assurance%20Engagements%20on%20Greenhouse%20Gas%20Statements-final_0.pdf.
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    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.\629\ 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).\630\
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    \629\ See, e.g., AICPA SSAE No. 22, AT-C Sec.  210.A16.
    \630\ See 15 U.S.C. 7262(b) (requiring a registered public 
accounting firm that prepares or issues an audit report for certain 
issuers to attest to, and report on, the assessment made by the 
management of the issuer with respect to internal controls).
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    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.\631\ 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.\632\ 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.
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    \631\ See proposed 17 CFR 229.1505(c).
    \632\ See proposed 17 CFR 229.1505(c)(1) through (13).
---------------------------------------------------------------------------

    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

[[Page 21402]]

reporting.\633\ 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,\634\ 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).
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    \633\ See proposed 17 CFR 229.1505(c)(1).
    \634\ See, e.g., AICPA SSAE No. 22, AT-C Sec.  210.45(c); AICPA 
SSAE No. 21, AT-C Sec.  205.63(c).
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    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.\635\ 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 \636\ 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.
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    \635\ See proposed 17 CFR 229.1505(c)(1).
    \636\ As previously mentioned, we are soliciting comment 
regarding whether the GHG emissions should be reported as of fiscal 
year-end or some other 12-month period. See supra Section II.G.1.
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    The proposed rules would also require the attestation report to 
identify the criteria against which the subject matter was measured or 
evaluated.\637\ 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.
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    \637\ See proposed 17 CFR 229.1505(c)(2).
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    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.\638\ 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.
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    \638\ See, e.g., AICPA SSAE No. 18, AT-C Sec.  105.A16 and .A42; 
AICPA SSAE No. 21, AT-C Sec.  105.A16 and .A44. In addition to 
relevance and completeness, the characteristics of suitable criteria 
under ISAE 3000.A23 include reliability, neutrality and 
understandability. Despite the differences in the characteristics 
listed, the underlying concepts and objectives are consistent.
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    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.\639\ 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.
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    \639\ See proposed 17 CFR 229.1505(c)(3).
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    The proposed rules would require the attestation report to include 
a statement that identifies the attestation standard (or standards) 
used.\640\ 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.\641\ 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.
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    \640\ See proposed 17 CFR 229.1505(c)(4).
    \641\ See proposed 17 CFR 229.1505(a)(2).
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    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.\642\ 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.\643\
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    \642\ See proposed 17 CFR 229.1505(c)(5).
    \643\ See, e.g., PCAOB AS 3101, par. 9(a).
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    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.\644\ 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

[[Page 21403]]

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.\645\ 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.\646\
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    \644\ See proposed 17 CFR 229.1505(c)(6).
    \645\ See, e.g., AICPA SSAE No.22, AT-C sec. 210.45(f).
    \646\ See, e.g., AICPA SSAE No. 21, AT-C sec. 205.63(f) and sec. 
206.12(e)(ii).
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    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).\647\ Because independence from 
the registrant, including its affiliates, would be a necessary 
qualification for the GHG emissions attestation provider,\648\ the 
attestation report would be required to include the attestation 
provider's confirmation of his or her compliance with the proposed 
independence requirement.
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    \647\ See proposed 17 CFR 229.1505(c)(7).
    \648\ See supra Section II.H.2.
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    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.\649\ 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.
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    \649\ See proposed 17 CFR 229.1505(c)(8).
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    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).\650\ 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.
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    \650\ See proposed 17 CFR 229.1505(c)(9).
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    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.\651\ 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.\652\ 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.\653\
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    \651\ See proposed 17 CFR 229.1505(c)(10).
    \652\ See, e.g., AICPA SSAE No. 22, AT-C sec. 210.45(l).
    \653\ See, e.g., AICPA SSAE No. 21 AT-C sec. 205.63(k) and sec. 
206.12(j).
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    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),\654\ the city and state where the 
attestation report has been issued,\655\ and the date of the 
report.\656\ 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.
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    \654\ See proposed 17 CFR 229.1505(c)(11).
    \655\ See proposed 17 CFR 229.1505(c)(12).
    \656\ See proposed 17 CFR 229.1505(c)(13).
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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

[[Page 21404]]

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.\657\ 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.\658\
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    \657\ See proposed 17 CFR 229.1505(d).
    \658\ See id.
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    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.\659\
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    \659\ See supra Section II.H.2.
---------------------------------------------------------------------------

    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,\660\ the registrant would be required to 
disclose in the filing, based on relevant information obtained from any 
GHG emissions attestation provider:
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    \660\ If an accelerated filer or a large accelerated filer 
voluntarily obtains assurance beyond what would be required by 
proposed Item 1505(a) and uses a different service provider for such 
assurance, it would also be required to provide the information 
required by proposed Item 1505(d) for such service provider.
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     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; \661\
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    \661\ See proposed 17 CFR 229.1505(d)(1).
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     Whether the GHG emissions attestation engagement is 
subject to any oversight inspection program, and if so, which program 
(or programs); \662\ and
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    \662\ See proposed 17 CFR 229.1505(d)(2).
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     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.\663\
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    \663\ See proposed 17 CFR 229.1505(d)(3).
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    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.\664\
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    \664\ For example, the AICPA imposes a minimum five-year 
documentation retention program for an audit. See AU-C 230.17. 
Although document retention is less prescriptive for attestation 
engagements, many attestation providers adhere to the five-year 
period in practice.
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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

[[Page 21405]]

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; \665\
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    \665\ See proposed 17 CFR 229.1505(e)(1).
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    (ii) Describe the assurance or verification standard used; \666\
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    \666\ See proposed 17 CFR 229.1505(e)(2).
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    (iii) Describe the level and scope of assurance or verification 
provided; \667\
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    \667\ See proposed 17 CFR 229.1505(e)(3).
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    (iv) Briefly describe the results of the assurance or verification; 
\668\
---------------------------------------------------------------------------

    \668\ See proposed 17 CFR 229.1505(e)(4).
---------------------------------------------------------------------------

    (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; \669\ 
and
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    \669\ See proposed 17 CFR 229.1505(e)(5).
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    (vi) Disclose any oversight inspection program to which the service 
provider is subject (e.g., the AICPA's peer review program).\670\
---------------------------------------------------------------------------

    \670\ See proposed 17 CFR 229.1505(e)(6).
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    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.\671\ 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.
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    \671\ See, e.g., letters from BNP Paribas; Eni SpA; ERM CVS; and 
Walmart. See also CAQ, S&P 500 and ESG Reporting.
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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.\672\ Those goals or targets 
might, for example, relate to the reduction of GHG emissions, or 
address energy usage,\673\ 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.
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    \672\ See proposed 17 CFR 229.1506(a)(1).
    \673\ For example, numerous companies have pledged to achieve 
100% of the electricity used in their global operations from 
renewable sources by 2050. See RE100, What are the requirements to 
become a RE100 member?, available at https://www.there100.org/technical-guidance.
---------------------------------------------------------------------------

    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.\674\ 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

[[Page 21406]]

reduction target by the end of 2020.\675\ 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.\676\ The proposed disclosure requirements 
are intended to elicit enhanced information about climate-related 
targets and goals so that investors can better evaluate these points.
---------------------------------------------------------------------------

    \674\ See, e.g., letters from Americans for Financial Reform 
Education Fund and Public Citizen; Center for Law and Social Policy; 
Domini Impact Investments; Dynamhex, Inc.; FAIRR Initiative; 
Generation Investment Management; Hannon Armstrong; HP, Inc.; 
Interfaith Center on Corporate Responsibility; NYC Office of 
Comptroller; Pre-Distribution Initiative; Regenerative Crisis 
Response Committee; and WK Associates.
    \675\ See supra note 66 (referencing The Wall Street Journal 
(Nov. 5, 2021)).
    \676\ See, e.g., Jocelyn Timperley, The Guardian, The truth 
behind corporate climate pledges (July 26, 2021); Peter Eavis and 
Clifford Krauss, The New York Times, What's Really Behind Corporate 
Promises on Climate Change? (May 12, 2021); and Alice C. Hill and 
Jennifer Nash, The Hill, The truth behind companies' `net zero' 
climate commitments (Apr. 9, 2021).
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    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.\677\
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    \677\ See proposed 17 CFR 229.1506(b)(1) through (6).
---------------------------------------------------------------------------

    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.\678\ 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.
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    \678\ See proposed 17 CFR 229.1506(b)(3).
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    Under the proposed rules, the registrant would be required to 
disclose the baseline year for multiple targets.\679\ 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.\680\ 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.
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    \679\ See proposed 17 CFR 229.1506(b)(4).
    \680\ See proposed 17 CFR 229.1506(b)(5).
---------------------------------------------------------------------------

    The proposed rules would further require a registrant to discuss 
how it intends to meet its climate-related targets or goals.\681\ 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.\682\ 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.\683\
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    \681\ See proposed 17 CFR 229.1506(b)(6).
    \682\ See proposed 17 CFR 229.1506(b)(6).
    \683\ See proposed 17 CFR 229.1502.
---------------------------------------------------------------------------

    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.\684\ 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.\685\ This proposed disclosure could help 
investors assess how well a registrant is managing its identified 
climate-related risks.
---------------------------------------------------------------------------

    \684\ See proposed 17 CFR 229.1506(c).
    \685\ See id.
---------------------------------------------------------------------------

    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.\686\ 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

[[Page 21407]]

offset could also help to mitigate instances of greenwashing.\687\
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    \686\ See proposed 17 CFR 229.1506(d).
    \687\ See, e.g., letter from Dimensional Fund Advisors.
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    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) \688\ or Section 15(d) \689\ and
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    \688\ 15 U.S.C. 78m(a).
    \689\ 15 U.S.C. 78o(d).

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[[Page 21408]]

    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) \690\ 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\
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    \690\ Form 20-F is the Exchange Act form used by a foreign 
private issuer for its annual report or to register a class of 
securities under Section 12 of the Exchange Act. The proposed rules 
would amend Part I of Form 20-F to require a foreign private issuer 
to provide the climate-related disclosures pursuant to the proposed 
rules either when registering a class of securities under the 
Exchange Act or when filing its Exchange Act annual report. A 
foreign private issuer would also be required to comply with the 
proposed rules when filing a Securities Act registration statement 
on Form F-1. Because Form F-1 requires a registrant to include the 
disclosures required by Part I of Form 20-F, the proposed amendment 
to Form 20-F would render unnecessary a formal amendment to Form F-
1. We are similarly not formally amending Forms S-3 and F-3 because 
the climate-related disclosure would be included in a registrant's 
Form 10-K or 20-F annual report that is incorporated by reference 
into those Securities Act registration statements.
    \691\ See Form 20-F, General Instruction B(d) (stating that 
Regulation S-X applies to the presentation of financial information 
in the form). Although Item 17 and 18 of Form 20-F, and the forms 
that refer to Form 20-F (including Forms F-1 and F-3) permit a 
foreign private issuer to file financial statements prepared in 
accordance with IFRS as issued by the IASB, the proposed Article 14 
disclosure would nevertheless be required (similar to disclosure 
required by Article 12 of Regulation S-X). See Acceptance from 
Foreign Private Issuers of Financial Statements Prepared in 
Accordance with International Financial Reporting Standards Without 
Reconciliation to U.S. GAAP, Rel. No. 33-8879 (Dec. 21, 2007) [73 FR 
986 (Jan. 4, 2008)], 999, n.136 (stating that ``Regulation S-X will 
continue to apply to the filings of all foreign private issuers, 
including those who file financial statements prepared using IFRS as 
issued by the IASB,'' but providing that such issuers ``will comply 
with IASB requirements for form and content within the financial 
statements, rather than with the specific presentation and 
disclosure provisions in Articles 4, 5, 6, 7, 9, and 10 of 
Regulation S-X'').
    \692\ Form 6-K is the form furnished by a foreign private issuer 
with an Exchange Act reporting obligation if the issuer: (i) Makes 
or is required to make the information public pursuant to the law of 
the jurisdiction of its domicile or in which it is incorporated or 
organized, or (ii) files or is required to file the information with 
a stock exchange on which its securities are traded and which was 
made public by that exchange, or (iii) distributes or is required to 
distribute the information to its security holders. See General 
Instruction B to Form 6-K. That instruction currently list certain 
types of information that are required to be furnished pursuant to 
subparagraphs (i), (ii), and (iii), above. While we are proposing to 
amend Form 6-K to add climate-related disclosure to the list of the 
types of information to be provided on Form 6-K, a foreign private 
issuer would not be required to provide the climate-related 
disclosure if such disclosure is not required to be furnished 
pursuant to subparagraphs (i), (ii), or (iii) of General Instruction 
B.
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    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.\693\ 
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.\694\
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    \693\ See proposed Item 3.E to Form 20-F.
    \694\ For similar reasons, we believe that requiring the 
proposed climate disclosures on Forms F-1, F-3, and F-4 is 
appropriate because those forms either require the disclosure 
pursuant to certain parts of Form 20-F (Forms F-1 and F-4) and 
certain items, such as risk factors, under Regulation S-K, or permit 
the incorporation by reference of Form 20-F (Forms F-3 and F-4) and 
therefore require disclosure similar to the domestic forms.
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    We are not proposing generally to exempt SRCs, EGCs,\695\ 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.\696\ 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.\697\ 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.\698\ 
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.
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    \695\ An emerging growth company (``EGC'') is a registrant that 
had total annual gross revenues of less than $1.07 billion during 
its most recently completed fiscal year and has not met the 
specified conditions for no longer being considered an EGC. See 17 
CFR 230.405; 17 CFR 240.12b-2; 15 U.S.C. 77b(a)(19); 15 U.S.C. 
78c(a)(80); and Inflation Adjustments and Other Technical Amendments 
under Titles I and II of the JOBS Act, Release No. 33-10332 (Mar. 
31, 2017) [82 FR 17545 (Apr. 12, 2017)].
    \696\ See, e.g., letters from Rob Bonta, California Attorney 
General et al.; Ceres et al.; and Natural Resources Defense Council.
    \697\ See proposed 17 CFR 229.1504(c)(3). In this regard we note 
that participants in the Commission-hosted 2021 Small Business Forum 
recommended that the Commission provide exemptions or scaled 
requirements for small and medium-sized companies in connection with 
any new ESG disclosure requirements adopted by the Commission. See 
Report on the 40th Annual Small Business Forum (May 2021), available 
at https://www.sec.gov/files/2021_OASB_Annual_Forum_Report_FINAL_508.pdf. See also Office of the 
Advocate for Small Business Capital Formation, Annual Report for 
Fiscal Year 2021 (supporting ``efforts to continue tailoring the 
disclosure and reporting framework to the complexity and size of 
operations of companies, either by scaling obligations or delaying 
compliance for the smallest of the public companies, particularly as 
it pertains to potential new or expanded disclosure requirements'').
    \698\ See infra Section II.M.
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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''),\699\ that should be excluded from all 
or some of the proposed climate-related disclosure rules?
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    \699\ A BDC is a closed-end investment company that has a class 
of its equity securities registered under, or has filed a 
registration statement pursuant to, Section 12 of the Exchange Act, 
and elects to be regulated as a business development company. See 
Section 54 of the Investment Company Act, 15 U.S.C. 80a-53. Like 
other Section 12 registrants, BDCs are required to file Exchange Act 
annual reports.
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    176. Should we require foreign private issuers that report on Form 
20-

[[Page 21409]]

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;

[[Page 21410]]

     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.\700\ 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?
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    \700\ See supra note 92.
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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.\701\ 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.\702\
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    \701\ See proposed 17 CFR 229.1507.
    \702\ For the proposed Subpart 1500 disclosures, this tagging 
requirement would be implemented by including a cross-reference to 
Rule 405 of Regulation S-T in proposed Item 1507 of Regulation S-K, 
and by revising Rule 405(b) of Regulation S-T to include the 
proposed climate-related disclosures required by Subpart 1500 of 
Regulation S-K. The proposed Article 14 of Regulation S-X 
disclosures would be subject to existing requirements in Rule 405(b) 
to tag information in financial statements (including footnotes). 
Pursuant to Rule 301 of Regulation S-T the EDGAR Filer Manual is 
incorporated by reference into the Commission's rules. In 
conjunction with the EDGAR Filer Manual, Regulation S-T governs the 
electronic submission of documents filed with the Commission. Rule 
405 of Regulation S-T specifically governs the scope and manner of 
disclosure tagging requirements for operating companies and 
investment companies, including the requirement in Rule 405(a)(3) to 
use Inline XBRL as the specific structured data language to use for 
tagging the disclosures.
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    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'').\703\ 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.\704\ In 2020, the Commission 
adopted Inline XBRL requirements for business development companies 
that will be effective no later than February 2023.\705\
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    \703\ Interactive Data to Improve Financial Reporting, Release 
No. 33-9002 (Jan. 30, 2009) [74 FR 6776 (Feb. 10, 2009)] (``2009 
Financial Statement Information Adopting Release'') (requiring 
submission of an Interactive Data File to the Commission in exhibits 
to such reports); see also Release No. 33-9002A (Apr. 1, 2009) [74 
FR 15666 (Apr. 7, 2009)].
    \704\ Inline XBRL Filing of Tagged Data, Release No. 33-10514 
(June 28, 2018) [83 FR 40846, 40847 (Aug. 16, 2018)]. Inline XBRL 
allows filers to embed XBRL data directly into an HTML document, 
eliminating the need to tag a copy of the information in a separate 
XBRL exhibit. Id. at 40851.
    \705\ Securities Offering Reform for Closed-End Investment 
Companies, Release No. 33-10771 (Apr. 8, 2020) [85 FR 33290 (June 1, 
2020) at 33318].
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    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.\706\
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    \706\ See supra notes 704 and 705. Inline XBRL requirements for 
business development companies will take effect beginning Aug. 1, 
2022 (for seasoned issuers) and Feb. 1, 2023 (for all other 
issuers). See id. If the proposed Inline XBRL requirements are 
adopted in the interim, they will not apply to business development 
companies prior to the aforementioned effectiveness dates.
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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

[[Page 21411]]

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,\707\ except for disclosures furnished on 
Form 6-K. The proposed filed climate-related disclosures would also be 
subject to potential Section 11 liability \708\ 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.
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    \707\ 15 U.S.C. 78r.
    \708\ 15 U.S.C. 77k.
---------------------------------------------------------------------------

    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.'' \709\ The treatment of disclosures on 
Form 6-K as furnished is a long-standing part of our foreign private 
issuer disclosure system.\710\
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    \709\ Form 6-K, General Instruction B.
    \710\ See Release No. 34-8069 (Apr. 28, 1967), [32 FR 7853 (May 
30, 1967)]. Form 6-K's treatment as furnished for purposes of 
Section 18 has existed since the Commission adopted the form.
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    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.\711\ 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.\712\ 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.\713\
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    \711\ See, e.g., letters from Baillie Gifford; Rob Bonta, 
California Attorney General et al.; Calvert Research and Management; 
Carolyn Kohoot; Center for American Progress; Ceres et al.; 
Certified B Corporations; Clean Yield Asset Management; Climate Risk 
Disclosure Lab; Consumer Federation of America; Environmental 
Bankers Association; Friends of the Earth, Amazon Watch, and 
Rainforest Action Network; Garcia Hamilton & Associates (June 11, 
2021); Grant Thornton; Sarah Ladin; Miller/Howard Investments; 
Natural Resources Defense Council; New York State Society of 
Certified Public Accountants; Nia Impact Capital; Teachers Insurance 
and Annuity Association of America; ValueEdge Advisors (July 5, 
2021); and Vert Asset Management.
    \712\ See, e.g., letters from Rob Bonta, California Attorney 
General et al.; Calvert Research and Management; and Ceres et al.
    \713\ See, e.g., letters from Consumer Federation of America; 
and Natural Resources Defense Council.
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    Other commenters recommended that we treat climate-related 
disclosures as furnished.\714\ 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.'' \715\ 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.\716\
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    \714\ See, e.g., letters from American Petroleum Institute; 
Associated General Contractors of America; Bank Policy Institute; 
Business Roundtable; Chamber of Commerce; Chevron; Cisco; 
ConocoPhilips; Dell Technologies; Dow; FedEx Corporation (June 11, 
2021); Investment Company Institute; NACCO Industries, Inc. (June 
11, 2021); KPMG, LLP; National Association of Manufacturers; 
National Investor Relations Institute; National Mining Association; 
Society for Corporate Governance; and United Airlines Holdings, Inc.
    \715\ Letter from American Petroleum Institute; see also letters 
from Chamber of Commerce; and National Association of Manufacturers.
    \716\ See, e.g., letters from National Mining Association; and 
United Airlines Holdings.
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    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.\717\ 
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,\718\ we intend 
to provide registrants with an ample transition period to prepare to 
provide such disclosure.\719\ 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.
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    \717\ See supra note 713.
    \718\ See, e.g., letter from National Association of 
Manufacturers.
    \719\ See infra Section II.M.
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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.\720\ 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

[[Page 21412]]

below summarizes the proposed phase-ins for the compliance date.
---------------------------------------------------------------------------

    \720\ See supra note 556.
---------------------------------------------------------------------------

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.

----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
           Registrant type                        Disclosure compliance date             Financial statement
                                                                                          metrics audit
                                                                                          compliance date
----------------------------------------------------------------------------------------------------------------
                                       All proposed             GHG emissions metrics:
                                        disclosures, including   Scope 3 and associated
                                        GHG emissions metrics:   intensity metric.
                                        Scope 1, Scope 2, and
                                        associated intensity
                                        metric, but excluding
                                        Scope 3.
----------------------------------------------------------------------------------------------------------------
Large Accelerated Filer..............  Fiscal year 2023 (filed  Fiscal year 2024 (filed  Same as disclosure
                                        in 2024).                in 2025).                compliance date.
Accelerated Filer and Non-Accelerated  Fiscal year 2024 (filed  Fiscal year 2025 (filed
 Filer.                                 in 2025).                in 2026).
SRC..................................  Fiscal year 2025 (filed  Exempted...............
                                        in 2026).
----------------------------------------------------------------------------------------------------------------

    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.\721\ 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.
---------------------------------------------------------------------------

    \721\ See, e.g., letters from Adobe; Apple; BNP Paribas; bp; 
Chevron; Eni SpA; and Walmart.
---------------------------------------------------------------------------

    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.\722\
---------------------------------------------------------------------------

    \722\ See supra Section II.G.3.
---------------------------------------------------------------------------

    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\

[[Page 21413]]

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.
---------------------------------------------------------------------------

    \723\ Section 2(b) of the Securities Act, 15 U.S.C. 77b(b), and 
Section 3(f) of the Exchange Act, 17 U.S.C. 78c(f), require the 
Commission, when engaging in rulemaking where it is required to 
consider or determine whether an action is necessary or appropriate 
in the public interest, to consider, in addition to the protection 
of investors, whether the action will promote efficiency, 
competition, and capital formation. Further, Section 23(a)(2) of the 
Exchange Act, 17 U.S.C. 78w(a)(2), requires the Commission, when 
making rules under the Exchange Act, to consider the impact that the 
rules would have on competition, and prohibits the Commission from 
adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the Exchange Act.
---------------------------------------------------------------------------

    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.\724\ 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,\725\ 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.\726\ 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.\727\
---------------------------------------------------------------------------

    \724\ See infra Section IV.C.1.
    \725\ Id.
    \726\ Id.
    \727\ See infra Section IV.D.
---------------------------------------------------------------------------

    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.\728\
---------------------------------------------------------------------------

    \728\ See infra Section IV.C.2
---------------------------------------------------------------------------

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).\729\ We estimate that during calendar year 
2020, excluding registered investment companies, there were 
approximately 6,220 registrants that filed on domestic forms \730\ 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).
---------------------------------------------------------------------------

    \729\ FPIs refer to the subset of all FPIs that file annual 
reports on Form 20-F, excluding MJDS filers using form 40-F.The 
number of domestic registrants and FPIs affected by the final 
amendments is estimated as the number of unique companies, 
identified by Central Index Key (CIK), that filed a Form 10-K, Form 
20-F, or an amendment thereto, or both a Form 10-Q and a Form S-1, 
S-3, S-4, or S-11 with the Commission during calendar year 2020, 
excluding asset-backed securities issuers. For purposes of this 
economic analysis, these estimates do not include registrants that 
only filed a Securities Act registration statement during calendar 
year 2020, or only filed a Form 10-Q not preceded by a Securities 
Act registration statement (in order to avoid including entities 
such as certain co-issuers of debt securities). We believe that most 
registrants that have filed a Securities Act registration statement 
or a Form 10-Q not preceded by a Securities Act registration 
statement, other than such co-issuers, would be captured by this 
estimate. The estimates for the percentages of SRCs, EGCs, 
accelerated filers, large accelerated filers, and non-accelerated 
filers are based on data obtained by Commission staff using a 
computer program that analyzes SEC filings, with supplemental data 
from Ives Group Audit Analytics and manual review of filings by 
staff.
    \730\ This number includes approximately 20 FPIs that filed on 
domestic forms in 2020 and approximately 90 BDCs.
---------------------------------------------------------------------------

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.\731\ 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.\732\
---------------------------------------------------------------------------

    \731\ See Commission Guidance Regarding Disclosure Related to 
Climate Change, Release No. 33-9106 (Feb. 2, 2010) [75 FR 6290 (Feb, 
8, 2010)] (``2010 Climate Change Guidance''), available at https://www.sec.gov/rules/interp/2010/33-9106.pdf (The guidance did not 
create new legal requirements nor modify existing ones. Instead, it 
highlighted climate-related topics that registrants should consider 
in seeking to meet their existing disclosure obligations (e.g., the 
impact of legislation, regulation, international accords, indirect 
consequences, physical risks, etc.) and in what section they should 
be discussed (e.g., risk factors, MD&A, etc.)). See also discussion 
in Section I.A.
    \732\ See Section I.B.
---------------------------------------------------------------------------

3. Existing State and Federal Laws
    There are also state and other Federal laws that require certain 
climate-related disclosures or reporting. For instance,

[[Page 21414]]

there are requirements for mandatory climate risk disclosure within the 
insurance industry. As of 2021, 14 states \733\ and the District of 
Columbia require any domestic insurers that write more than $100 
million in annual net written premium \734\ to disclose their climate-
related risk assessment and strategy via the NAIC Climate Risk 
Disclosure Survey.\735\ 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.
---------------------------------------------------------------------------

    \733\ The 14 states are California, Connecticut, Delaware, 
Maine, Maryland, Massachusetts, Minnesota, New Mexico, New York, 
Oregon, Pennsylvania, Rhode Island, Vermont, and Washington.
    \734\ Net written premium is defined as the premiums written by 
an insurance company, minus premiums paid to reinsurance companies, 
plus any reinsurance assumed.
    \735\ See NAIC, Assessments of and Insights from NAIC Climate 
Risk Disclosure Data (Nov. 2020), available at https://content.naic.org/article/news_release_naic_assesses_provides_insight_insurer_climate_risk_disclosure_survey_data.htm.
---------------------------------------------------------------------------

    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.\736\ This rule 
requires large direct emitters and suppliers of fossil fuels to report 
their emissions to the EPA.\737\ Specifically, the rule requires each 
facility that directly emits more than 25,000 metric tons of 
CO2e per year to report these direct emissions. 
Additionally, facilities that supply certain products that would result 
in over 25,000 metric tons of CO2e if those products were 
released, combusted, or oxidized must similarly report these 
``supplied'' emissions.\738\ The resulting emissions data are then made 
public through their website.
---------------------------------------------------------------------------

    \736\ See 40 CFR part 98 (2022); see also EPA, EPA Fact Sheet: 
Greenhouse Gases Reporting Program Implementation (2013), available 
at https://www.epa.gov/sites/default/files/2014-09/documents/ghgrp-overview-factsheet.pdf.
    \737\ According to the EPA, ``direct emitters'' are facilities 
that combust fuels or otherwise put GHGs into the atmosphere 
directly from their facility. An example of this is a power plant 
that burns coal or natural gas and emits carbon dioxide directly 
into the atmosphere. The EPA estimates that the GHGRP data reported 
by direct emitters covers about half of total U.S. emissions. 
``Suppliers'' are those entities that supply products into the 
economy which if combusted, released or oxidized emit greenhouse 
gases into the atmosphere. These fuels and industrial gases are not 
emitted from the supplier facility but instead distributed 
throughout the country and used. An example of this is gasoline, 
which is sold in the U.S. and primarily burned in cars throughout 
the country. The majority of GHG emissions associated with the 
transportation, residential and commercial sectors are accounted for 
by these suppliers.
    \738\ The EPA's emissions data does not include emissions from 
agriculture, land use, or direct emissions from sources that have 
annual emissions of less than 25,000 metric tons of CO2e.
---------------------------------------------------------------------------

    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).\739\ 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.'' \740\ 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.\741\
---------------------------------------------------------------------------

    \739\ On this latest point, in particular, facility-level 
supplied emissions cannot necessarily be characterized as a portion 
of the registrant's Scope 3 emission as the boundaries of the entity 
required to report under the EPA reporting regime (the facility) are 
different from the boundaries of the entity required to report under 
our proposed rules (the registrant).
    \740\ The EPA requires emissions reporting only for domestic 
facilities, while the proposed rule would not be limited to U.S. 
facilities and includes indirect emissions. The EPA also requires 
some gases (e.g. fluorinated ethers, perfluoropolyether) that are 
considered optional under the GHG Protocol and that are not included 
within the proposed definition of ``greenhouse gases.''
    \741\ See supra note 736.
---------------------------------------------------------------------------

    In addition, at least 17 states have specific GHG emissions 
reporting requirements.\742\ 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 
(CO2e).\743\ 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.\744\ California requires 
annual reporting of GHG emissions by industrial sources that emit more 
than 10,000 metric tons of CO2e, transportation and natural 
gas fuel suppliers, and electricity importers.\745\ 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.
---------------------------------------------------------------------------

    \742\ See NCSL, Greenhouse Gas Emissions Reduction Targets and 
Market-Based Policies (2021), available at https://www.ncsl.org/research/energy/greenhouse-gas-emissions-reduction-targets-and-market-based-policies.aspx. The 17 states with GHG reporting 
requirements are Hawaii, Washington, Oregon, California, Nevada, 
Colorado, Minnesota, Iowa, Virginia, Pennsylvania, New York, New 
Jersey, Maryland, Connecticut, Massachusetts, Vermont, and Maine.
    \743\ See Air Compliance and Emissions (ACE) Reporting, 
available at https://www.dec.ny.gov/chemical/54266.html.
    \744\ See M. Sakas, Colorado Greenhouse Gas Producers Are Now 
Required To Report Emissions Data To The State, Colorado Public 
Radio News (2020), available at https://www.cpr.org/2020/05/22/colorado-greenhouse-gas-producers-are-now-required-to-report-emissions-data-to-the-state.
    \745\ See Cal. Air Res. Bd., Mandatory Greenhouse Gas Reporting 
2020 Emissions Year Frequently Asked Questions (Nov. 4, 2021), 
available at https://www.arb.ca.gov/cc/reporting/ghg-rep/reported-data/2020mrrfaqs.pdf?_ga=2.110314373.182173320.1638196601-1516874544.1627053872.
---------------------------------------------------------------------------

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.\746\ 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.\747\ 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

[[Page 21415]]

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.\748\ 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,\749\ the European Union,\750\ and Japan.\751\ 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,\752\ Denmark, France, 
Ireland, Italy, Malaysia, Norway, Russia and South Korea.\753\ Insofar 
as issuers have operations abroad, they would already be subject to 
these mandatory disclosure requirements, policies and guidance.
---------------------------------------------------------------------------

    \746\ See Section I.D.
    \747\ See TCFD, Overview (Mar. 2021) 
(``TCFD_Booklet_FNL_Digital_March-2020''), available at https://assets.bbhub.io/company/sites/60/2020/10/TCFD_Booklet_FNL_Digital_March-2020.pdf.
    \748\ See TCFD, 2021 Status Report (Oct. 2021), available at 
https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Status_Report.pdf.
    \749\ For example, the United Kingdom's Financial Conduct 
Authority (FCA) issued a policy statement in 2021 expanding its 
TCFD-aligned disclosure requirements to standard issuers and 
formally incorporating references to the TCFD's Oct. 2021 guidance 
on metrics, targets and transition plans and updated implementation 
annex. This policy will apply for accounting periods beginning on or 
after Jan. 1, 2022. The FCA requirements are currently on a comply-
or-explain basis; the FCA has announced that it plans to consult on 
making these requirements mandatory alongside future proposals 
adapting the rules to any future ISSB climate standard, once issued. 
See FCA, PS21/23: Enhancing Climate-Related Disclosures by Standard 
Listed Companies (Dec. 2021), available at https://www.fca.org.uk/publication/policy/ps21-23.pdf. In addition, the United Kingdom has 
adopted TCFD-aligned disclosure requirements for asset managers and 
certain asset owners, effective Jan. 1, 2022, with certain phase-
ins. See FCA, PS21/24: Enhancing Climate-Related Disclosures by 
Asset Managers, Life Insurers and FCA-Regulated Pension Providers 
(Dec. 2021), available at https://www.fca.org.uk/publication/policy/ps21-24.pdf.
    \750\ In the European Union, the European Commission (EC) 
adopted a proposal for a Corporate Sustainability Reporting 
Directive (CSRD), which would revise existing company reporting 
rules and aim to provide more comparable and consistent information 
to investors. The CSRD proposal enlarges the scope of the reporting 
requirements and would cover nearly 50,000 companies in the European 
Union. The CSRD proposal acknowledges the importance of the IFRS' 
efforts to establish the ISSB and seeks compatibility with the TCFD 
recommendations, along with other international frameworks. The EC 
aims to have the new CSRD reporting requirements in place for 
reporting year 2023. See Proposal for Directive of the European 
Parliament and of the Council amending Directive 2013/34/EU, 
Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 
537/2014, as regards corporate sustainability reporting, COM (2021) 
189 final (Apr. 21, 2021), available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC018. Additionally, the EC is 
progressing work on reporting standards for meeting the proposed 
CSRD requirement. The European Financial Reporting Advisory Group 
(``EFRAG'') published a climate standard prototype in Sept. 2021 
that is based on the TCFD framework. See EFRAG, Climate Standard 
Working Paper, (Sept. 8, 2021), available at https://www.efrag.org/News/Project-527/EFRAG-PTF-ESRS-welcomes-Climate-standard-prototype-working-paper?AspxAutoDetectCookieSupport=1.
    \751\ Japan's Financial Services Agency (FSA) is planning to 
make it mandatory for large companies to make climate-related 
disclosures aligned with the TCFD framework from as early as Apr. 
2022. In addition, climate disclosures have been part of Japan's 
corporate governance code since June 2021; however, the code is not 
legally binding and the disclosures were introduced on a `comply-or-
explain' basis. In Apr. 2022, the Tokyo Stock Exchange (TSE) will be 
replacing its First and Second sections, the ``Mothers'' market for 
startups and the tech-focused JASDAQ, with three new segments: 
Prime, Standard and Growth. According to Nikkei, companies listed on 
the Prime market will be required to comply with disclosure 
requirements aligned with the TCFD recommendations starting in Apr. 
2022. See Japan's FSA to Mandate Climate Disclosures from Apr. 2022, 
(Oct. 2021), available at https://www.esginvestor.net/japans-fsa-to-mandate-climate-disclosures-from-april-2022/.
    \752\ The Canadian Securities Administrators (CSA) is 
considering proposed climate-related disclosure requirements largely 
consistent with the TCFD recommendations, with a few exceptions. The 
proposed requirements would elicit disclosure by issuers related to 
the four pillars of the TCFD recommendations (Governance, Strategy, 
Risk management, and Metrics and targets). The CSA anticipates that 
the proposed requirements would come into force in 2022 and would be 
phased in over one and three year periods. See Consultation: 
Climate-Related Disclosure Update and CSA and Request for Comment, 
available at https://www.osc.ca/sites/default/files/2021-10/csa_20211018_51-107_disclosure-update.pdf.
    \753\ See TCFD 2021 Status Report, available at https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Status_Report.pdf.
---------------------------------------------------------------------------

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.\754\ 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.
---------------------------------------------------------------------------

    \754\ One limitation of using this keyword search is that it is 
unable to discern the extent or quality of climate-related 
disclosures, nor can it determine specific sub-topics within 
climate-related disclosures. For these reasons, the analysis was 
supplemented by natural language processing (NLP) analysis, as 
described later in this section.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

                           Table 1--Filings With Climate-Related Keywords by Form Type
----------------------------------------------------------------------------------------------------------------
                              Form                                  Has keyword     All filings       Percent
----------------------------------------------------------------------------------------------------------------
10-K............................................................           1,785           5,791              31
20-F............................................................             286             729              39
40-F............................................................              91             124              73
                                                                 -----------------------------------------------
    Total.......................................................           2,162           6,644              33
----------------------------------------------------------------------------------------------------------------
This table presents the analysis of annual filings submitted to the Commission between June 27, 2019, and Dec.
  31, 2020. For each form type, the table indicates how many contain any of the climate-related keywords, which
  include ``climate change,'' ``climate risk,'' and ``global warming.''

[[Page 21416]]

[GRAPHIC] [TIFF OMITTED] TP11AP22.014

                   Table 2--Filings With Climate-Related Keywords by Accelerated Filer Status
----------------------------------------------------------------------------------------------------------------
                          Filer status                              Has keyword     All filings       Percent
----------------------------------------------------------------------------------------------------------------
LAF.............................................................           1,117           2,280              49
AF..............................................................             371           1,290              29
NAF.............................................................             465           2,754              17
Other...........................................................             209             320              65
                                                                 -----------------------------------------------
    Total.......................................................           2,162           6,644              33
----------------------------------------------------------------------------------------------------------------
This table presents the analysis of annual filings submitted to the Commission between June 27, 2019, and Dec.
  31, 2020. Filer status consists of large accelerated filers (LAF), accelerated filers (AF), and non-
  accelerated filers (NAF). For each filer status, the table indicates how many contain any of the climate-
  related keywords, which include ``climate change,'' ``climate risk,'' and ``global warming.''

  [GRAPHIC] [TIFF OMITTED] TP11AP22.015
  

[[Page 21417]]

                           Table 3--Filings With Climate-Related Keywords by Industry
----------------------------------------------------------------------------------------------------------------
                            Industry                                Has keyword     All filings       Percent
----------------------------------------------------------------------------------------------------------------
Maritime Transportation.........................................              64              68              94
Electric Services...............................................             154             171              90
Oil and Gas.....................................................             169             202              84
Steel Manufacturing.............................................              14              17              82
Rail Transportation.............................................               8              10              80
Paper and Forest Products.......................................              20              28              71
Insurance.......................................................              46              66              70
Passenger Air and Air Freight...................................              23              34              68
Trucking Services...............................................              14              22              64
Mining..........................................................             109             198              55
Beverages, Packaged Foods and Meats.............................              56             109              51
Construction Materials..........................................              54             118              46
Automotive......................................................              11              26              42
Real Estate Management and Development..........................             274             661              41
Capital Goods...................................................              41             110              37
Technology Hardware & Equipment.................................              61             177              34
Agriculture.....................................................              11              32              34
Textiles and Apparel............................................              12              36              33
Not in Peer Group...............................................             478           1,431              33
Consumer Retailing..............................................             138             558              25
Banking.........................................................             158             754              21
Chemicals.......................................................             131             922              14
Interactive Media and Services..................................             116             894              13
                                                                 -----------------------------------------------
    Total.......................................................           2,162           6,644              33
----------------------------------------------------------------------------------------------------------------
This table presents the analysis of annual filings submitted to the Commission between June 27, 2019, and Dec.
  31, 2020. For each industry, the table indicates how many contain any of the climate-related keywords, which
  include ``climate change,'' ``climate risk,'' and ``global warming.''

[[Page 21418]]

[GRAPHIC] [TIFF OMITTED] TP11AP22.016

[[Page 21419]]

    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).\755\ 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.
---------------------------------------------------------------------------

    \755\ The specific NLP method used in this analysis is word 
embedding, which utilizes Google's publicly available, pre-trained 
word vectors that are then applied to the text of climate-related 
disclosures within regulatory filings. While this NLP analysis can 
be used to identify the general topic and the extent of disclosures, 
it is limited in its ability to discern the quality or decision-
usefulness of disclosures from investors' perspective.
---------------------------------------------------------------------------

    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.

[[Page 21420]]

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[[Page 21421]]

[GRAPHIC] [TIFF OMITTED] TP11AP22.018

BILLING CODE 8011-01-C
    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.\756\ They further report that while 35% of Russell 
3000 firms provided climate-related information in 2009, this figure 
grew to 60% in 2020,\757\ 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.
---------------------------------------------------------------------------

    \756\ See P. Bolstad, S. Frank, E. Gesick, and D. Victor, Flying 
Blind: What Do Investors Really Know About Climate Change Risks in 
the U.S. Equity and Municipal Debt Markets, Hutchins Center Working 
Paper 67 (2020).
    \757\ Id. The methodology uses a series of keywords to determine 
whether a company provides climate-related disclosures. Some 
keywords may occur in non-climate contexts, with the authors noting 
that the statistics are biased.

---------------------------------------------------------------------------

[[Page 21422]]

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.\758\ 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.
---------------------------------------------------------------------------

    \758\ See Climate Change & ESG Reporting from the Public Company 
Perspective (2021), available at https://www.centerforcapitalmarkets.com/wp-content/uploads/2021/08/CCMC_ESG_Report_v4.pdf.
---------------------------------------------------------------------------

    The Governance & Accountability Institute \759\ (``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.\760\
---------------------------------------------------------------------------

    \759\ Governance & Accountability Institute Inc. (``G&A, Inc.'') 
is a consulting and research organization providing services to 
publicly traded and privately owned companies to help enhance their 
public environmental, social and governance (ESG) and sustainability 
profiles.
    \760\ See G & A Inc., Sustainability Reporting in Focus (2021), 
available at https://www.ga-institute.com/research/ga-research-collection/sustainability-reporting-trends/2021-sustainability-reporting-in-focus.html.
---------------------------------------------------------------------------

    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 \761\ 
reports that out of the 524 U.S. companies in their Climate High Impact 
Sample,\762\ 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.\763\ One commenter stated that there 
is significant variation in disclosure rates of GHG emissions across 
various industries.\764\ 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%.\765\ 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.\766\ 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.\767\
---------------------------------------------------------------------------

    \761\ CDP operates a global disclosure system that enables 
companies, cities, states and regions to measure and manage their 
environmental risks, opportunities and impacts. Despite not being a 
framework like GRI, SASB and TCFD, CDP's questionnaires gather both 
qualitative and quantitative information from across governance, 
strategy, risk, impact and performance. To aid comparability and 
ensure comprehensiveness, CDP includes sector-specific questions and 
data points. In 2018, CDP aligned its climate change questionnaire 
with the TCFD.
    \762\ The CDP Climate High Impact sample identifies companies 
deemed high impact based on two main considerations--market cap and 
GHG emissions.
    \763\ See Letter from CDP North America (Dec. 13, 2021).
    \764\ See Letter from Aron Szapiro, Head of Policy Research, 
Morningstar (June 9, 2021).
    \765\ Id. The comment letter does not disaggregate the 
disclosure rate across the different scopes of emissions.
    \766\ See State and Trends of ESG Disclosure Policy Measures 
Across IPSF Jurisdictions, Brazil, and the US, International 
Platform on Sustainable Finance (2021) (The disclosure rates are 
calculated using data from Refinitiv), available at https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/211104-ipsf-esg-disclosure-report_en.pdf.
    \767\ See Section IV.C.2.3.
---------------------------------------------------------------------------

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,\768\ 31% use the 
GRI,\769\ 29% use the TCFD,\770\ and 24% use the CDP.\771\ Similar 
statistics on the usage of different reporting frameworks are also 
provided by other studies. The G&A report \772\ finds that 53% of the 
Russel 1000 reporters either mention or align with SASB,\773\ 52% 
utilized GRI reporting standards,\774\ 30% either

[[Page 21423]]

mention or align with TCFD recommendations,\775\ 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.\776\
---------------------------------------------------------------------------

    \768\ The SASB standards are designed for communication by 
companies to investors about how sustainability issues impact long-
term enterprise value. SASB standards guide the disclosure of 
financially material sustainability information by companies to 
their investors. SASB standards, which are available for 77 
industries, identify the subset of ESG issues most relevant to 
financial performance in each industry. The SASB standards can be 
both complementary with the core elements of the TCFD 
recommendations, as well as used by organizations to operationalize 
them. See https://www.sasb.org/about/sasb-and-other-esg-frameworks/.
    \769\ The GRI standards outline both how and what to report 
regarding the material economic, social and environmental impacts of 
an organization on sustainable development. For 33 potentially 
material sustainability topics, the GRI standards contain disclosure 
requirements. Three series of GRI standards support the reporting 
process: The GRI Topic Standards, each dedicated to a particular 
topic and listing disclosures relevant to that topic; the GRI Sector 
Standards, which are applicable to specific sectors; and the GRI 
Universal Standards, which apply to all organizations. The GRI 
Standards can be used in sustainability reports, as well as in 
annual or integrated reports that are oriented at a broad range of 
stakeholders. See https://www.globalreporting.org/standards/.
    \770\ The TCFD recommended disclosures cover four core elements: 
Governance, Strategy, Risk Management and Metrics and Targets. Each 
element has two or three specific disclosures (as shown in Table 4) 
to be made in the organization's mainstream report (i.e. annual 
financial filings). These are meant to generate comparable, 
consistent and reliable information on climate-related risks. The 
TCFD provides both general, and in some cases, sector-specific 
guidance for each disclosure, while simultaneously framing the 
context for disclosure, and offering suggestions on what and how to 
disclose in the mainstream report. See https://www.fsb-tcfd.org/recommendations/.
    \771\ See supra note 761.
    \772\ See supra note 760.
    \773\ Of the Russell 1000 reporting companies, 39% indicate that 
they are in alignment with SASB standards, while the other 14% 
simply mention the standards.
    \774\ Of those reporters utilizing the GRI standards, G&A finds 
that a small portion (5%) utilizes the ``Comprehensive'' level of 
reporting, the majority (64%) chose to report in accordance with the 
``Core'' option, while the remaining portion (31%) utilizes ``GRI-
Referenced'' reports, which are not fully in accordance with the GRI 
standards. GRI-Referenced reports contain the GRI Content Index and 
reference certain disclosures.
    \775\ Of the Russell 1000 reporting companies, 17% indicate that 
they are in alignment with the TCFD recommendations, while the other 
13% simply mention the recommendations.
    \776\ See White & Case and the Society for Corporate Governance: 
A Survey and In-Depth Review of Sustainability Disclosures by Small- 
and Mid-Cap Companies, available at https://www.whitecase.com/publications/article/survey-and-depth-review-sustainability-disclosures-small-and-mid-cap-companies (Among the firms reviewed, 
41 firms (51%) provided some form of voluntary sustainability 
disclosure on their websites. Further, only nine of those 41 firms 
indicated the reporting standards with which they aligned their 
reporting, with the majority of the nine companies not following any 
one set of standards completely. Additionally, six firms followed 
the GRI, while three firms stated that they follow both the TCFD and 
SASB).
---------------------------------------------------------------------------

    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.\777\ 
The Corporate Reporting Dialogue \778\ 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.
---------------------------------------------------------------------------

    \777\ See How CDP is Aligned to the TCFD (2018), available at 
https://www.cdp.net/en/guidance/how-cdp-is-aligned-to-the-tcfd.
    \778\ The Corporate Reporting Dialogue is a platform, convened 
by the Value Reporting Foundation, to promote greater coherence, 
consistency and comparability between corporate reporting 
frameworks, standards and related requirement. See Driving Alignment 
in Climate-related Reporting, Corporate Reporting Dialogue (2019), 
available at https://www.integratedreporting.org/wp-content/uploads/2019/09/CRD_BAP_Report_2019.pdf.

    Table 4--Disclosure Rate of TCFD Elements Among U.S. Firms \779\
------------------------------------------------------------------------
                                                              Rate of
                 TCFD disclosure element                  disclosure (%)
------------------------------------------------------------------------
Governance:
    (a) Describe the board's oversight of climate-                    17
     related risks and opportunities....................
    (b) Describe management's role in assessing and                   10
     managing climate-related risks and opportunities...
Strategy:
    (a) Describe the climate-related risks and                        45
     opportunities the organization has identified over
     the short, medium, and long term...................
    (b) Describe the impact of climate-related risks and              34
     opportunities on the organization's businesses,
     strategy, and financial planning...................
    (c) Describe the resilience of the organization's                  5
     strategy, taking into consideration different
     climate-related scenarios, including a 2 [deg]C or
     lower scenario.....................................
Risk Management:
    (a) Describe the organization's processes for                     15
     identifying and assessing climate-related risks....
    (b) Describe the organization's processes for                     17
     managing climate-related risks.....................
    (c) Describe how processes for identifying,                       16
     assessing, and managing climate-related risks are
     integrated into the organization's overall risk
     management.........................................
Metrics and Targets:
    (a) Describe the metrics used by the organization to              21
     assess climate-related risks and opportunities in
     line with its strategy and risk management process.
    (b) Disclose Scope 1, Scope 2, and, if appropriate,               19
     Scope 3 greenhouse gas (GHG) emissions, and the
     related risks......................................
    (c) Describe the targets used by the organization to              25
     manage climate-related risks and opportunities and
     performance against targets........................
------------------------------------------------------------------------

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

    \779\ See Moody's Analytics, TCFD-Aligned Reporting by Major 
U.S. and European Corporations, (2022), available at https://www.moodysanalytics.com/articles/pa/2022/tcfd_aligned_reporting_by_major_us_and_european_corporations. To 
arrive at these statistics, Moody's conducted an artificial 
intelligence (AI) based review of all public filings, including 
financial filings, annual reports, integrated reports, 
sustainability reports, and other publicly available reports that 
were associated with companies' annual reporting on sustainability. 
Non-public disclosures, such as CDP reports, were not included in 
the analysis.
---------------------------------------------------------------------------

    Carbon reduction targets or goals have become an increasing focus 
for both companies and countries.\780\ 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 [deg]Celsius above pre-industrial levels 
this century, as well as pursue efforts to limit the temperature 
increase even further to 1.5[deg] degrees Celsius.\781\ 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.\782\ Approximately one-fifth of these 
companies have science-based targets in-line with a 1.5 degree Celsius 
limit

[[Page 21424]]

on global warming.\783\ 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.\784\ The trend in 
companies disclosing other climate-related targets (e.g. water usage) 
has also been increasing over time.\785\
---------------------------------------------------------------------------

    \780\ See Commitments to Net Zero Double in Less Than a Year, 
United Nations Climate Change (Sept. 21, 2020), available at https://unfccc.int/news/commitments-to-net-zero-double-in-less-than-a-year.
    \781\ See Section I.
    \782\ See, e.g., J. Eaglesham, Climate Promises by Businesses 
Face New Scrutiny, The Wall Street Journal (2021), available at 
www.wsj.com/articles/climate-promises-by-businesses-face-new-scrutiny-11636104600.
    \783\ See memorandum, dated Nov. 30, 2021, concerning staff 
meeting with representatives of Persefoni. This statistic is 
compiled by Persefoni using information from the Science Based 
Targets Initiative. This and the other staff memoranda referenced 
below are available at https://www.sec.gov/comments/s7-10-22/s71022.htm.
    \784\ As of Jan. 25, 2022, The Climate Pledge has acquired 217 
signatories. See The Climate Pledge, available at https://www.theclimatepledge.com/us/en/Signatories.
    \785\ For example, the percentage of both global and U.S. 
companies with water reduction targets grew by 4% in 2019 on a year-
over-year basis. This represented 28% of major global companies 
(i.e. those listed on the S&P Global 1200 index) and 27% of major 
(i.e. those listed in the S&P 500 index)) U.S. companies publicly 
disclosing these targets. See State of Green Business 2021, 
available at https://www.spglobal.com/marketintelligence/en/news-insights/research/state-of-green-business-2021.
---------------------------------------------------------------------------

    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).\786\
---------------------------------------------------------------------------

    \786\ See S. Lu, The Green Bonding Hypothesis: How do Green 
Bonds Enhance the Credibility of Environmental Commitments? (2021), 
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3898909.
---------------------------------------------------------------------------

    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.\787\ 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.
---------------------------------------------------------------------------

    \787\ See C. Flammer, Corporate Green Bonds, Journal of 
Financial Economics, 499-516 (2021). (Green bonds may only be a 
partial solution to achieving credible targets given that they have 
implications beyond commitment.)
---------------------------------------------------------------------------

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 \788\ 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.\789\
---------------------------------------------------------------------------

    \788\ See supra note 760.
    \789\ Other studies also report evidence of third-party 
assurance among smaller samples of companies analyzed. For example, 
according to a recent study by the International Federation of 
Accountants, in 2019, 99 out of the 100 largest U.S. firms by market 
capitalization provided some form of sustainability disclosure, 
which may contain climate-related information among other 
sustainability-related topics. Seventy of those firms obtained some 
level of third-party assurance, with the vast majority being 
``limited assurance'' according to the study. Of the 70 firms that 
obtained assurance, the study reports that 54 obtained ``limited 
assurance,'' eight obtained ``reasonable assurance,'' five obtained 
``moderate assurance,'' and three did not disclose any assurance. Of 
the 81 unique assurance reports examined in the study, nine were 
found to be issued by an auditing firm, while 72 were issued by 
another service provider. See International Federation of 
Accountants (``IFAC''), The State of Play in Sustainability 
Assurance (2021), available at https://www.ifac.org/knowledge-gateway/contributing-global-economy/publications/state-play-sustainability-assurance. Among the sample of 436 companies included 
in the CCMC Survey, 28% disclosed that they engaged a third party to 
provide some form of assurance regarding their climate-related 
disclosure (the frequency of these disclosures was 52% among the 436 
companies in the sample). See supra note 758.
---------------------------------------------------------------------------

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.\790\ The results of multiple recent surveys indicate that 
climate risks are among the most important priorities for a broad set 
of large asset managers.\791\ 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.\792\
---------------------------------------------------------------------------

    \790\ See 2021 Global Investor Statement to Governments on the 
Climate Crisis (2021) (this statement has been signed by 733 
investors collectively managing over US$52 trillion in assets), 
available at https://theinvestoragenda.org/wp-content/uploads/2021/09/2021-Global-Investor-Statement-to-Governments-on-the-Climate-Crisis.pdf; See also Alexander Karsner, Testimony Before the House 
Financial Services Subcommittee on National Security, International 
Development and Monetary Policy (Sept. 11, 2019), available at 
https://financialservices.house.gov/uploadedfiles/hhrg-116-ba10-wstate-karsnera-20190911.pdf. A recent report examined how climate 
change could affect 22 different sectors of the U.S. economy and 
found that if global temperatures rose 2.8 [deg]C from pre-
industrial levels by 2100, climate change could cost $396 billion 
each year. If temperatures increased by 4.5 [deg]C, the yearly costs 
would reach $520 billion. See Jeremy Martinich and Allison Crimmins, 
Climate Damages and Adaptation Potential Across Diverse Sectors of 
the United States, Nature Climate Change 9, 397-404 (2019); 
available at https://www.nature.com/articles/s41558-019-0444-6. 
Similarly, the Swiss Re Institute estimated how global warming could 
affect 48 countries--representing 90% of the world economy--and 
found that the decrease in GDP in North America could range from -
3.1% if Paris Agreement targets are met (a well-below 2 [deg]C 
increase), to -9.5% if no mitigating actions are taken (3.2 [deg]C 
increase); See The Economics of Climate Change: No Action Not an 
Option, available at https://www.swissre.com/dam/jcr:e73ee7c3-7f83-4c17-a2b8-8ef23a8d3312/swiss-re-institute-expertise-publication-economics-of-climate-change.pdf.
    \791\ See, e.g., Emirhan Ilhan, Climate Risk Disclosure and 
Institutional Investors, Swiss Fin. Inst. Research Paper Series 
(Working Paper No. 19-66), (last revised Jan. 7, 2020), available at 
https://ssrn.com/abstract=3437178 (noting that a survey of 439 large 
institutional investors shows that 79% of respondents believe that 
climate risk reporting is as important as traditional financial 
reporting, and almost one-third consider it to be more important); 
See also Macquaire Asset Management 2021 ESG Survey Report (2021), 
available at https://www.mirafunds.com/assets/mira/our-approach/sustainability/mam-esg-survey/mam-2021-esg-survey-report.pdf (noting 
that in a survey of 180 global institutional real assets investors, 
including asset managers, banks, consultants and investment 
advisors, foundations and endowments, insurance companies, and 
pension funds, who combined represent more than $21 trillion of 
assets under management, more than half of responding investors 
selected climate change as their primary ESG concern).
    \792\ See PWC, The Economic Realities of ESG (Oct. 28, 2021), 
available at https://www.pwc.com/gx/en/services/audit-assurance/corporate-reporting/esg-investor-survey.html.

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[[Page 21425]]

    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.\793\ 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.\794\
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    \793\ See Section IV.A.5.d.
    \794\ See Morrow and Sodali, Institutional Investor Survey 
(2021), available at https://higherlogicdownload.s3.amazonaws.com/GOVERNANCEPROFESSIONALS/a8892c7c-6297-4149-b9fc-378577d0b150/UploadedImages/Institutional_Investor_Survey_2021.pdf.
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    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.\795\ 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.\796\
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    \795\ See https://www.esgtoday.com/state-street-to-require-companies-to-provide-tcfd-aligned-climate-disclosures/.
    \796\ See BlackRock Investment Stewardship (BIS), Policies 
Updated Summary (2022), https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment-engprinciples-global-summary.pdf.
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    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+,\797\ the Global Investor Coalition on 
Climate Change (``GIC''),\798\ the Institutional Investors Group on 
Climate Change (``IIGCC''),\799\ and the Transition Pathway Initiative 
(``TPI''),\800\ with many of these groups seeing increasing membership 
in recent years.\801\ 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.\802\ Investors have also 
demonstrated their interest in climate-related issues through an 
increase in climate-related shareholder proposals \803\ and increased 
flows into mutual funds with environmental goals in their investment 
mandates.\804\
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    \797\ Climate Action 100+ is composed of 615 global investors 
across 33 markets with more than US$60 trillion in AUM. See Climate 
Action 100+, available at https://www.climateaction100.org/about/.
    \798\ As of Apr. 2018, GIC was signed by 409 investors 
representing more than U.S. $24 trillion in AUM, available at 
https://climateinitiativesplatform.org/index.php/Global_Investor_Coalition_on_Climate_Change_(GIC).
    \799\ IIGCC has more than 330 members, mainly pension funds and 
asset managers, across 22 countries, with over $33 trillion in AUM. 
See The Institutional Investors Group on Climate Change, available 
at https://www.iigcc.org/.
    \800\ The TPI is supported globally by 108 investors with more 
than $29 trillion combined AUM. See Transition Pathway Initiative, 
available at https://www.transitionpathwayinitiative.org/.
    \801\ For example, Climate Action 100+ launched in 2017 with 225 
investors with more than USD $26.3 trillion AUM to engage with 100+ 
of the world's highest emitting companies to reduce material climate 
risks. In 2021, Climate Action 100+ has grown to 615 investors, $60 
trillion in assets, engaging with 167 companies that represent 80%+ 
of global industrial emissions.
    \802\ See P. Kr[uuml]ger, Corporate Goodness and Shareholder 
Wealth, 115(2) Journal of Financial Economics 304-329 (2015); G. 
Capelle-Blancard, A. Petit, Every Little Helps? ESG News and Stock 
Market Reaction, Journal of Business Ethics 157, 543-565 (2019); and 
G. Serafeim and A. Yoon, Which Corporate ESG News Does the Market 
React To? (Forthcoming) Financial Analysts Journal (2021) (for 
evidence of stock market responses to ESG news). See also A. 
Bernstein, M. Gustafson, and R. Lewis, Disaster on the Horizon: The 
Price Effect of Sea Level Rise, 134.2 Journal of Financial Economics 
253-300 (2019) A. Bernstein, S. Billings, M. Gustafson, and R. 
Lewis, Partisan Residential Sorting on Climate Change Risk 
(Forthcoming), Journal of Financial Economics (2021); M. Baldauf, L. 
Garlappi, and C. Yannelis, Does Climate Change Affect Real Estate 
Prices? Only If You Believe In It, 33 (3) Review of Financial 
Studies 1256-1295 (2020) (for evidence of responses of investor 
demand in equilibrium prices and investment choice (based on 
heterogeneous preferences and beliefs) in real estate markets).
    \803\ A recent 2021 proxy season review by the Harvard Law 
School found that shareholder climate-related proposals have 
increased for the second consecutive year. The authors also note 
that, in 2021, environmental proposals were withdrawn at a 
meaningfully higher rate relative to the prior year. This is an 
indication of stronger commitments from companies to take actions 
towards the specified environmental goals, or at the very least 
provide the related disclosures. Many companies may prefer engaging 
with a proponent rather than taking the proposal to a vote. See 2021 
Proxy Season Review: Shareholder Proposals on Environmental Matters, 
available at https://corpgov.law.harvard.edu/2021/08/11/2021-proxy-season-review-shareholder-proposals-on-environmental-matters/.
    \804\ See S.M. Hartzmark and A.B. Sussman, Do Investors Value 
Sustainability? A Natural Experiment Examining Ranking and Fund 
Flows, 74 (6) The Journal of Finance 2789-2837 (2019). Data from 
fund tracker Morningstar Inc. compiled by Goldman Sachs Group Inc. 
shows that, since the start of 2019, a net $473 billion has flowed 
into stock mutual and exchange-traded funds with environmental goals 
as part of their mandates, compared to a net $103 billion going into 
all other stock funds. See Scott Patterson and Amrith Ramkumar, 
Green Finance Goes Mainstream, Lining Up Trillions Behind Global 
Energy Transition, Wall Street Journal (May 22, 2021), available at 
https://www.wsj.com/articles/green-finance-goes-mainstream-lining-up-trillions-behind-global-energy-transition-11621656039?mod=article_inline.
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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.\805\ Due to deficiencies 
in current climate-reporting practices, investor demand for comparable 
and reliable information does not appear to have been met.\806\ As a 
result, investors may face difficulties locating and assessing climate-
related information when making their investment or voting 
decisions.\807\

[[Page 21426]]

Below we describe some key market failures with regard to disclosure, 
for example (1) disclosures are not costless; (2), there are agency 
problems; \808\ (3) managers may inaccurately present information; and 
(4) investor responses may be unpredictable and non-unfirm.\809\ In 
addition, there may be other problems, e.g. a lack of consistency, that 
may indicate Commission action.
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    \805\ See Section IV.B.2.b.
    \806\ See IOSCO, Report on Sustainability-Related Registrant 
Disclosures (2021), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD678.pdf.
    \807\ See GAO, Climate-Related Risks (2018) available at https://www.gao.gov/assets/gao-18-188.pdf (reporting that ``investors may 
find it difficult to navigate through the filings to identify, 
compare, and analyze the climate-related disclosures across 
filings'').
    \808\ Agency problems are those conflicts of interest between 
shareholders (i.e., the principals) and managers (i.e., the agents) 
of a firm.
    \809\ See Beyer, Cohen, Lys, and Walther, The Financial 
Reporting Environment: Review of The recent Literature, J. Acct. 
Econ. 296-343 (2010) for a more technical and detailed discussion of 
these and other additional assumptions.
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(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.\810\ 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.\811\ 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.
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    \810\ See for example R.E. Verrecchia, Discretionary Disclosure, 
5 Journal of Accounting and Economics 365-380 (1983).
    \811\ See Robert Freeman and Senyo Tse, An Earnings Prediction 
Approach to Examining Intercompany Information Transfers, 15(4) J. 
Acct. Econ. 509-523 (1992).
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    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.\812\ 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.
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    \812\ It is worth noting that in some cases, undertaking costly 
signals can allow agents to credibly signal their type to investors. 
In these cases, costly disclosures can lead to a separating 
equilibrium where it may otherwise not exist. See D. Kreps and J. 
Sobel, 2(1) Signaling, Handbook of Game Theory with Economic 
Applications, 849-867 (1994); J. Riley, Silver Signals: Twenty-Five 
Years of Screening and Signaling, 39(1) Journal of Economic 
Literature 432-478, (2001).
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(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.\813\ 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.
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    \813\ See E. Einhorn. Voluntary Disclosure Under Uncertainty 
About the Reporting Objective, 43 Journal of Accounting and 
Economics 245-274 (2007).
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(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.\814\ 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.\815\
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    \814\ See E. Einhorn, and A. Ziv, Biased Voluntary Disclosure, 
Review of Accounting Studies 420-442 (2012) (Biases in reporting can 
be any number of costs in these models. These include not only 
inefficient actual investments associated with the cost of distorted 
reporting, but also the risk of litigation, reputation erosion, and/
or future flexibility in reporting.).
    \815\ If misrepresentation becomes sufficiently costly, then 
there may be no managers who find it advantageous to misrepresent, 
despite any potential benefits. In this case, purposeful 
misrepresentation would not occur, thereby fulfilling one of the 
assumptions of the standard full revelation argument. Clear 
guidelines for disclosure and imposed costs upon the discovery of 
misrepresentation are important mechanisms for enforcing and 
promoting the transmission of information to investors.
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    If, on the other hand, misreporting has no costs for managers, then 
this results in what is referred to as a cheap talk equilibrium.\816\ 
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.
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    \816\ See V. Crawford, J. Sobel, Strategic Information 
Transformation, 50 Econometrica 1431-1451 (1982).
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    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.

[[Page 21427]]

(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.\817\ 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.\818\ 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.
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    \817\ See J. Suijs, Voluntary Disclosure Of Information When 
Firms Are Uncertain Of Investor Response, 43 Journal of Accounting 
and Economics 391-410 (2007).
    \818\ See R.A. Dye, Investor Sophistication and Voluntary 
Disclosures, 3 Review of Accounting Studies 261-287 (1998).
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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.\819\ 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.\820\ If management prioritizes short-term results \821\ due 
to pressures to perform along certain metrics,\822\ management may fail 
to assess and provide relevant disclosures on certain climate-related 
risks,\823\ particularly those that are medium- or long-term in 
nature.\824\ 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.
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    \819\ Longer horizons, for example, tend to involve changes in 
chronic physical risks--sea-level rise, drought, etc. Shorter-term 
horizons may, instead, be relevant for any increase in acute 
physical risks such as hurricanes, wildfires, and heatwaves. See ING 
Climate Risk Report 2020, available at https://www.ing.com/MediaEditPage/ING-Climate-Risk-report-2020.htm.
    \820\ A stream of literature examines the association of 
climate-related disclosures with corporate governance structures and 
managerial characteristics. See, e.g., M. K[inodot]l[inodot][ccedil] 
and C. Kuzey, The Effect of Corporate Governance on Carbon Emission 
Disclosures: Evidence from Turkey, 11-1 International Journal of 
Climate Change Strategies and Management 35-53 (2019). See also S. 
Yunus, E.T. Evangeline, and S. Abhayawansa, Determinants of Carbon 
Management Strategy Adoption: Evidence from Australia's Top 200 
Publicly Listed Firms, 31-2 Managerial Auditing Journal 156-179 
(2016).
    \821\ Henry M. Paulson Jr., Short-Termism and the Threat From 
Climate Change, Perspectives on the Long Term: Building a Stronger 
Foundation for Tomorrow (Apr. 2015), available at https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/short-termism-and-the-threat-from-climate-change.
    \822\ Factors including corporate executive compensation and 
attention to quarterly earnings and reporting are thought to 
contribute to excessive focus on short-term goals. See, e.g., Short-
Termism Revisited, available at https://corpgov.law.harvard.edu/2020/10/11/short-termism-revisited/.
    \823\ See How to Take the Long-Term View in a Short-Term World, 
Moral Money (Financial Times), (Feb. 25, 2021), available at https://www.ft.com/content/5bc1580d-911e-4fe3-b5b5-d8040f060fe1.
    \824\ See Richard Mahony and Diane Gargiulo, The State of 
Climate Risk Disclosure: A Survey of U.S. Companies (2019) (A recent 
survey conducted on the members of the Society for Corporate 
Governance (SCG) about the state of U.S. climate risk disclosures 
revealed that tying executive compensation to progress on climate 
goals is beginning to emerge among some companies, but it is far 
from a common practice. Only 6% of respondents said their board 
linked compensation to climate objectives.), available at https://www.dfinsolutions.com/sites/default/files/documents/2019-10/TCFD_II_Climate_Disclosure_V10_revisedFINAL.pdf.
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    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.\825\ 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.
---------------------------------------------------------------------------

    \825\ See, e.g., TCFD, Recommendations of the Task Force on 
Climate-Related Financial Disclosures, at 16 (June 2017), available 
at https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-2017-TCFD-Report-11052018.pdf.
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    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.\826\ 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.\827\ 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

[[Page 21428]]

investor responses. In this circumstance, managers may prefer to 
withhold applicable disclosures.\828\
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    \826\ In other words, this assumes that all investors uniformly 
interpret (and react to) managers' disclosures or their absence and 
that investors' interpretation and reaction is known to managers. 
See, e.g., A. Beyer, D.A. Cohen, T.Z. Lys, and B.R. Walther, The 
Financial Reporting Environment: Review of the Recent Literature, 50 
(2) Journal of Accounting and Economics 296-343 (2010).
    \827\ See, e.g., TCFD, Recommendations of the Task Force on 
Climate-Related Financial Disclosures, at 16 (June 2017), available 
at https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-2017-TCFD-Report-11052018.pdf.
    \828\ See, e.g., M.J. Fishman and K.M. Hagerty, Mandatory versus 
Voluntary Disclosure in Markets With Informed and Uninformed 
Customers, 19 (1) Journal of Law, Economics, & Organization 45-63 
(2003); P. Bond and Y. Zeng, Silence Is Safest: Information 
Disclosure When the Audience's Preferences Are Uncertain 
(forthcoming), Journal, of Financial Economics (2021); D. Butler, 
and D. Read, Unravelling Theory: Strategic (Non-) Disclosure of 
Online Ratings, 12 Games 73 (2021).
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    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.\829\ Even 
when companies assess and disclose climate-related risks, reporting 
fragmentation can present substantial obstacles to investors in 
processing this information.\830\ 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.\831\ Moreover, these disclosures 
are often vague and boilerplate, creating further challenges for 
investors.\832\ 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 \833\ and in practice.\834\
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    \829\ See J.A. Bingler, M. Kraus, and M. Leippold, Cheap Talk 
and Cherry-Picking: What Climate Bert Has to Say on Corporate 
Climate Risk Disclosures (2021) available at, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3796152.
    \830\ Carbon Disclosure Project (``CDP''), Pitfalls of Climate-
Related Disclosures (2020), available at Pitfalls-of-Climate-
Related-Disclosure.pdf (rackcdn.com).
    \831\ See SASB, The State Of Disclosure: An Analysis of the 
Effectiveness of Sustainability Disclosure in SEC Filings, (2017), 
available at https://www.sasb.org/knowledge-hub/state-of-disclosure-2017/.
    \832\ The SASB reports that about 50% of SEC registrants provide 
generic or boilerplate sustainability information in their 
regulatory filings.
    \833\ See Vincent P. Crawford and Joel Sobel, Strategic 
Information Transmission, Econometrica: Journal of the Econometric 
Society 1431-1451 (1982).
    \834\ See, e.g., Robert Forsythe, Russell Lundholm and Thomas 
Rietz, Cheap Talk, Fraud, and Adverse Selection In Financial 
Markets: Some Experimental Evidence, 12 (3) The Review of Financial 
Studies 481-518 (July 1999), available at https://doi.org/10.1093/revfin/12.3.0481.
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    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.\835\ 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.\836\ 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.\837\ 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.\838\ Some studies point 
to the potential for substantial underreporting of material climate-
related information within the current voluntary reporting regime.\839\
---------------------------------------------------------------------------

    \835\ The TCFD, the SASB, the GRI, the Principles for 
Responsible Investment, the PCAF, and the CDP (among others), have 
all developed standards and systems that aim to help firms and 
investors identify, measure, and communicate climate-related 
information and incorporate that information into their business 
practices. Multiple frameworks have emerged, in part, because each 
seeks to provide different information or fulfill different 
functions when it comes to disclosing information related to 
climate-related risks or other ESG factors that may be important to 
investors.
    \836\ See Climate Risk Disclosures & Practices, available at 
https://climatedisclosurelab.duke.edu/wp-content/uploads/2020/10/Climate-Risk-Disclosures-and-Practices.pdf.
    \837\ See Section IV.A.5. A recent survey of members of the 
Society for Corporate Governance (SCG) regarding the state of U.S. 
climate risk disclosures revealed that companies are using many of 
the existing frameworks to present emissions, environmental data, 
and other information on ESG issues. Many of the respondents 
indicated that their companies are now reporting using CDP, GRI, 
SASB and other standards, with corporate registrants expressing a 
desire for greater clarity regarding how to make adequate climate 
disclosures. The survey results indicate that many companies are 
grappling with how best to provide useful information to investors 
regarding complex and interrelated risks. See Richard Mahony and 
Diane Gargiulo, The State of Climate Risk Disclosure: A Survey of 
U.S. Companies (2019), available at https://www.dfinsolutions.com/sites/default/files/documents/2019-10/TCFD_II_Climate_Disclosure_V10_revisedFINAL.pdf.
    \838\ See Lee Reiners and Charlie Wowk, Climate-Risk-
Disclosures-and-Practices (2021), available at https://climatedisclosurelab.duke.edu/wp-content/uploads/2020/10/Climate-Risk-Disclosures-and-Practices.pdf.
    \839\ A past study using ESG disclosure data in Bloomberg on US-
listed firms, found that, on average, from 2007 to 2015, firms 
provided only about 18% (median: 13%) of the prescribed SASB 
disclosure items (which serve as benchmark for financially material 
disclosures). See J. Grewal, C. Hauptmann and G. Serafeim, Material 
Sustainability Information and Stock Price Informativeness, Journal 
of Business Ethics (Forthcoming) (2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2966144.
---------------------------------------------------------------------------

    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).\840\ 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.
---------------------------------------------------------------------------

    \840\ See H.B. Christensen, L. Hail, and C. Leuz, Mandatory CSR 
and Sustainability Reporting: Economic Analysis and Literature 
Review, Review of Accounting Studies 1-73 (2021).
---------------------------------------------------------------------------

    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

[[Page 21429]]

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.\841\
---------------------------------------------------------------------------

    \841\ One study documents how investors can use information from 
one firm to make inferences of other similar firms in the context of 
earnings announcements. See supra note 812.
---------------------------------------------------------------------------

    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.\842\ 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.\843\ 
Recent academic work provides evidence of firms' engagement in 
obfuscation and other misleading efforts (so-called ``greenwashing'') 
\844\ 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.\845\ 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.\846\ 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.\847\
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    \842\ By proposing to treat the proposed required climate-
related disclosures as ``filed,'' we are therefore subjecting them 
to potential liability under Exchange Act Section 18, except for 
disclosures made 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. See Section II.C.4 (discussions within).
    \843\ See Section II.H.k.
    \844\ A review of several academic papers reveal that there is 
no universally accepted definition of ``greenwashing.'' Though the 
term ``greenwashing'' is often used in industry discussions 
regarding ESG, the Commission does not define ``greenwashing'' in 
this proposal, rules, or form amendments. Greenwashing is typically 
described as the set of activities conducted by firms or funds to 
falsely convey to investors that their investment products or 
practices are aligned with environmental or other ESG principles.
    \845\ See Ruoke Yang, What Do We Learn From Ratings About 
Corporate Social Responsibility?, R&R Journal of Financial 
Intermediation (2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3165783.
    \846\ Florian Berg, Julian K[ouml]lbel, Roberto Rigobon, 
Aggregate Confusion: The Divergence of ESG Ratings, MIT Sloan School 
(Working Paper 5822-19) (May 17, 2020), available at https://ssrn.com/abstract=3438533 or http://dx.doi.org/10.2139/ssrn.3438533. 
Authors found that the correlations between six different ESG 
ratings are on average 0.54, and range from 0.38 to 0.71, while the 
correlations between credit ratings were 0.99. See also OECD, OECD 
Business and Finance Outlook 2020, Sustainable and Resilient Finance 
(Sept. 29, 2020), available at https://www.oecd.org/daf/oecd-business-and-finance-outlook-26172577.htm. OECD analyzed different 
rating providers, such as Bloomberg, MSCI and Refinitiv and found 
wide differences in the ESG ratings assigned, with an average 
correlation of 0.4. When OECD analysis then compared ESG ratings 
with the issuer credit rating by major providers, it found that 
credit scores for selected issuers vary much less. See also 
International Monetary Fund, Global Financial Stability Report (Oct. 
2019), available at https://www.imf.org/en/Publications/GFSR/Issues/2019/10/01/global-financial-stability-report-october-2019. It found 
that only 37% of Lipper ethical funds also carry a sustainable 
designation by Bloomberg.
    \847\ See OECD Business and Finance Outlook 2020, Sustainable 
and Resilient Finance (Sept. 29, 2020); H. Friedman, M. Heinle, and 
I. Luneva, A Theoretical Framework for Environmental and Social 
Impact Reporting (Working Paper) (2021).
---------------------------------------------------------------------------

    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.\848\ Such stock price effects tend to display 
cross-sectional heterogeneity with, for example, firms disclosing large 
GHG emissions experiencing price declines.\849\ Similar effects have 
also been observed in derivatives markets.\850\ Investor responses in 
real estate markets potentially affected by physical risks,\851\ as 
well as revealed preferences from flows into mutual funds with 
environmental goals in their investment mandates,\852\ 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.
---------------------------------------------------------------------------

    \848\ See J. Grewal, E.J. Riedl, and G. Serafeim, Market 
Reaction to Mandatory Nonfinancial Disclosure, 65 (7) Management 
Science 3061-3084 (2019).
    \849\ See V. Jouvenot and P. Kruger, Mandatory Corporate Carbon 
Disclosure: Evidence from a Natural Experiment (Working Paper) 
(2021); P. Bolton and M. Kacperzcyk, Signaling through Carbon 
Disclosure (Working Paper) (2020).
    \850\ E. Ilhan, Z. Sautner, G. Vilkov, Carbon Tail Risk, 34 (3) 
Review of Financial Studies 1540-1571 (2021).
    \851\ See supra note 802.
    \852\ See supra note 804.

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[[Page 21430]]

    Improving and standardizing climate disclosures also could mitigate 
adverse selection problems that may arise in the presence of asymmetric 
information \853\ by making more accurate and standardized information 
available to the general public.\854\ 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.\855\ 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.\856\
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    \853\ Asymmetric information occurs when one party to an 
economic transaction possesses greater material knowledge than the 
other party. Adverse selection occurs when the more knowledgeable 
party only chooses to transact in settings that, based on their 
private information, is advantageous for them. Less informed parties 
aware of their informational disadvantage might be less inclined to 
transact at all for fear of being taken advantage of. See George 
Akerlof, The Market for `Lemons, Quality Uncertainty and the Market 
Mechanism, 84 (3) Quarterly Journal of Economics 488-500 (1970).
    \854\ See R.E. Verrecchia, Essays on Disclosure, 32 Journal of 
Accounting and Economics 1-3, 97-180 (2001).
    \855\ See R. Lambert, C. Leuz, and R.E. Verrecchia, Accounting 
Information, Disclosure, and the Cost of Capital, 45 (2) Journal of 
Accounting Research 385-420 (2007).
    \856\ In 2021, the CDP coordinated with 168 financial 
institutions, with a combined AUM of $17 trillion USD, to engage 
over 1,300 companies to request climate-related information, among 
other topics. See CDP Non-Disclosure Campaign: 2021 Results, 
available at https://cdn.cdp.net/cdp-production/cms/reports/documents/000/006/069/original/CDP_2021_Non-Disclosure_Campaign_Report_10_01_22_%281%29.pdf?1642510694.
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    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,\857\ while omitting harder to verify 
risks.\858\ 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 \859\ and the 
misalignment of interests and incentives between long-term shareholders 
and management,\860\ whereby the latter may unduly focus on short-term 
results \861\ given pressures to demonstrate performance.\862\ 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.
---------------------------------------------------------------------------

    \857\ See supra note 830 (A recent study, for example, shows 
that absent mandatory requirements from regulators, voluntary 
disclosures following third-party frameworks are generally of poor 
quality and that firms making these disclosures cherry-pick to 
report primarily non-material climate risk information.).
    \858\ See World Economic Forum, How to Set Up Effective Climate 
Governance on Corporate Boards: Guiding Principles and Questions 
(2019), available at https://www3.weforum.org/docs/WEF_Creating_effective_climate_governance_on_corporate_boards.pdf. 
In addition, there are a number of academic studies examining the 
association of climate-related disclosures with corporate governance 
structures and managerial characteristics. See, e.g., M. 
K[inodot]l[inodot][ccedil] and C. Kuzey, The Effect of Corporate 
Governance on Carbon Emission Disclosures: Evidence from Turkey, 11-
1 International Journal of Climate Change Strategies and Management 
35-53 (2019); S. Yunus, E.T. Evangeline, and S. Abhayawansa, 
Determinants of Carbon Management Strategy Adoption: Evidence from 
Australia's Top 200 Publicly Listed Firms, 31-2 Managerial Auditing 
Journal 156-179 (2016); Caroline Flammer, Michael W. Toffel, and 
Kala Viswanathan, Shareholder Activism and Firms' Voluntary 
Disclosure of Climate Change Risks, 42-10 Strategic Management 
Journal 1850-1879 (Oct. 2021).
    \859\ Physical and transition climate risks can materialize over 
time horizons ranging from the immediate future to several decades. 
Long horizons, for example, tend to involve changes in chronic 
physical risks--(sea-level rise, drought, etc.). Shorter-term 
horizons may, instead, be relevant for increase in acute physical 
risks such as hurricanes, wildfires, and heatwaves. See ING Climate 
Risk Report 2020,  available at https://www.ing.com/2021-Climate-Report.htm.
    \860\ A report by the Environmental Audit Committee of the UK 
House of Commons on Greening Finance, issued in June 2018, found 
that short-termism is a pervasive problem in corporate decision 
making and leaves business ill-equipped to consider and incorporate 
long term risks, such as climate change and sustainability. See 
Envtl. Audi Comm., House of Commons, U.K. Parliament, Greening 
Finance: Embedding Sustainability in Financial Decision Making (June 
6, 2018), available at https://publications.parliament.uk/pa/cm201719/cmselect/cmenvaud/1063/106302.htm.
    \861\ See Henry M. Paulson Jr., Short-Termism and the Threat 
From Climate Change, Perspectives on the Long Term: Building a 
Stronger Foundation for Tomorrow (Apr. 2015), available at https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/short-termism-and-the-threat-from-climate-change.
    \862\ Factors including corporate executive compensation and 
attention to quarterly earnings and reporting are thought to 
contribute to excessive focus on short-term goals. See, e.g., 
https://corpgov.law.harvard.edu/2020/10/11/short-termism-revisited.
---------------------------------------------------------------------------

    Agency problems might be exacerbated by registrants' use of 
boilerplate language or selective disclosure (i.e., ``cherry 
picking''),\863\ 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.\864\ 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.\865\ 
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.
---------------------------------------------------------------------------

    \863\ See supra note 806; see also Morningstar, Corporate 
Sustainability Disclosures (2021), available at https://www.morningstar.com/en-uk/lp/corporate-sustainability-disclosures. 
(``Companies will disclose the good and hide the bad while 
disclosure remains voluntary.'').
    \864\ See JE Fisch, Making Sustainability Disclosure 
Sustainable, 107 Georgetown Law Journal 923-966 (2019). See Climate 
Risk Disclosures & Practices: Highlighting the Need for a 
Standardized Regulatory Disclosure Framework to Weather the Impacts 
of Climate Change on Financial Markets, (2020), available at https://climatedisclosurelab.duke.edu/wp-content/uploads/2020/10/Climate-Risk-Disclosures-and-Practices.pdf.
    \865\ See C. Kanodia and D. Lee, Investment and Disclosures: The 
Disciplinary Role of Performance Reports, 36(1) Journal of 
Accounting Research 33-55 (1998); P. Healy, and K. Palepu, 
Information Asymmetry, Corporate Disclosure, and the Capital 
Markets: A Review of the Empirical Disclosure Literature, 31 (1-3) 
Journal of Accounting and Economics 405-440 (2001); Huang Pinghsun 
and Yan Zhang, Does Enhanced Disclosure Really Reduce Agency Costs? 
Evidence from the Diversion of Corporate Resources, 87(1) The 
Accounting Review, 199-229 (2012); R.M. Bushman and A.J. Smith, 
Financial Accounting Information and Corporate Governance, 32 (1-3) 
Journal of Accounting and Economics 237-333 (2001); R. Lambert, C. 
Leuz, and R.E. Verrecchia, Accounting Information, Disclosure, and 
the Cost of Capital, 45 (2) Journal of Accounting Research 385-420 
(2007).
---------------------------------------------------------------------------

    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

[[Page 21431]]

(or firm valuations).\866\ 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.
---------------------------------------------------------------------------

    \866\ See Section IV.D for more information on capital market 
benefits.
---------------------------------------------------------------------------

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 CO2e, the price per metric ton of 
CO2e, 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

[[Page 21432]]

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,\867\ 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.\868\
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    \867\ Transition plans would be defined as a registrant's 
strategy and implementation plan to reduce climate-related physical 
and transition risks and increase climate-related opportunities, 
including by reducing its own emissions. If the registrant has made 
a public commitment to reduce its GHG emissions by a certain date, 
it must disclose such date and its plan to achieve its public 
commitment.
    \868\ See Section IV.C.1.f for a more detailed discussion of the 
potential benefits of targets and goals disclosure.
---------------------------------------------------------------------------

    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.\869\
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    \869\ The choice of a one percent threshold is consistent with 
what the Commission currently uses in other contexts for disclosure 
of certain items within the financial statements and without (e.g., 
Sec. Sec.  210.5-03.1(a), 210.12-13, and 229.404(d)).
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    We expect that the proposed financial statement metrics impact 
would provide additional transparency into the nature

[[Page 21433]]

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.\870\ 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.
---------------------------------------------------------------------------

    \870\ See supra note 830 and 806.
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    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.\871\ 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.\872\ Academic research finds that assurance 
procedures can increase the relevance and reliability of disclosures, 
particularly for those involving significant estimation uncertainties. 
\873\
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    \871\ Such audits could increase the probability of discovering 
and penalizing any misrepresentation. Since this would increase the 
expected costs of engaging in misrepresentation, as discussed in 
Section IV.B.2, this would also be likely to increase the odds of 
accurate revelation of material information.
    \872\ See Section II.F.5.
    \873\ See M. DeFond and J.A. Zhang, A Review of Archival 
Auditing Research, 58(2-3) Journal of Accounting and Economics 275-
326 (2014); V.K. Krishnan, The Association Between Big 6 Auditor 
Industry Expertise and the Asymmetric Timeliness of Earnings 20 
Journal of Accounting, Auditing and Finance 209-228 (2005); W. 
Kinney and R. Martin, Does Auditing Reduce Bias in Financial 
Reporting? A Review of Audit-Related Adjustment Studies, 13 
Auditing: A Journal of Practice & Theory 149-156 (1994); K.B. Behn, 
J.H. Choi, and T. Kang, (2008), Audit Quality and Properties of 
Analyst Earnings Forecasts 83 The Accounting Review 327-349 (2008). 
Some commenters expressed similar views. See, e.g., Comment Letters 
from CAQ, Ceres; Impax Asset Management; San Francisco Employees' 
Retirement System; and UNEP-FI.
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e. GHG Emissions Metrics
    The proposed rules would require all registrants to disclose Scope 
1 and Scope 2 GHG emissions. Given the

[[Page 21434]]

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.\874\ 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.\875\ 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.\876\ 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.
---------------------------------------------------------------------------

    \874\ See Section IV.A.3.
    \875\ See supra note 737.
    \876\ See Section IV.A.3.
---------------------------------------------------------------------------

    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.\877\ 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.
---------------------------------------------------------------------------

    \877\ See H.B. Christensen, E. Floyd, L.Y. Liu, and M Maffett, 
The Real Effects of Mandated Information on Social Responsibility in 
Financial Reports: Evidence from Mine-Safety Records, 64 (2-3) 
Journal of Accounting and Economics 284-304 (2017).
---------------------------------------------------------------------------

    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 CO2e 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

[[Page 21435]]

avoid potential investor confusion about the reporting scope used in 
the financial statements and enhance comparability across 
registrants,\878\ helping investors in assessing a registrant's 
transition risk against that of its competitors.
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    \878\ Unlike the GHG Protocol, which currently provides 
different options for setting organizational boundaries, the 
proposed rules would require that the scope of consolidation and 
reporting be consistent for financial data and GHG emissions data.
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    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.\879\ 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.\880\ 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%.\881\ 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.\882\ 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),\883\ 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.\884\
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    \879\ The proposed rules include a safe harbor for Scope 3 
emissions disclosure from certain forms of liability under the 
federal securities laws.
    \880\ In calculating Scope 3 emissions, registrants have the 
flexibility to choose a methodology they deem fit, however, the 
specific methodology must be disclosed. Estimates or ranges are 
permitted. Emissions reporting must be presented as CO2e 
as well as disaggregated into the different types of GHGs.
    \881\ See Eric Rosenbaum, Climate experts are worried about the 
toughest carbon emissions for companies to capture (Aug. 18, 2021) 
available at https://www.cnbc.com/2021/08/18/apple-amazon-exxon-and-
the-toughest-carbon-emissions-to-
capture.html#:~:text=Scope%203%20carbon%20emissions%2C%20or,as%2085%2
5%20to%2095%25.
    \882\ See also MSCI, Emissions: Seeing the Full Picture (Sept. 
17, 2020), available at https://www.msci.com/www/blog-posts/scope-3-carbon-emissions-seeing/02092372761.
    \883\ The MSCI ACWI Investable Market Index (IMI) captures 
large, mid and small cap representation across 23 Developed Markets 
and 25 Emerging Markets countries, covering approximately 99% of the 
global equity investment opportunity set.
    \884\ Ibid.
---------------------------------------------------------------------------

    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.\885\ 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.
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    \885\ Scope 3 upstream and downstream emissions represents a 
substantial portion of global GHG emissions. For example, according 
to a recent report, Scope 3 downstream emissions that happen after a 
product or service leaves a company's control/ownership represented 
about 49% of global GHG emissions in 2019. Capital goods (87%), 
banks (81%) and retailing (80%) were among the industries with the 
highest percentage of Scope 3 downstream emissions relative to their 
total emissions. These downstream emissions can come from a variety 
of sources. For example, capital goods activities include emissions 
from raw material manufacturing and transport. Banks emit few GHGs 
to run their operations--but finance the emissions of other 
companies through loans and investments. See State of Green Business 
2021, available at https://www.spglobal.com/marketintelligence/en/news-insights/research/state-of-green-business-2021.
---------------------------------------------------------------------------

    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.\886\ 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.\887\ 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.
---------------------------------------------------------------------------

    \886\ See, e.g. I Ben-David, Y. Jang, S. Kleimeier, and M. 
Viehs, Exporting Pollution: Where Do Multinational Firms Emit CO2? 
36 (107) Economic Policy 377-437 (2021); X. Li and Y.M. Zhou, 
Offshoring Pollution While Offshoring Production? 38 Strategic 
Management Journal 2310-2329 (2017).
    \887\ See R. Dai, R. Duan, H. Liang, and L. Ng, Outsourcing 
Climate Change (SSRN Working Paper) (2021), available here https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3765485.
---------------------------------------------------------------------------

    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

[[Page 21436]]

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.\888\ 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.
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    \888\ See J. van Binsbergen, Duration-Based Stock Valuation: 
Reassessing Stock Market Performance and Volatility (2021), 
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3611428; D. Greenwald, M. Leombroni, H. 
Lustig, and S. van Nieuwerburgh, Financial and Total Wealth 
Inequality with Declining Interest Rates (2021), available at 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3789220. Both of 
these papers find that the Macauley duration of equity, the weighted 
average length of time which investors will receive the cash flows 
from the asset, is in excess of 35 years as of 2019. This indicates 
that changes in cash flows in the distant future can impact equity 
prices today.
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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,\889\ as well as the potential higher costs associated with 
their verification.
---------------------------------------------------------------------------

    \889\ See Section II.G.3.
---------------------------------------------------------------------------

    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.\890\ 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.\891\ 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.\892\ 
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

[[Page 21437]]

of reliability against which to evaluate the disclosures.\893\
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    \890\ See IFAC Charts the Way Forward for Assurance of 
Sustainability Information (Dec. 6, 2021), available at https://www.ifac.org/news-events/2021-12/ifac-charts-way-forward-assurance-sustainability-information.
    \891\ See Section II.H.1 for more information.
    \892\ See PCAOB, AS 2110 Identifying and Assessing Risks of 
Material Misstatement (2010).
    \893\ See K. Hodge, K., N. Subramaniam, J. Stewart, Assurance of 
Sustainability Reports: Impact on Report Users' Confidence and 
Perceptions of Information Credibility, (19) Australian Accounting 
Review 178-194 (2009), available at https://doi.org/10.1111/j.1835-2561.2009.00056.x.
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    Academic research finds that assurance procedures can increase the 
relevance and reliability of disclosures,\894\ 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.\895\ 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.\896\
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    \894\ See supra note 874.
    \895\ See, e.g., K. Hodge, K., N. Subramaniam, and J. Stewart, 
Assurance of Sustainability Reports: Impact on Report Users' 
Confidence and Perceptions of Information Credibility, 19 Australian 
Accounting Review 178-194 (2009), available at https://doi.org/10.1111/j.1835-2561.2009.00056.x; Mark Sheldon, User Perceptions of 
CSR Disclosure Credibility with Reasonable, Limited and Hybrid 
Assurances (Dissertation) (2016) available at https://vtechworks.lib.vt.edu/bitstream/handle/10919/65158/Sheldon_MD_D_2016.pdf. This absence of evidence, however, is not 
necessarily evidence of absence. It is possible that reasonable 
assurance can have benefits over limited assurance that are not 
easily identifiable.
    \896\ See R.J. Casey and J.H. Grenier, Understanding and 
contributing to the enigma of corporate social responsibility (CSR) 
assurance in the United States, 34(1) Auditing: A Journal of 
Practice & Theory 97, 97-130 (2015). The authors also find that the 
lower costs of capital are in excess of estimated assurance costs 
(i.e., 5% to 10% of total audit fees) for the majority of companies. 
We acknowledge, however, that the benefits cited in this study may 
be overstated to the extent that they reflect a selection bias. 
Specifically, companies that anticipate a net loss due to assurance 
would choose to forgo obtaining such assurance, thereby removing 
themselves from the treatment group. This potential limitation in 
interpreting such findings is also supported by evidence of 
systematic differences in companies voluntarily reporting higher 
assurance levels. See C.H. Cho, G. Michelon, D.M. Patten, and R.W. 
Roberts, CSR report assurance in the USA: An empirical investigation 
of determinants and effects, 5(2) Sustainability Accounting, 
Management and Policy Journal 130, 130-148 (2014), available at 
https://doi.org/10.1108/SAMPJ-01-2014-0003.
---------------------------------------------------------------------------

    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.\897\ 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.\898\
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    \897\ See N. Tepalagul, and L. Lin, Auditor Independence And 
Audit Quality: A Literature Review, 30(1) Journal of Accounting, 
Auditing & Finance 101-121 (2015) (for a more detailed discussion on 
academic evidence on independence in auditing).
    \898\ See Marco Grotteria, and Roberto Gomez Cram, Do Financial 
Investors Underreact To Voluntary Corporate Disclosure? (Working 
Paper) (2022).
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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

[[Page 21438]]

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.\899\ 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).
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    \899\ As of Jan. 25, 2022, The Climate Pledge has acquired 217 
signatories. See The Climate Pledge, available at https://www.theclimatepledge.com/us/en/Signatories.
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    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.\900\ 
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.
---------------------------------------------------------------------------

    \900\ See S. Lu, The Green Bonding Hypothesis: How do Green 
Bonds Enhance the Credibility of Environmental Commitments? (2021), 
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3898909.
---------------------------------------------------------------------------

    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.\901\ 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.\902\ 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.
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    \901\ See supra Sections II.G.1.b. and III C.1.e.
    \902\ See id.
---------------------------------------------------------------------------

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.\903\ These benefits are expected to reduce search costs and 
substantially improve investors' information-processing 
efficiency.\904\ 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.\905\ 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.\906\
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    \903\ For example, structuring climate-related disclosures would 
enable more advanced analyses than those described in the 
aforementioned Commission staff review that used keyword searches 
and NLP. See supra IV.A.5.a.
    \904\ The findings on XBRL cited in the following paragraphs are 
not necessarily focused on climate-related disclosures and metrics, 
but we expect the findings to be generally applicable and to result 
in similar benefits for investors.
    \905\ See, e.g., Y. Cong, J. Hao, and L. Zou, The Impact of XBRL 
Reporting on Market Efficiency, 28 J. Info. Sys. 181 (2014) (finding 
support for the hypothesis that ``XBRL reporting facilitates the 
generation and infusion of idiosyncratic information into the market 
and thus improves market efficiency''); Y. Huang, J.T. Parwada, Y.G. 
Shan, and, J. Yang, Insider Profitability and Public Information: 
Evidence From the XBRL Mandate (Working Paper) (2019) (finding XBRL 
adoption levels the informational playing field between insiders and 
non-insiders); J. Efendi, J.D. Park, and C. Subramaniam, Does the 
XBRL Reporting Format Provide Incremental Information Value? A Study 
Using XBRL Disclosures During the Voluntary Filing Program, 52 
Abacus 259 (2016) (finding XBRL filings have larger relative 
informational value than HTML filings); J. Birt, K. Muthusamy, and 
P. Bir, XBRL and the Qualitative Characteristics of Useful Financial 
Information, 30 Account. Res. J. 107 (2017) (finding ``financial 
information presented with XBRL tagging is significantly more 
relevant, understandable and comparable to non-professional 
investors''); S.F. Cahan, S. Chang, W.Z. Siqueira, and K. Tam, The 
Roles of XBRL and Processed XBRL in 10-K Readability, J. Bus. Fin. 
Account. (2021) (finding Form 10-K file size reduces readability 
before XBRL's adoption since 2012, but increases readability after 
XBRL adoption, indicating ``more XBRL data improves users' 
understanding of the financial statements'').
    \906\ See, e.g., P.A. Griffin, H.A. Hong, J.B. Kim, and J.H. 
Lim, The SEC's XBRL Mandate and Credit Risk: Evidence on a Link 
between Credit Default Swap Pricing and XBRL Disclosure, 2014 
American Accounting Association Annual Meeting (2014) (attributing 
the negative association between XBRL information and credit default 
swap spreads to ``(i) a reduction in firm default risk from better 
outside monitoring and (ii) an increase in the quality of 
information about firm default risk from lower information cost''); 
J.Z. Chen, H.A. Hong, J.B. Kim, and J.W. Ryou, Information 
Processing Costs and Corporate Tax Avoidance: Evidence from the 
SEC's XBRL Mandate, 40 (2) J. Account Pub. Pol. (2021) (finding XBRL 
reporting decreases likelihood of firm tax avoidance, because ``XBRL 
reporting reduces the cost of IRS monitoring in terms of information 
processing, which dampens managerial incentives to engage in tax 
avoidance behavior'').

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[[Page 21439]]

    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.\907\ 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.\908\ 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.\909\
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    \907\ Additional information intermediaries that have used XBRL 
disclosures may include financial media, data aggregators and 
academic researchers. See, e.g., N. Trentmann, Companies Adjust 
Earnings for Covid-19 Costs, but Are They Still a One-Time Expense? 
The Wall Street Journal (2020), available at https://www.wsj.com/articles/companies-adjust-earnings-for-covid-19-costs-but-are-they-still-a-one-time-expense-11600939813 (citing XBRL research software 
provider Calcbench as data source); Bloomberg Lists BSE XBRL Data, 
XBRL.org (2018), available at https://www.xbrl.org/news/bloomberg-lists-bse-xbrl-data/; R. Hoitash, and U. Hoitash, Measuring 
Accounting Reporting Complexity with XBRL, 93 Account. Rev. 259-287 
(2018). See 2019 Pension Review First Take: Flat to Down, Goldman 
Sachs Asset Management (2020) (an example of asset manager use of 
XBRL data), available at https://www.gsam.com/content/dam/gsam/pdfs/common/en/public/articles/2020/2019_Pension_First_Take.pdf?sa=n&rd=n 
(citing XBRL research software provider Idaciti as a data source).
    \908\ See, e.g., A.J. Felo, J.W. Kim, and J. Lim, Can XBRL 
Detailed Tagging of Footnotes Improve Financial Analysts' 
Information Environment?, 28 Int'l J. Account. Info. Sys. 45 (2018); 
Y. Huang, Y.G. Shan, and J.W. Yang., Information Processing Costs 
and Stock Price Informativeness: Evidence from the XBRL Mandate, 46 
Aust. J. Mgmt., 110-131 (2020) (finding ``a significant increase of 
analyst forecast accuracy post-XBRL''); M. Kirk, J. Vincent, and D. 
Williams, From Print to Practice: XBRL Extension Use and Analyst 
Forecast Properties (Working Paper 2016) (finding ``the general 
trend in forecast accuracy post-XBRL adoption is positive''); C. 
Liu, T. Wang, and L.J. Yao, XBRL's Impact on Analyst Forecast 
Behavior: An Empirical Study, 33 J. Account. Pub. Pol. 69-82 (2014) 
(finding ``mandatory XBRL adoption has led to a significant 
improvement in both the quantity and quality of information, as 
measured by analyst following and forecast accuracy''). But see S.L. 
Lambert, K. Krieger, and N. Mauck, Analysts' Forecasts Timeliness 
and Accuracy Post-XBRL, 27 Int'l. J. Account. Info. Mgmt. 151-188 
(2019) (finding significant increases in frequency and speed of 
analyst forecast announcements, but no significant increase in 
analyst forecast accuracy post-XBRL).
    \909\ See, e.g., A. Lawrence, J. Ryans, and E. Sun, Investor 
Demand for Sell-Side Research, 92 Account. Rev. 123-149 (2017) 
(finding the ``average retail investor appears to rely on analysts 
to interpret financial reporting information rather than read the 
actual filing''); D. Bradley, J. Clarke, S. Lee, and C. Ornthanalai, 
Are Analysts' Recommendations Informative? Intraday Evidence on the 
Impact of Time Stamp Delays, 69 J. Finance 645-673 (2014) 
(concluding ``analyst recommendation revisions are the most 
important and influential information disclosure channel 
examined'').
---------------------------------------------------------------------------

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.\910\ We proceed by discussing these various costs.
---------------------------------------------------------------------------

    \910\ For example, these costs may include the revelation of 
trade secrets, the disclosure of profitable customers and markets, 
or the exposure of operating weakness to competing firms, unions, 
regulators, investors, customers or suppliers. These costs are 
commonly referred to as ``proprietary 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''),\911\ we estimate the annual costs over the first 
six years of compliance with the proposed rules.\912\ 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,

[[Page 21440]]

operational efficiency, and competition within the market for relevant 
services.
---------------------------------------------------------------------------

    \911\ See Paperwork Reduction Act, Public Law 104-13, 109 Stat 
163 (1995) (codified at 44 U.S.C. 3501 et seq.). See infra Section 
V.
    \912\ The following estimates are applicable to registrants 
filing form 10-K that have no existing climate-related disclosure 
processes or expertise. All estimates are rounded to the nearest 
$5,000.
---------------------------------------------------------------------------

    One commenter provided cost estimates for their services in 
assisting client companies prepare TCFD-aligned disclosures.\913\ 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.\914\ 
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,\915\ however the reporting 
company may still incur internal costs in preparing these disclosures 
on an annual basis.
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    \913\ See memorandum, dated Feb. 4, 2022, concerning staff 
meeting with representatives of S&P Global.
    \914\ This cost range pertains to clients' use of the 
commenter's ``TCFD Suite'', which consists of the following modules: 
Benchmarking/gap assessment, management interviews, physical risk 
assessment, and various transition risk assessments, including 
policy risk analysis, market risk assessment, technology risk 
assessment, and reputation risk assessment. This cost range excludes 
the cost of additional services, such as target-setting ($20,000 to 
$30,000) and calculating GHG footprints ($75,000 to $125,000 for 
Scopes 1, 2, and 3), the latter of which is discussed in further 
detail in the following subsection.
    \915\ The commenter reports that should the TCFD requirements 
change based on new science, projections, and business changes, 
costs of the TCFD Suite in future years may range from $125,000 to 
$175,000.
---------------------------------------------------------------------------

    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.\916\ 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.\917\ All 
respondents disclose Scopes 1, 2, and 3 emissions, while none of them 
obtain third-party assurance for their climate-related disclosures.
---------------------------------------------------------------------------

    \916\ See L. Reiners and K. Torrent, The Cost of Climate 
Disclosure: Three Case Studies on the Cost of Voluntary Climate-
Related Disclosure, Climate Risk Disclosure Lab (2021), available at 
https://climatedisclosurelab.duke.edu/wp-content/uploads/2021/12/The-Cost-of-Climate-Disclosure.pdf.
    \917\ Incremental costs would be minimal to the extent that the 
mandatory disclosure rule overlaps with their current reporting 
practices. The respondents acknowledge that actual incremental costs 
would depend on the contents of the final rule.
---------------------------------------------------------------------------

    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) \918\ and 
third-party costs ($60,000 to $160,000).\919\ 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.\920\ 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.
---------------------------------------------------------------------------

    \918\ The company allocates three employees to produce climate-
related disclosures. Two employees in Legal and Compliance devote a 
combined 80 hours per year on this task, while one employee in 
Management and Administration devotes two hours per year.
    \919\ The company reports that approximately one-third of these 
third-party costs is associated with designing the annual 
sustainability report and associated web page, while the remaining 
two-thirds is associated with report writing and consulting work on 
the voluntary frameworks.
    \920\ These annual costs reflect a larger scope of climate-
related disclosures (e.g., multiple frameworks, sustainability 
report, etc.) relative to the initial cost, which is specific to 
TCFD reporting only. Nevertheless, because these estimates aggregate 
the costs of reporting under the TCFD in addition to other climate 
disclosure framework, these estimates can serve as an upper bound of 
what annual costs may be specific to TCFD reporting only.
---------------------------------------------------------------------------

    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) 
\921\ and the cost for auditors and consultants ($400,000).\922\ 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.
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    \921\ Internal costs include the cost of approximately 20 
employees working part-time on climate-related disclosures from Nov. 
until Mar. and one full-time consultant.
    \922\ Auditors review data quality and data collection 
procedures, while consultants help prepare substantive disclosures, 
advise on adherence to the voluntary climate disclosure frameworks, 
and prepare web updates.
---------------------------------------------------------------------------

    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.\923\ 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.
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    \923\ The company notes that the bulk of its annual costs comes 
from producing chapter 7 of its Universal Registration Document, 
issued under the EU's Prospectus Regulation (Regulation (EU) 2017/
1129). Chapter 7 pertains to the extra-financial performance 
statement of the consolidated firm.
---------------------------------------------------------------------------

    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.\924\ 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

[[Page 21441]]

$250,000 annually to assist in its ESG and sustainability report 
process.\925\
---------------------------------------------------------------------------

    \924\ See Letter from Society for Corporate Governance (June 11, 
2021).
    \925\ See Letter from Williams Companies, Inc. (June 12, 2021).
---------------------------------------------------------------------------

    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.\926\ 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 \927\ 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 \928\), risk management disclosure 
costs ($14,900), metrics and targets disclosure costs ($104,400 in the 
first year and $80,500 in subsequent years \929\), internal audit costs 
($30,300), and signposting costs ($100).\930\ 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.
---------------------------------------------------------------------------

    \926\ See U.K. Dep't for Bus., Energy, & Indus. Strategy, 
Mandating Climate-Related Financial Disclosures by Publicly Quoted 
Companies, Large Private Companies and Limited Liability 
Partnerships (LLPs), Final Stage Impact Assessment (Oct. 1, 2021), 
available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1029317/climate-related-financial-disclosure-consultation-final-stage-impact-assessment.pdf 
(The UK's climate-related disclosure rules would apply to Relevant 
Public Interest Entities (PIEs), including Premium and Standard 
Listed Companies with over 500 employees, UK registered companies 
with securities admitted to AiM with more than 500 employees, 
Limited Liability Partnership (LLPs) within the threshold of the 
``500 test,'' and UK registered companies which are not included in 
the categories above and are within the threshold of the ``500 
test.'').
    \927\ In the final stage impact assessment, the cost estimate 
provided for familiarization costs assumes that scenario analysis is 
required. Because the proposed rules do not require scenario 
analysis, this number references familiarization costs provided in 
the initial impact assessment, which assumes no scenario analysis. 
See U.K. Dep't for Bus., Energy, & Indus. Strategy, Mandating 
Climate-Related Financial Disclosures by Publicly Quoted Companies, 
Large Private Companies and Limited Liability Partnerships (LLPs), 
Consultation Impact Assessment (Jan. 29, 2021), available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/972423/impact-assessment.pdf.
    \928\ This number excludes the cost of scenario analysis since 
this is not required under the proposed rules.
    \929\ We note that these numbers do not include the costs of 
measuring and reporting Scope 3 emissions since this is not required 
under the UK proposed rules.
    \930\ These numbers have been converted from GBP based on the 
2021 average exchange rate of $1.3757 USD/GBP, rounded to the 
nearest $100. We note that the impact assessment also provides 
estimates of incremental costs associated with each subsidiary; 
however, these costs are not included in the estimates cited above 
for the sake of brevity. Signposting costs refer to the ``additional 
annual cost to those in scope to upload the required reporting 
documentation and signposting to this documentation within their 
annual report.''
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    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.\931\ 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).
---------------------------------------------------------------------------

    \931\ See supra note 783. Legal and audit fees are not included 
in these cost estimates.
---------------------------------------------------------------------------

    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.\932\ 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

[[Page 21442]]

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.\933\ 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.
---------------------------------------------------------------------------

    \932\ See memorandum, dated Jan. 21, 2022, concerning staff 
meeting with representatives of Ledger8760, available at https://www.sec.gov/comments/s7-10-22/s71022.htm.
    \933\ See memorandum, dated Jan. 14, 2022, concerning staff 
meeting with representatives of South Pole. These numbers have been 
converted from EUR based on the 2021 average exchange rate of $1.183 
USD/EUR, rounded to the nearest $100.
---------------------------------------------------------------------------

    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).\934\ 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.\935\ For small entities,\936\ 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.
---------------------------------------------------------------------------

    \934\ See Section IV.A.3 for more information on the EPA 
mandatory Greenhouse Gas Reporting Program.
    \935\ See EPA, Regulatory Impact Analysis for the Mandatory 
Reporting of Greenhouse Gas Emissions (Sept. 2009), available at 
https://www.epa.gov/sites/default/files/2015-07/documents/regulatoryimpactanalysisghg.pdf. The EPA notes that several facility 
types do not currently report emissions (or the existence of such 
disclosure practices cannot be confirmed), therefore the cost 
estimates for these facility types reflect full start-up costs to 
meet the reporting requirements.
    \936\ The EPA defines a small entity as (1) a small business, as 
defined by SBA's regulations at 13 CFR part 121.201; (2) a small 
governmental jurisdiction that is a government of a city, county, 
town, school district, or special district with a population of less 
than 50,000; or (3) a small organization that is any not-for-profit 
enterprise that is independently owned and operated and is not 
dominant in its field.
---------------------------------------------------------------------------

    A survey conducted by PCAF provides some estimates of the costs of 
assessing financed emissions.\937\ 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 \938\ 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.
---------------------------------------------------------------------------

    \937\ See Letter from PCAF (Dec. 21, 2021).
    \938\ The 18 survey respondents consist of 2 insurance 
companies, 13 banks (commercial, investment, or development), 1 
asset owner, and 2 asset managers. Respondents' asset size ranges 
from less than a $1bn USD to $500bn USD. The average assets covered 
by this disclosure activity was approximately $5-20bn USD.
---------------------------------------------------------------------------

(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.\939\ 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.\940\ 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).
---------------------------------------------------------------------------

    \939\ Data on audit fees is from Audit Analytics, which provides 
all fee data disclosed by SEC registrants in electronic filings 
since Jan. 1, 2000.
    \940\ See R.J. Casey and J.H. Grenier, Understanding and 
Contributing to the Enigma of Corporate Social Responsibility (CSR) 
Assurance in the United States, 97 Auditing: A Journal of Practice & 
Theory 130 (2015).
---------------------------------------------------------------------------

    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.\941\ 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,\942\ 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 \943\ where disclosure requirements 
are based on the TCFD's framework for climate-related financial 
reporting, would also face lower incremental costs.\944\ Moreover, 
costs may also be mitigated by the proposed transition period, which 
would allow firms to more gradually transition to the new reporting 
regime.
---------------------------------------------------------------------------

    \941\ See Section IV.C.1.e for more information on how the 
proposed rules compare to the EPA's emissions reporting 
requirements.
    \942\ See Section IV.A.5.a.
    \943\ E.g., Morningstar reports that over 35% of S&P 500 
revenues came from foreign markets, while this percentage is around 
20% for the revenues coming from companies belonging to the Russell 
2000 index. See, https://www.morningstar.com/articles/918437/your-us-equity-fund-is-more-global-than-you-think.
    \944\ See Section IV.A.4 for a discussion on International 
Disclosure Requirements.
---------------------------------------------------------------------------

    Several industry reports also document how a sizeable portion of 
U.S.

[[Page 21443]]

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.\945\ 
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.
---------------------------------------------------------------------------

    \945\ See Letter from Mike Kreidler, Office of the Insurance 
Commissioner, State of Washington (June 14, 2021).
---------------------------------------------------------------------------

    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.\946\ Additionally, as the 
market for assurance matures, the Commission staff expects these costs 
to decrease over time.
---------------------------------------------------------------------------

    \946\ For example, during fiscal year 2020, median audit fees as 
percentage of revenue for large accelerated filers and accelerated 
filers was 0.16%, while the corresponding figure for non-accelerated 
filers was 1.1%.
---------------------------------------------------------------------------

    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.\947\ 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.\948\ 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.
---------------------------------------------------------------------------

    \947\ See supra note 760. See also discussion of the Commission 
staff's review using climate-related keyword searches in Section 
IV.A.5.a.
    \948\ Because higher proportional fixed costs for smaller firms 
may be particularly acute with respect to assessing Scope 3 
emissions, the proposed rules exempt SRCs from providing Scope 3 
emissions disclosures. Since SRCs are a small fraction of the 
market, the overall benefit to investors would not be as large as 
for non-SRCs, while avoiding high fixed costs that could put them at 
a potential competitive disadvantage.
---------------------------------------------------------------------------

    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.\949\ 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.\950\ 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.
---------------------------------------------------------------------------

    \949\ An AICPA survey of 1,032 reporting companies with $75 
million or less in market capitalization in 2018 found an average 
cost of $5,850 per year, a median cost of $2,500 per year, and a 
maximum cost of $51,500 per year for fully outsourced XBRL creation 
and filing, representing a 45% decline in average cost and a 69% 
decline in median cost since 2014. See M. Cohn, AICPA Sees 45% Drop 
in XBRL Costs for Small Companies, Accounting Today (Aug. 15, 2018) 
(stating that a 2018 NASDAQ survey of 151 listed registrants found 
an average XBRL compliance cost of $20,000 per quarter, a median 
XBRL compliance cost of $7,500 per quarter, and a maximum, XBRL 
compliance cost of $350,000 per quarter in XBRL costs per quarter), 
available at https://www.accountingtoday.com/news/aicpa-sees-45-drop-in-xbrl-costs-for-small-reporting-companies (retrieved from 
Factiva database). See also Letter from Nasdaq, Inc., Mar. 21, 2019 
to the Request for Comment on Earnings Releases and Quarterly 
Reports; Release No. 33-10588 (Dec. 18, 2018) 83 FR 65601 (Dec. 21, 
2018).
    \950\ See 17 CFR 229.601(b)(101); 17 CFR 232.405 (for 
requirements related to tagging financial statements (including 
footnotes and schedules) in Inline XBRL). See also 17 CFR 
229.601(b)(104); 17 CFR 232.406 for requirements related to tagging 
cover page disclosures in Inline XBRL. Beginning in 2024, filers of 
most fee-bearing forms will also be required to structure filing fee 
information in Inline XBRL, although the Commission will provide an 
optional web tool that will allow filers to provide those tagged 
disclosures without the use of Inline XBRL compliance services or 
software. See 17 CFR 229.601(b)(108) and 17 CFR 232.408; Filing Fee 
Disclosure and Payment Methods Modernization, Release No. 33-10997 
(Oct. 13, 2021), 86 FR 70166 (Dec. 9, 2021).
---------------------------------------------------------------------------

    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.\951\ 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.
---------------------------------------------------------------------------

    \951\ See Section IV.A.5.
---------------------------------------------------------------------------

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

[[Page 21444]]

and unfamiliar to many registrants.\952\ 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.
---------------------------------------------------------------------------

    \952\ See supra note 841.
---------------------------------------------------------------------------

    However, certain factors may mitigate this concern. First, existing 
and proposed safe harbors \953\ 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.\954\
---------------------------------------------------------------------------

    \953\ As previously noted, registrants would be able to use the 
existing safe harbors for forward-looking statements that were added 
to the Securities Act and Exchange Act pursuant to the PSLRA 
assuming all conditions of those safe harbor provisions are met. See 
supra note 219.
    \954\ Compliance would be required in a registrant's fiscal year 
ending no earlier than two years after the effective date of any 
adopted rules. An additional one year phase-in would be provided for 
registrants that are not large accelerated filers, while complying 
with Scope 3 emissions reporting would also be provided with an 
additional one year phase-in.
---------------------------------------------------------------------------

    Another potential indirect cost is the possibility that certain 
provisions of the proposed rules may force registrants to disclose 
proprietary information.\955\ 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.
---------------------------------------------------------------------------

    \955\ Proprietary costs are generally relevant for reporting 
that involves information about a firms' business operations or 
production processes and disclosures that are specific, detailed and 
process-oriented. See, e.g., C. Leuz, A. Triantis, and T.Y. Wang, 
Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary 
SEC Deregistrations, 45(2) Journal of Accounting and Economics 181-
208 (2008); D.A. Bens, P. G. Berger, and S.J. Monahan, Discretionary 
Disclosure in Financial Reporting: An Examination Comparing Internal 
Firm Data to Externally Reported Segment Data, 86 (2) The Accounting 
Review 417-449 (2011).
---------------------------------------------------------------------------

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.\956\ 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.\957\
---------------------------------------------------------------------------

    \956\ See Letter from Financial Executives International's (FEI) 
Committee on Corporate Reporting (CCR) (June 10, 2021).
    \957\ The assumption that first year's costs are greater than 
subsequent years' is consistent with the cost estimation models of 
the EPA's Greenhouse Gas Reporting Program and the UK's proposal of 
mandatory TCFD-aligned disclosure.
---------------------------------------------------------------------------

    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,\958\ 
can also make it costly for management to determine the risks which 
meet the materiality threshold.
---------------------------------------------------------------------------

    \958\ See Section IV.B.2.a.(4).
---------------------------------------------------------------------------

    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.\959\ 
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.
---------------------------------------------------------------------------

    \959\ See supra note 806.
---------------------------------------------------------------------------

    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 \960\ and may 
put significant and sometimes competing demands on registrants.\961\ 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.
---------------------------------------------------------------------------

    \960\ Id.
    \961\ TCFD, Status Report: Task Force on Climate-related 
Financial Disclosures, (June 2019), available at https://www.fsb-tcfd.org/wp-content/uploads/2019/06/2019-TCFD-Status-Report-FINAL-053119.pdf.
---------------------------------------------------------------------------

    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

[[Page 21445]]

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.\962\
---------------------------------------------------------------------------

    \962\ See supra note 841.
---------------------------------------------------------------------------

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.\963\
---------------------------------------------------------------------------

    \963\ A recent study by McKinsey found that 85% of investors 
either agreed or strongly agreed that ``more standardization of 
sustainability reporting'' would help them allocate capital more 
effectively, and 83% either agreed or strongly agreed that it would 
help them manage risk more effectively. See Sara Bernow et al., More 
Than Values: The Value-Based Sustainability Reporting That Investors 
Want, McKinsey & Company (Aug. 7, 2019), available at https://
www.mckinsey.com/~/media/McKinsey/Business%20Functions/
Sustainability/Our%20Insights/
More%20than%20values%20The%20value%20based%20sustainability%20reporti
ng%20that%20investors%20want/More%20than%20values-VF.pdf.
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    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.\964\ A recent report from Lazard Ltd. also found a 
significant relationship between carbon dioxide emissions and a 
company's price-to-earnings ratio.\965\ 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.\966\
---------------------------------------------------------------------------

    \964\ See S. Kleimeier, and M. Viehs, Carbon Disclosure, 
Emission Levels, and the Cost of Debt, Emission Levels, and the Cost 
of Debt, SSRN (2018), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2719665.
    \965\ See Lazard Climate Center (2021), available at https://www.lazard.com/media/451920/lazard-climate-center-presentation-december-2021.pdf. The report examined more than 16,000 companies 
from 2016 through 2020 and found that investors are actively and 
directly pricing some transition risk into valuations, however the 
effects vary significantly across different types of GHGs, market 
cap, and sectors. Large cap companies (>$50 billion) experience 
greater valuation discounts, while big emitters, such as energy 
companies, showed the starkest correlation. On average, a 10% 
decrease in a large U.S. energy company's emissions corresponded 
with a 3.9% increase in its price-to-earnings ratio.
    \966\ See supra note 850 (Jouvenout and Kruger, 2021).
---------------------------------------------------------------------------

    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.\967\ 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.\968\ 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.
---------------------------------------------------------------------------

    \967\ Id. See also J. Grewal, E.J. Riedl, and G. Serafeim, 
Market Reaction to Mandatory Nonfinancial Disclosure, 65 (7) 
Management Science 3061-3084 (2019); See supra note 850 (Bolton and 
Kacperczyk, 2020). The first paper in particular finds a negative 
aggregate stock market response to the passage of a mandatory ESG 
disclosure rules in the EU. These results, however, should be 
interpreted with caution. For one, the empirical design is based on 
matching, but there are reasons to believe that the treatment and 
control groups differ along important dimensions. Further, there is 
no event study plot, and results are not shown for cumulative 
abnormal returns after controlling for common risk factors like the 
Fama-French 3-factor model. It is therefore difficult to discern 
whether the passage of the disclosure rules is actually driving the 
aggregate market response.
    \968\ For example, the passage of disclosure rules may signal 
more stringent enforcement of emissions rules going forward, leading 
to an increase in the risk of regulation. Therefore, it is difficult 
to disentangle the pure effect of disclosure rules on stock 
performance and the cost of capital.
---------------------------------------------------------------------------

    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.\969\ 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.\970\ According to survey evidence of global 
institutional investors, respondents believe that equity valuations do 
not fully reflect climate-related risks.\971\ 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.
---------------------------------------------------------------------------

    \969\ See H. Hong, F.W. Li, J. Xu. Climate Risks And Market 
Efficiency, 208.1 Journal of Econometrics 265-28 (2019).
    \970\ See, e.g., K. Alok, W. Xin, C. Zhang, Climate Sensitivity 
And Predictable Returns, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3331872.
    \971\ See P. Krueger, Z. Sautner, L.T. Starks, The Importance of 
Climate Risks for Institutional Investors, 33(3) The Review of 
Financial Studies, 1067-1111 (2020).
---------------------------------------------------------------------------

    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.\972\ These benefits

[[Page 21446]]

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.
---------------------------------------------------------------------------

    \972\ See, e.g., N. Bhattacharya, Y.J. Cho, J.B. Kim, Leveling 
the Playing Field Between Large and Small Institutions: Evidence 
from the SEC's XBRL Mandate, 93(5) The Accounting Review 51-71 
(2018); B. Li, Z. Liu, W. Qiang, and B. Zhang, The Impact of XBRL 
Adoption on Local Bias: Evidence from Mandated U.S. Filers, 39(6) 
Journal of Accounting and Public Policy (2020); W. Sassi, H. Ben 
Othman, and K. Hussainey, The Impact of Mandatory Adoption of XBRL 
on Firm's Stock Liquidity: A Cross-Country Study, 19(2) Journal of 
Financial Reporting and Accounting 299-324 (2021); C. Ra and H. Lee, 
XBRL Adoption, Information Asymmetry, Cost of Capital, and Reporting 
Lags, 10 IBusiness, 93-118 (2018); S.C. Lai, Y.S. Lin, Y.H. Lin, and 
H.W. Huang, XBRL Adoption and Cost of Debt, International Journal of 
Accounting & Information Management (2015); Y. Cong, J. Hao, and L. 
Zou, The Impact of XBRL Reporting on Market Efficiency, 28(2) 
Journal of Information Systems 181-207 (2014).
---------------------------------------------------------------------------

    There are also important efficiency implications in relation to 
systemic risks.\973\ The increasing frequency and severity of climate 
events can potentially lead to destabilizing losses for insurance 
companies,\974\ banks,\975\ 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.\976\ 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.\977\
---------------------------------------------------------------------------

    \973\ Systemic risk refers to the risk of a breakdown of an 
entire system, rather than simply the failure of individual parts. 
In a financial context, systematic risk denotes the risk of a 
cascading failure in the financial sector, caused by linkages within 
the financial system, resulting in a severe economic downturn.
    \974\ See Facts + Statistics: Global Catastrophes, Insurance 
Information Institute, available at https://www.iii.org/fact-statistic/facts-statistics-global-catastrophes.
    \975\ The Office of the Comptroller of the Currency (OCC) 
recently requested feedback on draft principles designed to support 
the identification and management of climate-related financial risks 
at OCC-regulated institutions with more than $100 billion in total 
consolidated assets. See Principles for Climate-Related Financial 
Risk Management for Large Banks, Office of the Comptroller of the 
Currency (2021), available at https://occ.gov/news-issuances/news-releases/2021/nr-occ-2021-138.html?source=email.
    \976\ Gregg Gelzinis and Graham Steele, Climate Change Threatens 
the Stability of the Financial System, Center for American Progress 
(Nov. 21, 2019, 12:01 a.m.), available at https://www.americanprogress.org/issues/economy/reports/2019/11/21/477190/climate-change-threatens-stability-financial-system.
    \977\ See The Availability Of Data with Which to Monitor and 
Assess Climate-Related Risks to Financial Stability, The Financial 
Stability Board (``FSB'') (July 7, 2021) (stating that the 
availability of data with which to monitor and assess climate-
related risks to financial stability), available at https://www.fsb.org/2021/07/the-availability-of-data-with-which-to-monitor-and-assess-climate-related-risks-to-financial-stability/.
---------------------------------------------------------------------------

    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.\978\ Stress from large, complex, and 
interconnected financial institutions, or correlated stress across 
smaller market participants, could be transmitted and propagate through 
the financial system,\979\ causing disruptions in the provision of 
financial services.\980\ 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.\981\
---------------------------------------------------------------------------

    \978\ The Implications of Climate Change for Financial 
Stability, FSB, available at https://www.iii.org/fact-statistic/facts-statistics-global-catastrophes (2021).
    \979\ Physical risks can have immediate and direct effects on 
asset values, but they also present long-term indirect risks. By 
damaging assets that serve as collateral for loans or that underpin 
other investments, reducing property values, increasing insurance 
premiums or decreasing insurance coverage, diminishing agricultural 
capacity, and causing labor forces to migrate, the physical 
consequences of climate change could have profound and long term 
effects on financial markets more generally. See Jonathan Woetzel et 
al., Climate Risk and Response: Physical Hazards and Socioeconomic 
Impacts, McKinsey Global Institute (Jan. 2020), available at https://www.mckinsey.com/business-functions/sustainability/our-insights/climate-risk-and-response-physical-hazards-and-socioeconomic-impacts.
    \980\ A recent report by an advisory committee to the Commodity 
Futures Trading Commission (CFTC) concluded that ``climate change 
poses a major risk to the stability of the U.S. financial system and 
to its ability to sustain the American economy.'' See Report of the 
Climate-Related Market Risk Subcommittee, Market Risk Advisory 
Committee of the U.S. Commodity Futures Trading Commission, Managing 
Climate Risk in the U.S. Financial System (2020). The Office of the 
Comptroller of the Currency (OCC) has identified the effects of 
climate change and the transition to a low carbon economy as 
presenting emerging risks to banks and the financial system. See, 
e.g., Semiannual Risk Perspective, 2-4 (Fall 2021), available at 
https://www.occ.treas.gov/publications-and-resources/publications/semiannual-risk-perspective/files/pub-semiannual-risk-perspective-fall-2021.pdf.
    \981\ See The Availability Of Data with Which to Monitor and 
Assess Climate-Related Risks to Financial Stability, (July 7, 2021) 
(stating that the availability of data with which to monitor and 
assess climate-related risks to financial stability), available at 
https://www.fsb.org/2021/07/the-availability-of-data-with-which-to-monitor-and-assess-climate-related-risks-to-financial-stability/.
---------------------------------------------------------------------------

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

[[Page 21447]]

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-[agrave]-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.\982\ 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,\983\ 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.
---------------------------------------------------------------------------

    \982\ See, https://www.morningstar.com/articles/918437/your-us-equity-fund-is-more-global-than-you-think.
    \983\ See Section IV.B.2.
---------------------------------------------------------------------------

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).\984\ 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.
---------------------------------------------------------------------------

    \984\ See D.W. Diamond and R.E. Verrecchia, Disclosure, 
Liquidity, and the Cost of Capital, 46 J. Fin.1325 (1991) (this 
study finds that revealing public information to reduce information 
asymmetry can reduce a firm's cost of capital through increased 
liquidity); See also C. Leuz and R.E. Verrecchia, The Economic 
Consequences of Increased Disclosure, 38 J. Acct. Res. 91 (2000). 
Several studies provide both theoretical and empirical evidence of 
the link between information asymmetry and cost of capital. See, 
e.g., T.E. Copeland and D. Galai, Information Effects on the 
Bid[hyphen]Ask Spread, 38 J. Fin. 1457 (1983) (proposing a theory of 
information effects on the bid-ask spread); D. Easley and M. O'Hara, 
Information and the Cost of Capital, 59 J. Fin. 1553 (2004) (This 
study shows that differences in the composition of information 
between public and private information affect the cost of capital, 
with investors demanding a higher return to hold stocks with greater 
private information.).
---------------------------------------------------------------------------

    In the first case, less information asymmetry among investors could 
mitigate adverse selection problems by reducing the informational 
advantage of informed traders.\985\ 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.\986\
---------------------------------------------------------------------------

    \985\ See R.E. Verrecchia, Essays on Disclosure, 32(1-3) Journal 
of Accounting and Economics 97-180 (2001).
    \986\ See supra note 841; See also D.W. Diamond and R.E. 
Verrecchia, Disclosure, Liquidity, and the Cost of Capital, 46(4) 
The Journal of Finance 1325-1359 (1991).
---------------------------------------------------------------------------

    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).\987\ In addition, firms that 
choose to disclose emissions have lower costs of equity and loan 
spreads.\988\ 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).
---------------------------------------------------------------------------

    \987\ See J. Grewal, C. Hauptmann, and G. Serafeim, Material 
Sustainability Information and Stock Price Informativeness, Journal 
of Business Ethics 1-32 (2020); M.E. Barth, S.F. Cahan, L. Chen, and 
E.R. Venter, Integrated Report Quality: Share Price Informativeness 
and Proprietary Costs, Socially Responsible Investment eJournal 
(2021).
    \988\ See D.S. Dhaliwal et al., Voluntary Nonfinancial 
Disclosure and the Cost of Equity Capital: The Initiation of 
Corporate Social Responsibility Reporting, 86.1 The Accounting 
Review 59-100 (2011; S. Kleimeier, and M. Viehs, Carbon Disclosure, 
Emission Levels, and the Cost of Debt, Emission Levels, and the Cost 
of Debt (2018); E.M. Matsumura, R. Prakash, and S.C. Vera-Munoz. 
Climate Risk Materiality and Firm Risk, available at SSRN 2983977 
(2020).
---------------------------------------------------------------------------

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.\989\ 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.\990\ 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.
---------------------------------------------------------------------------

    \989\ See B. Downar, J. Ernstberger, S. Reichelstein, S. 
Schwenen, and A. Zaklan, The Impact of Carbon Disclosure Mandates on 
Emissions and Financial Operating Performance, Review of Accounting 
Studies 1-39 (2021); S. Tomar, Greenhouse Gas Disclosure and 
Emissions Benchmarking (Working Paper) (2021), available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3448904; See supra note 
850 (Jouvenout and Kruger, 2021).
    \990\ See supra note 841.
---------------------------------------------------------------------------

    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

[[Page 21448]]

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 \991\ 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.
---------------------------------------------------------------------------

    \991\ See supra note 841.
---------------------------------------------------------------------------

    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.\992\
---------------------------------------------------------------------------

    \992\ See Carlyle, Private Equity Industry's First-Ever ESG Data 
Convergence Project Announces Milestone Commitment of Over 100 LPs 
and GPs (Jan. 28, 2022), available at https://www.carlyle.com/media-room/news-release-archive/private-equity-industrys-first-ever-esg-data-convergence-project-announces-over-100-lps-gps.
---------------------------------------------------------------------------

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

[[Page 21449]]

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,\993\ 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.
---------------------------------------------------------------------------

    \993\ SASB research shows climate risk is nearly ubiquitous but 
highly differentiated across 77 industries. See SASB Publishes 
Updated Climate Risk Technical Bulletin (Apr. 13, 2021), available 
at https://www.globenewswire.com/news-release/2021/04/13/2208855/0/en/SASB-Publishes-Updated-Climate-Risk-Technical-Bulletin.html.
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2. Require Scenario Analysis
    Another alternative would be to require registrants to conduct 
scenario analysis and include the related information in their 
disclosures. Consistent, comparable, and reliable disclosures of 
scenario analysis could inform investors with respect to the resilience 
of registrants' business strategies and operations across a range of 
plausible future climate scenarios. Disclosure of scenario analysis 
could deliver informational benefits to investors beyond that which 
would be provided under the proposed rules. It could help investors 
assess issues that have high uncertainty by evaluating the impact on 
and the resiliency of the registrant under multiple plausible future 
scenarios, such as a temperature increase of 1.5[deg]C, 2[deg]C, and 
3[deg]C above pre-industrial levels. It could also allow investors to 
proactively manage risk as they would be better able to assess the 
range of potential threats and opportunities, evaluate different 
management actions, and adapt accordingly. Furthermore, since some 
climate-related risks may only manifest over longer horizons, scenario 
analysis could assist investors in determining whether registrants have 
incorporated such risks into their long-term strategy. Investors could 
subsequently incorporate this information into asset prices, thereby 
more accurately pricing climate-related risks and contributing to 
market efficiency.
    Both scenario analysis methodologies and climate science, however, 
continue to advance and develop, which may pose significant challenges 
for some registrants. Specifically, the required data may be 
unavailable or costly to obtain. Furthermore, some registrants may lack 
the necessary expertise, requiring them to hire external consultants to 
conduct the analysis. These challenges may pose undue burdens with 
respect to difficulty and/or costs to some registrants, such as smaller 
companies and those that otherwise have no prior experience in scenario 
analysis. For these reasons, the Commission is not proposing to mandate 
scenario analysis and related disclosure at this time.
3. Require Specific External Protocol for GHG Emissions Disclosure
    Another alternative would be to require registrants to follow an 
external protocol (e.g., GHG protocol) for reporting emissions. 
Requiring a specific protocol may potentially benefit investors by 
providing a more consistent and comparable framework in reporting 
emissions, thus facilitating investors' information processing. 
However, there also may be certain drawbacks.
    First, the organizational boundaries adopted by external protocols 
may create inconsistencies with the way companies would report 
information about their GHG emissions vis-[agrave]-vis the rest of 
their financial statements. The GHG Protocol, for example, requires 
that a company base its organizational boundaries on either an equity 
share approach or a control approach, which may differ from the way 
registrants set their scope for the purpose of reporting information in 
their financial statements. 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 as those included in its consolidated financial 
statements. Requiring a consistent scope of consolidation and reporting 
between financial data and GHG emissions data 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.
    Furthermore, requiring companies to follow a specific external 
protocol might limit flexibility for registrants and thus reduce their 
ability to report emissions in a manner that is tailored to their 
specific circumstances. For example, registrants following an existing 
but different protocol, which nevertheless provides relevant emissions 
information, would be required to switch protocols, incurring 
additional cost.
    Requiring compliance with a specific protocol could also reduce the 
scope for innovation in driving the most appropriate forms of 
disclosure within these overarching guidelines (e.g., the methodologies 
pertaining to the measurement of GHG emissions, particularly Scope 3 
emissions, are still evolving). Additionally, requiring compliance with 
a specific external protocol as of the date of the adoption of any 
final rules may become problematic in the future to the extent that the 
external protocol's methodologies shift or evolve such that the version 
incorporated by reference into the final rules becomes outdated or 
inconsistent with improving methodologies. While we expect that many 
registrants will choose to follow many of the standards and guidance 
provided by the GHG Protocol when calculating their GHG emissions, not 
requiring compliance with the GHG Protocol would provide some 
flexibility to the Commission's climate-related disclosure regime and 
enable registrants to follow new and potentially less costly 
methodologies as they emerge.
4. Permit GHG Emissions Disclosures To Be ``Furnished'' Instead of 
``Filed''
    Another alternative would be to permit Scopes 1, 2, and 3 emissions 
disclosures to be considered ``furnished'' instead of ``filed,'' which 
may limit the incremental risk of being held liable under Section 18 of 
the Exchange Act for these disclosures. This may also benefit some 
registrants as their Scopes 1 and 2 emissions disclosures would not be 
automatically incorporated into Securities Act registration statements 
and thereby not be subject to Section 11 liability. We note that this 
could have a lower incremental impact on Scope 3 emissions disclosures 
since Scope 3 emissions disclosures are covered under a proposed safe 
harbor provision and hence already afforded other liability 
protections. However, reduced liability in general may lead to the 
applicable disclosures being perceived as less reliable by investors, 
which could have adverse effects on registrants' stock liquidity or 
costs of capital. For these reasons, the Commission is not proposing to 
permit emissions disclosures to be furnished at this time.
5. Do Not Require Scope 3 Emissions for Registrants With a Target or 
Goal Related to Scope 3
    Another alternative would be to not require Scope 3 emissions 
disclosures if

[[Page 21450]]

such emissions are part of a target or goal from any registrant. This 
would allow certain registrants to avoid the potentially significant 
costs and difficulties associated with measuring and reporting Scope 3 
emissions. This could potentially deprive investors of important 
information necessary to assess registrants' exposures to certain risks 
associated with trying to achieve targets or transition plans. Scope 3 
emissions can provide investors with a more complete picture of how 
targets or transition plans might impact risks (e.g., future 
regulations restricting emissions or changes in market conditions that 
disfavor high emissions products or services) of the registrant through 
the value chain. This can be particularly important considering that 
Scope 3 emissions can make up the vast majority of total emissions for 
many registrants.\994\ Furthermore, some firms can give the appearance 
of low (direct) emissions by shifting high-emission activities 
elsewhere in their value chain.\995\ Mandatory disclosure of Scope 3 
emissions for registrants with a target or goal related to Scope 3 
emissions can help prevent such misrepresentation.
---------------------------------------------------------------------------

    \994\ See supra, note 888.
    \995\ See supra, note 893.
---------------------------------------------------------------------------

6. Exempt EGCs From Scope 3 Emissions Disclosure Requirements
    Another alternative would be to retain the exemption for SRCs, as 
currently proposed, but also extend it to EGCs. EGCs may similarly face 
resource constraints related to company size or age, hence this 
alternative would allow EGCs to avoid the costs of Scope 3 emissions 
measurement and reporting. Given that the designations of SRC and EGC 
are not mutually exclusive, however, EGCs that are also SRCs would be 
covered under the exemption as currently proposed. Conversely, EGCs 
that are not SRCs are relatively less resource-constrained since they, 
by definition, have greater revenues and/or public float, and therefore 
may be better positioned to provide Scope 3 emissions disclosures.
7. Eliminate Exemption for SRCs From Scope 3 Reporting
    Another alternative would be to eliminate the exemption for SRCs. 
Because SRCs make up approximately half of domestic filers in terms of 
numbers (though considerably less in terms of market cap), this 
alternative could address data gaps with respect to Scope 3 emissions, 
with the potential to benefit all investors. As discussed in Section 
II.G.3, however, this alternative may pose fixed costs (e.g. data 
gathering and verification), that would fall disproportionately on 
SRCs. Also, because SRCs are a small fraction of the market, the 
overall benefit to investors would be limited.
8. Remove Safe Harbor for Scope 3 Emissions Disclosures
    The proposed rules provide a safe harbor for Scope 3 emissions 
disclosures. An alternative would be to remove this safe harbor for 
Scope 3 emissions disclosures. This alternative would strengthen 
accountability for Scope 3 emissions disclosures. It also would 
significantly increase registrants' exposure to litigation over the 
accuracy of such disclosures. While rigorous liability in many contexts 
can provide incentives that promote reliable disclosures, an 
accommodation may be warranted for Scope 3 emissions due to the 
challenges associated with their measurement and disclosure.\996\
---------------------------------------------------------------------------

    \996\ See Section II.G.3
---------------------------------------------------------------------------

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
    The proposed rules would require assurance over Scopes 1 and 2 
emissions disclosure from large accelerated filers and accelerated 
filers. In addition to such assurance, we could require these filers to 
also obtain either a separate assessment by management and disclosure 
on the effectiveness of controls over GHG emissions disclosures or an 
attestation report specifically covering the effectiveness of controls 
over GHG emissions disclosures, or both. Specifically, management could 
be required to include a statement in the annual report on their 
responsibility for the design and evaluation of controls over GHG 
emission disclosures, as well as to disclose their conclusion regarding 
the effectiveness of controls over GHG emissions disclosures, in 
addition to the existing DCP evaluation and disclosure. In addition, we 
could require a GHG emissions attestation provider to obtain reasonable 
assurance on whether material weaknesses exist regarding management's 
assessment of the effectiveness of controls over GHG emissions 
disclosures as of the measurement date. The GHG emissions attestation 
provider could also be required to issue an attestation report on the 
effectiveness of controls over GHG emissions disclosures.\997\
---------------------------------------------------------------------------

    \997\ See AICPA, AU-C 940, An Audit of Internal Control Over 
Financial Reporting That Is Integrated With an Audit of Financial 
Statements (2021), available at https://www.aicpa.org/content/dam/aicpa/research/standards/auditattest/downloadabledocuments/au-c-00940.pdf.
---------------------------------------------------------------------------

    By requiring GHG emissions attestation providers to assess not just 
the disclosures, but also the controls over GHG emissions disclosures 
(i.e., the underlying mechanisms, rules, and procedures associated with 
generating such disclosures), this alternative could further strengthen 
the integrity of the disclosed information. In the context of 
emissions, GHG emissions attestation providers may evaluate and test 
the effectiveness of registrants' controls related to the collection, 
calculation, estimation, and validation of GHG emissions data and 
disclosure. These processes could strengthen disclosure credibility as 
they reduce the likelihood of errors or fraud and their ensuing 
misstatements.\998\ Investors would benefit from any resulting 
improvement in disclosure reliability for reasons discussed in prior 
sections: It would allow investors to make better-informed investment 
decisions, allow applicable information to be better incorporated into 
asset prices, and contribute to a more efficient allocation of capital. 
Registrants may also benefit via reduced costs of capital and increased 
stock liquidity.
---------------------------------------------------------------------------

    \998\ Potentially consistent with this, though in a different 
setting, academic evidence surrounding Section 404 of the Sarbanes-
Oxley Act (SOX) finds lower accruals and discretionary accruals for 
small firms whose 2002 float (prior to when firms could have known 
and therefore tried to alter their float to avoid the regulation) 
made them likely to be just above the requirements for compliance, 
relative to those just below. Iliev, Peter (2010). The effect of SOX 
Section 404: Cost, earnings quality and stock prices. Journal of 
Finance, 65, 1163-1196.
---------------------------------------------------------------------------

    However, this alternative would also impose additional assurance 
costs.\999\ Given that GHG emissions measurement and disclosure are 
developing areas, it is unclear what exact controls are or would be in 
effect, making it difficult to anticipate precisely what such 
attestation would entail. These uncertainties pose further difficulties 
in obtaining informative cost estimates and, accordingly, accurate 
assessments of how burdensome such a requirement would be to 
registrants. This leaves the

[[Page 21451]]

possibility that the costs could outweigh the incremental benefits 
given that the proposed rules already require assurance for Scopes 1 
and 2 emissions disclosures for applicable registrants. For these 
reasons, the Commission is not proposing at this time to require an 
attestation report on the effectiveness of controls over GHG emissions 
disclosures.
---------------------------------------------------------------------------

    \999\ Also potentially consistent with this, prior academic 
studies of Section 404 of SOX find significantly higher auditing 
fees, negative stock returns, and reduced innovation, though no 
clear evidence of a decline in investment, for marginally complying 
small firms near the float requirement threshold. See Iliev, Peter 
(2010). The effect of SOX Section 404: Cost, earnings quality and 
stock prices. Journal of Finance, 65, 1163-1196; Gao, Huasheng, and 
Jin Zhang (2019). SOX Section 404 and corporate innovation. Journal 
of Financial and Quantitative Analysis 54(2): 759-787; Albuquerque, 
Ana and Julie Lei Zhu (2019). Has Section 404 of the Sarbanes-Oxley 
Act discouraged corporate investment? New evidence from a natural 
experiment. Management Science 65(7): 3423-3446.
---------------------------------------------------------------------------

10. Require Reasonable Assurance for Scopes 1 and 2 Emissions 
Disclosures From All Registrants
    Another alternative would be to require reasonable assurance for 
Scopes 1 and 2 emissions disclosures from all registrants. As described 
above, requiring assurance can benefit investors in several ways, 
including enhanced reliability of disclosures, which would allow 
investors to make better-informed investment decisions
    However, because costs increase with the level of assurance, 
requiring reasonable assurance may be particularly burdensome for 
affected registrants (i.e., smaller firms) as they would be more likely 
to incur proportionately higher compliance costs due to the fixed cost 
components of such compliance, regardless of whether or not there is a 
transition period before this requirement takes effect. While the 
benefits of assurance could be approximately proportional to 
registrant's market value, the costs are not. In an effort to arrive at 
an appropriate balance between these factors, the proposed rules would 
require reasonable assurance (after a specified transition period) only 
from large accelerated filers and accelerated filers because the 
benefits to investors are more likely to justify the costs for these 
firms.
11. Require Limited, Not Reasonable, Assurance for Large Accelerated 
Filers and/or Accelerated Filers and/or Other Filers
    Obtaining reasonable assurance generally costs more than obtaining 
limited assurance. Current market practice appears to favor obtaining 
limited assurance over sustainability reports, if assurance is obtained 
at all. Experimental evidence suggests assurance (relative to none) may 
increase perceived reliability of sustainability reports, but is yet to 
provide evidence that reasonable assurance increases perceived 
reliability of sustainability reports relative to limited 
assurance.\1000\ We acknowledge, however, that experimental findings 
from lab settings may not necessarily reflect the behavior or 
preferences of experienced investors in actual financial markets. 
Furthermore, other research often exhibits a selection bias (i.e., 
companies that voluntarily decide to obtain a higher-than-required 
level of assurance are systematically different across several 
dimensions), making it difficult to determine the causal effect of the 
different levels of assurance.\1001\
---------------------------------------------------------------------------

    \1000\ See, e.g., K. Hodge, K., N. Subramaniam, and J. Stewart, 
Assurance of Sustainability Reports: Impact on Report Users' 
Confidence and Perceptions of Information Credibility, 19 Australian 
Accounting Review 178-194 (2009), available at https://doi.org/10.1111/j.1835-2561.2009.00056.x; Mark Sheldon, User Perceptions of 
CSR Disclosure Credibility with Reasonable, Limited and Hybrid 
Assurances (Dissertation) (2016) available at https://vtechworks.lib.vt.edu/bitstream/handle/10919/65158/Sheldon_MD_D_2016.pdf.
    \1001\ See C.H. Cho, G. Michelon, D.M. Patten, and R.W. Roberts, 
CSR report assurance in the USA: An empirical investigation of 
determinants and effects, 5 (2) Sustainability Accounting, 
Management and Policy Journal 130, 130-148 (2014), available at 
https://doi.org/10.1108/SAMPJ-01-2014-0003.
---------------------------------------------------------------------------

    One possibility to mitigate the additional costs of reasonable 
assurance would be to maintain the requirement that large accelerated 
filers obtain reasonable assurance, but allow accelerated filers to 
obtain limited assurance without any scaling up to a reasonable 
assurance. Another possibility would be to require limited assurance, 
but expand the assurance requirement to a broader scope of registrants 
including non-accelerated filers and smaller reporting companies. 
However, these possibilities have the disadvantage of lack of 
consistency, which could lead to confusion among investors.
12. In Lieu of Requiring Assurance, Require Disclosure About Any 
Assurance Obtained Over GHG Emissions Disclosures
    Another alternative would be to require all registrants to disclose 
what type of assurance they are receiving, if any, in lieu of requiring 
assurance. This would potentially allow affected registrants to avoid 
the costs of obtaining limited assurance and/or reasonable 
assurance.\1002\ Additionally, registrants would have the flexibility 
to choose any level of assurance (i.e., none, limited, or reasonable 
assurance) but still be required to disclose their choice for 
transparency. This alternative, however, may reduce the reliability and 
comparability of these disclosures relative to the standardized 
assurance requirements within the proposed rules. In addition, as it 
does not set any minimum requirements for the assurance, this 
alternative would not address the fragmentation and selective 
disclosure issues that characterize the current, voluntary reporting 
regime.
---------------------------------------------------------------------------

    \1002\ See Section IV.C.2.(3) for cost estimates of assurance 
over emissions disclosures.
---------------------------------------------------------------------------

13. Permit Host Country Disclosure Frameworks
    Another alternative would be to permit alternative compliance using 
host country disclosure frameworks that the Commission deems suitable. 
Such an alternative would be beneficial for registrants that already 
comply with another country's disclosure requirements since they could 
avoid incurring additional costs to comply with the Commission's rules. 
This flexibility, however, may fail to address or may even exacerbate 
growing concerns from investors that climate-related disclosures lack 
comparability and consistency. While it might be individually optimal 
for a given firm to use their existing host country disclosure 
frameworks, the potential lack of consistency and comparability of the 
disclosure between these firms and other registrant might impose costs 
on investors. Investors might not able to compare across firms using 
different disclosure presentations, or may have to incur additional 
costs in order to do so.
14. Alternative Tagging Requirements
    With respect to Inline XBRL tagging, one alternative is to change 
the scope of disclosures required to be tagged. We could, for example, 
remove the tagging requirements for climate-related disclosures for all 
or a subset of registrants (such as smaller reporting companies). As 
another example, we could require only a subset of proposed climate-
related disclosures, such as the quantitative climate-related metrics, 
to be tagged in Inline XBRL. Narrowing the scope of climate-related 
disclosures to be tagged could provide some incremental cost savings 
for registrants compared to the proposal, because incrementally less 
time would be required to select and review the particular tags to 
apply to the climate-related disclosures.
    We expect this incremental cost savings to be low because all 
affected registrants are or in the near future will be required to tag 
certain of their disclosures (including both quantitative and 
qualitative disclosures) in Inline XBRL.\1003\ Moreover, narrowing the 
scope of tagging requirements would

[[Page 21452]]

diminish the extent of informational benefits that would accrue to 
investors by reducing the volume of climate-related information that 
would become less costly to process and easier to compare across time 
and registrants. For example, an alternative whereby only quantitative 
climate-related disclosures would be tagged would inhibit investors 
from efficiently extracting/searching climate-related disclosures about 
registrants' governance; strategy, business model, and outlook; risk 
management; and targets and goals, thus creating the need to manually 
run searches for these disclosures through entire documents.\1004\ Such 
an alternative would also inhibit the automatic comparison/redlining of 
these disclosures against prior periods, and the performance of 
targeted artificial intelligence or machine learning assessments 
(tonality, sentiment, risk words, etc.) of specific narrative climate-
related disclosures outside the financial statements rather than the 
entire unstructured document.
---------------------------------------------------------------------------

    \1003\ Inline XBRL requirements for business development 
companies will take effect beginning Aug. 1, 2022 (for seasoned 
issuers) and Feb. 1, 2023 (for all other issuers). If the proposed 
Inline XBRL requirements are adopted in the interim, they will not 
apply to business development companies prior to the aforementioned 
effectiveness dates. See supra note 706.
    \1004\ To illustrate, using a search string such as ``climate 
change'' or ``greenhouse gas'' to search through the text of all 
filings from a particular filer population so as to determine the 
trends in narrative climate-related disclosure among that population 
over time, could return many narrative disclosures outside of the 
climate-related disclosures. Examples of this would be a description 
of pending environmental litigation, existing government regulations 
and agency names, and broader regulatory risk factors.
---------------------------------------------------------------------------

G. Request for Comment

    We request comment on all aspects of our economic analysis, 
including the potential costs and benefits of the proposed rules and 
alternatives thereto, and whether the proposed rules, if adopted, would 
promote efficiency, competition, and capital formation or have an 
impact on investor protection. In addition, we also seek comment on 
alternative approaches to the proposed rules and the associated costs 
and benefits of these approaches. Commenters are requested to provide 
empirical data, estimation methodologies, and other factual support for 
their views, in particular, on costs and benefits estimates. 
Specifically, we seek comment with respect to the following questions:
     Are there any costs and benefits to any entity that are 
not identified or misidentified in the above analysis?
     Are there any effects on efficiency, competition, and 
capital formation that are not identified or misidentified in the above 
analysis?
     Are there any other alternative approaches to improving 
climate-related disclosure that we should consider? If so, what are 
they and what would be the associated costs or benefits of these 
alternative approaches? For example, what would be the costs and 
benefits of implementing a new, comprehensive system, for reporting and 
transferring GHG emissions across corporate supply and distribution 
chains, as described by Kaplan and Ramanna (2021)? \1005\
---------------------------------------------------------------------------

    \1005\ See R. Kaplan and K. Ramanna, How to Fix ESG Reporting 
(2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3900146.
---------------------------------------------------------------------------

     Are there any sources of data that could provide a more 
precise estimation of the potential compliance costs that registrants 
may incur if the proposed rules are adopted?
     Have we accurately estimated the costs of disclosing Scope 
1 and 2 emissions? If not, please provide alternative estimates of 
these costs.
     Have we accurately estimated the costs of disclosing Scope 
3? If not, please provide alternative estimates of these costs.
     Are there any additional sources of information to 
estimate the costs of complying with the Scopes 1, 2, and 3 GHG 
emissions disclosure requirements and the costs of obtaining limited 
and reasonable assurance for these disclosures?
     Would any data sources allow these compliance cost 
estimates to be apportioned to separate provisions of the proposed 
rules? Furthermore, how would these cost estimates vary across time 
horizons? For example, the first year of implementation may come with 
higher start-up costs while subsequent years may come with lower costs.
     Have we accurately characterized the cost of limited 
assurance and reasonable assurance over Scopes 1 and 2 emissions? If 
not, please provide an estimate of these costs. Similarly, is there 
data that can show how the costs of limited assurance and reasonable 
assurance differ for large accelerated, accelerated and non-accelerated 
filers?
     How are the costs of obtaining limited assurance and 
reasonable assurance likely to change over time (e.g., over the five 
years following adoption or compliance with a specified level of 
assurance)? What would be the costs and benefits of providing a longer 
transition period for obtaining assurance over Scopes 1 and 2 emissions 
disclosures?

V. Paperwork Reduction Act

A. Summary of the Collections of Information

    Certain provisions of our rules and forms that would be affected by 
the proposed amendments contain ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\1006\ The Commission is submitting the proposal to the 
Office of Management and Budget (``OMB'') for review in accordance with 
the PRA.\1007\ The hours and costs associated with preparing and filing 
the forms and reports constitute reporting and cost burdens imposed by 
each collection of information. An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
requirement unless it displays a currently valid OMB control number. 
Compliance with the information collections is mandatory. Responses to 
the information collections are not kept confidential and there is no 
mandatory retention period for the information disclosed. The titles 
for the affected collections of information are:
---------------------------------------------------------------------------

    \1006\ See 44 U.S.C. 3501 et seq.
    \1007\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

     Form S-1 (OMB Control No. 3235-0065);
     Form F-1 (OMB Control No. 3235-0258);
     Form S-4 (OMB Control No. 3235-0324);
     Form F-4 (OMB Control No. 3235-0325);
     Form S-11 (OMB Control No. 3235-0067);
     Form 10 (OMB Control No. 3235-0064);
     Form 10-K (OMB Control No. 3235-0063);
     Form 10-Q (OMB Control No. 3235-0070);
     Form 20-F (OMB Control No. 3235-0288); and
     Form 6-K (OMB Control No. 3235-0116).\1008\
---------------------------------------------------------------------------

    \1008\ The proposed amendments would also indirectly affect 
Forms S-3 and F-3. Registrants filing Forms S-3 and F-3 are able to 
incorporate by reference their annual reports filed on Forms 10-K or 
20-F. Because the proposed amendments would affect Forms 10-K and 
20-F, and are not expected to affect Forms S-3 and F-3 except when 
Forms 10-K and 20-F are incorporated by reference into those 
Securities Act forms, we are not separately accounting for the PRA 
burden related to Forms S-3 and F-3.
---------------------------------------------------------------------------

    The proposed amendments would require U.S. registrants filing 
Securities Act registration statements on Forms S-1, S-4, and S-11 to 
include the climate-related disclosures required under proposed subpart 
1500 of Regulation S-K and proposed Article 14 of Regulation S-X. The 
proposed amendments would also require foreign private issuers to 
include the proposed climate-related disclosures when filing Securities 
Act registration statements on Forms F-1 and F-4. The proposed 
amendments would further require U.S. registrants and foreign private 
issuers to include

[[Page 21453]]

the proposed climate-related disclosures in their Exchange Act annual 
reports filed, respectively, on Forms 10-K and 20-F and in Exchange Act 
registration statements filed, respectively, on Forms 10 and 20-F. 
Registrants would be required to include the climate-related 
information required under proposed subpart 1500 in a part of the 
registration statement or annual report that is separately captioned as 
Climate-Related Disclosure. Registrants would be required to include 
the climate information required under Article 14 in a note to the 
financial statements, which would be subject to audit. Further, as 
described below, accelerated filers and large accelerated filers would 
be required to include an attestation report covering their Scopes 1 
and 2 emissions disclosure, subject to phase-ins. In addition, U.S. 
registrants and foreign private issuers would be required to report 
material changes to the climate information disclosed in their Exchange 
Act reports on, respectively, Forms 10-Q and 6-K. A description of the 
proposed amendments, including the need for the climate information and 
its proposed use, as well as a description of the likely respondents, 
can be found in Section II above, and a discussion of the economic 
effects of the proposed amendments can be found in Section IV above.

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

    Our estimates of the paperwork burden associated with the proposed 
amendments are based primarily on climate-related reporting cost 
estimates from six sources: A comment letter from the Society for 
Corporate Governance (``Society'') that provided some hour and cost 
estimates for climate reporting by large-cap companies; \1009\ a report 
by the Climate Risk Disclosure Lab at Duke University School of Law's 
Global Financial Markets Center that presents survey results of 
climate-related disclosure costs for three unnamed companies; \1010\ an 
impact assessment conducted by the United Kingdom's Department for 
Business, Energy, and Industrial Strategy for a rule that, similar to 
the Commission's proposed rules, would require TCFD-aligned disclosures 
from all listed firms; \1011\ two cost estimates from a data analytics 
firm--one that covered primarily risk assessment and analysis pursuant 
to the TCFD framework, and the other for calculating GHG emissions; 
\1012\ and cost estimates for GHG emissions measurement and reporting 
from two climate management firms.\1013\
---------------------------------------------------------------------------

    \1009\ See letter from Society for Corporate Governance.
    \1010\ See Climate Risk Disclosure Lab The Cost of Climate 
Disclosure: Three Case Studies on the Cost of Voluntary Climate-
Related Disclosure (Dec. 2021), available at https://climatedisclosurelab.duke.edu/wp-content/uploads/2021/12/The-Cost-of-Climate-Disclosure.pdf.
    \1011\ See UK Department for Business, Energy, and Industrial 
Strategy, Final Stage Impact Assessment (Oct. 1, 2021), available at 
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1029317/climate-related-financial-disclosure-consultation-final-stage-impact-assessment.pdf; see also 
UK Department for Business, Energy, and Industrial Strategy, Initial 
Impact Assessment (Jan. 29, 2021), available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/972423/impact-assessment.pdf . The scope of the 
impact assessment included companies listed on the London Stock 
Exchange with over 500 employees, UK registered companies admitted 
to AIM with over 500 employees, and certain other companies.
    \1012\ See memorandum, dated Feb. 4, 2022, concerning staff 
meeting with representatives of S&P Global. This and the other staff 
memoranda referenced below are available at https://www-draft.sec.gov/comments/s7-10-22/s71022.htm.
    \1013\ See memorandum, dated Nov. 30, 2021, concerning staff 
meeting with representatives of Persefoni; and memorandum, dated 
Jan. 14, 2022, concerning staff meeting with representatives of 
South Pole.
---------------------------------------------------------------------------

    In response to Acting Chair Lee's request for public input about 
climate disclosures,\1014\ Society submitted the results of a survey it 
had conducted on a small number of public large-cap companies about the 
costs of their current climate reporting. According to this commenter, 
two companies estimated that the number of employee hours spent on 
climate reporting ranged from 7,500 to 10,000 annually, while a third 
company estimated the number of annual employee hours spent on climate 
reporting to be 2,940 hours.\1015\ The average annual employee hours 
spent on climate reporting for these large-cap companies was 6,813 
hours.\1016\
---------------------------------------------------------------------------

    \1014\ See supra Section I.B.
    \1015\ See letter from Society for Corporate Governance. This 
commenter also stated that fees for external climate advisory 
services ranged from $50,000 to $1.35 million annually.
    \1016\ 7,500 hrs. + 10,000 hrs. + 2,940 hrs. = 20,440 hrs.; 
20,440/3 = 6,813 hrs.
---------------------------------------------------------------------------

    The Climate Risk Disclosure Lab's report presents the results of 
its survey of one European large-cap financial institution, one US 
large-cap industrial manufacturing company, and one US mid-cap waste 
management company about their climate-related disclosure costs.\1017\ 
The European financial institution reported annual climate-related 
disclosure costs ranging from $250,000 to $500,000, which averages to 
$375,000 annually.\1018\ For PRA purposes, we have converted this 
dollar cost average to 6,818 burden hours using a metric of $55/
hour.\1019\ The US industrial manufacturing company disclosed annual 
climate-related disclosure costs for its employees and one full-time 
consultant ranging from $200,000 to $350,000, which averages to 
$275,000 annually. We have similarly converted this dollar cost average 
to 5,000 burden hours.\1020\ The US waste management company reported 
that its employees spent 82 hours annually to produce its climate-
related disclosures. The average annual internal burden hours spent on 
climate reporting for these three companies comes to 3,967 hours.\1021\
---------------------------------------------------------------------------

    \1017\ See supra Section IV.C.2 for a more detailed discussion 
of these reported costs.
    \1018\ $250,000 + $500,000 = $750,000. $750,000/2 = $375,000.
    \1019\ This metric is based on a reported national annual 
average salary for a climate specialist of $114,463. See glassdoor, 
How much does a Climate Change Specialist make? (Dec. 2021), 
available at https://www.glassdoor.com/Salaries/climate-change-specialist-salary-SRCH_KO0,25.htm. $114,463/2080 hrs. = $55/hr. 
$375,000/$55/hr. = 6,818 hrs. (rounded to nearest dollar).
    \1020\ $200,000 + $350,000 = $550,000. $550,000/2 = $275,000. 
$275,000/$55/hr. = 5,000 hrs.
    \1021\ 6,818 hrs. + 5,000 hrs. + 82 hrs. = 11,900 hrs.; 11,900 
hrs./3 = 3,967 hrs.
---------------------------------------------------------------------------

    The UK Impact Assessment estimated on an ongoing, annual basis the 
number of hours and costs that it would take in-house personnel \1022\ 
to gather data and prepare and provide disclosure for each of the 
following TCFD-aligned topics: Governance, strategy, risk management, 
and metrics and targets.\1023\ The impact assessment also estimated on 
an annual, ongoing basis the number of hours and costs that it would 
take a parent company's personnel to collect and process climate-
related data from its subsidiaries.\1024\ The impact assessment further 
estimated on a one-time basis the number of hours and costs that it 
would take in-house personnel to become familiar with and review the 
new climate-related reporting requirements and related guidance.\1025\

[[Page 21454]]

The total number of hours that the Impact Assessment estimated it would 
take a company to comply with the TCFD-aligned disclosure requirements 
in the first year came to 3,447 hours, of which 977.5 hours pertained 
to qualitative, TCFD-aligned disclosure and 2,469.5 hours pertained to 
GHG emissions metrics and targets disclosure.\1026\
---------------------------------------------------------------------------

    \1022\ Unlike this PRA analysis, which assumes that some of the 
paperwork burden will be borne by in-house personnel and some by 
outside professionals, the UK Impact Assessment assumed that all of 
the work would be done by in-house personnel.
    \1023\ The UK Impact Assessment's estimated number of hours for 
each TCFD-aligned disclosure topic per company was: 225 hrs. for 
governance; 295 hrs. for strategy; 245 hrs. for risk management; and 
(in Year 1) 2,227 hrs. for metrics and targets, which included one 
in-house climate-related expert working full-time.
    \1024\ This estimate was 85 hrs.
    \1025\ The primary difference between the Initial Impact 
Assessment and Final Impact Assessment concerned the estimated 
``familiarization'' costs. The Final Impact Assessment assumed that 
the rule would require scenario analysis and added additional hours 
for in-house personnel to become familiar with scenario analysis 
methodology. Because our proposed rules do not require scenario 
analysis, we are using the familiarization estimate of the Initial 
Impact Assessment (323 hrs.) when totaling the estimated hours 
required to comply with the UK's proposed climate disclosure rules. 
We have added to the familiarization estimate the number of hours 
(77 hrs.) that the Final Impact Assessment estimated for the one-
time legal review of the new climate disclosure requirements by in-
house personnel.
    \1026\ 400 hrs. (familiarization and review) + 195 hrs. 
(governance) + 295 hrs. (strategy) + 245 hrs. (risk management) + 
2,227 hrs. (metrics and targets) + 85 hrs. (parent co. processing) = 
3,447 hrs. For purposes of the PRA, we have allocated approximately 
half of the hours pertaining to familiarization and review and 
parent company processing between the qualitative TCFD-aligned 
disclosure and the GHG emissions metrics and targets disclosure. 
This results in 977.5 hrs. allocated to the qualitative TCFD-aligned 
disclosure and 2,469.5 hrs. allocated to the GHG emissions metrics 
and targets disclosure.
---------------------------------------------------------------------------

    We also have considered cost estimates from S&P Global, a data 
analytics firm that provides ESG consulting services, including 
climate-related data collection and analysis, among other services. 
This firm provided one cost estimate for preparing TCFD-aligned 
disclosures primarily covering physical risk and transition risk 
assessment and analysis, which, for a company lacking any experience in 
climate reporting, ranged from $150,000 to $200,000 (an average of 
$175,000) in the first year of reporting.\1027\ For a company with 
prior experience in GHG emissions reporting but requiring assistance 
with TCFD-aligned reporting, the firm estimated average costs of 
$100,000.\1028\ This results in an average cost estimate for all 
companies for TCFD-aligned disclosures, excluding GHG emissions 
calculation and reporting, of $137,500 in the first year of TCFD-
aligned reporting.\1029\ For PRA purposes, we have converted this 
dollar cost average to 2,500 burden hours.\1030\
---------------------------------------------------------------------------

    \1027\ See memorandum concerning staff meeting with 
representatives of S&P Global. $150,000 + $200,000 = $350,000; 
$350,000/2 = $175,000.
    \1028\ See id.
    \1029\ $175,000 + $100,000 = $275,000; $275,000/2 = $137,500.
    \1030\ $137,500/$55/hr. = 2,500 hrs.
---------------------------------------------------------------------------

    This data analytics firm provided a separate cost estimate for 
calculating a company's Scopes 1, 2, and 3 emissions.\1031\ For the 
initial calculation of a company's GHG emissions, including all three 
scopes, the cost estimate ranged from $75,000 to $125,000 (an average 
of $100,000).\1032\ The firm also estimated that the setting and 
reporting of GHG emissions targets would on average add an additional 
$25,000, resulting in an average first-year cost estimate for GHG 
emissions metrics and targets of $125,000.\1033\ For PRA purposes, we 
have converted this dollar cost average to 2,273 burden hours.\1034\ 
This results in a total incremental burden increase (for both TCFD-
aligned disclosures and GHG emissions calculation) in the first year of 
climate-related reporting of 4,773 burden hours.\1035\
---------------------------------------------------------------------------

    \1031\ See memorandum concerning staff meeting with 
representatives of S&P Global. Although the proposed rules would 
require the disclosure of a registrant's Scope 3 emissions only if 
they are material, this cost estimate is relevant for determining 
the upper bound of the proposed rules' estimated PRA burden.
    \1032\ $75,000 + $125,000 = $200,000; $200,000/2 = $100,000.
    \1033\ Although the proposed rules would not require a 
registrant to set GHG emissions targets, they would require certain 
disclosures if the registrant does set targets. We have therefore 
included S&P Global's cost estimate for targets for purposes of 
determining the upper bound of the proposed rules' estimated PRA 
burden. However, because setting targets would be voluntary under 
the proposed rules, the estimated PRA burden may overstate the 
potential burden.
    \1034\ $125,000/$55/hr. = 2,273 hrs.
    \1035\ 2,500 hrs. + 2,273 hrs. = 4,773 hrs.
---------------------------------------------------------------------------

    We also considered the cost estimates for GHG emissions measurement 
and reporting provided by two climate management firms, Persefoni and 
South Pole. Persefoni estimated that, depending on the maturity of a 
company's emissions reporting program, a company's average first-year 
costs for measuring and reporting Scopes 1, 2, and 3 emissions ranged 
from $50,000 to $125,000, which averages to $87,500, or 1,591 
hours.\1036\ South Pole estimated annual costs for measuring and 
reporting Scopes 1, 2 and 3 emissions as ranging from $11,800 to 
$118,300, which averages to $65,050, or 1,183 hours.\1037\
---------------------------------------------------------------------------

    \1036\ See memorandum concerning staff meeting with 
representatives of Persefoni. $50,000 + $125,000 = $175,000; 
$175,000/2 = $87,500; $87,500/$55/hr. = 1,591 hrs.
    \1037\ See memorandum concerning staff meeting with 
representatives of South Pole. $11,800 + $118,300 = $130,100; 
$130,100/2 = $65,050; $65,050/$55/hr. = 1,183 hrs.
---------------------------------------------------------------------------

    The UK Impact Assessment estimated that the calculation and 
reporting of GHG emissions metrics and related targets would take the 
greatest amount of time, constituting approximately 72 percent of the 
total incremental burden.\1038\ The data analytics firm, however, 
estimated that GHG emissions metrics and targets would constitute 
approximately 48 percent of the total incremental burden.\1039\ The 
burden estimates provided by the above-referenced commenter and Climate 
Lab did not allocate between GHG emissions and non-GHG emissions 
climate reporting. For purposes of the PRA, we have allocated the 
burden estimates from the commenter and Climate Lab equally between the 
qualitative TCFD-aligned disclosure and the GHG emissions metrics and 
targets disclosure.\1040\
---------------------------------------------------------------------------

    \1038\ See supra note 1033 (2,469.5 hrs./3,447 hrs. = 72 
percent).
    \1039\ See supra note 1042 (2,273 hrs./4,773 hrs. = 48 percent).
    \1040\ For the Society for Corporate Governance-derived 
estimate, this results in 3,406.5 hrs. for each of the qualitative 
TCFD-aligned disclosure and the GHG emissions metrics and targets 
disclosure. For the Climate Lab-derived burden estimate, this 
results in 1,983.5 burden hrs. for each of the qualitative and 
quantitative disclosures.
---------------------------------------------------------------------------

    Based on the above sources, we estimate that the proposed 
qualitative TCFD-aligned disclosures would result in an average 
incremental burden hour increase of 2,217 hrs. for each affected 
collection of information for the first year of climate 
reporting.\1041\ We estimate that the proposed GHG emissions metrics 
and targets disclosure would result in an average incremental burden 
hour increase of 2,151 hours for each affected collection of 
information for the first year of reporting.\1042\
---------------------------------------------------------------------------

    \1041\ 3,406.5 hrs. (Society) + 1,983.5 hrs. (Climate Lab) + 
977.5 hrs. (UK) +2,500 hrs. (S&P Global) = 8,867.5 hrs.; 8,867.5/4 = 
2,217 hrs. (rounded to the nearest whole number).
    \1042\ 3,406.5 hrs. (Society) + 1,983.5 hrs. (Climate Lab) + 
2,469.5 hrs. (UK) + 2,273 hrs. (S&P Global) + 1,591 hrs. (Persefoni) 
+ 1,183 hrs. (South Pole) = 12,906.5 hrs.; 12,906.5 hrs./6 = 2,151 
hrs.
---------------------------------------------------------------------------

    In addition to GHG emissions metrics, the proposed rules would 
require the disclosure of certain climate-related financial statement 
metrics. Although the TCFD recommends the disclosure of metrics 
pertaining to the financial impacts of climate-related events and 
conditions, it is unclear whether the above sources' burden estimates 
for TCFD-aligned disclosure would include financial statement metrics. 
Based on staff experience reviewing financial statements, we estimate 
that preparation of the financial statements to present the proposed 
financial statement metrics would require 70 additional burden hours 
per filing. To ensure that our PRA estimates cover the burden 
associated with the proposed climate-related financial statement 
metrics, we have included this amount, in addition to the burden 
estimate for GHG emissions metrics and targets, in the estimated 
overall PRA burden of the proposed rules.
    The proposed rules would require a registrant to present the 
climate-related financial statement metrics and associated disclosures 
in a note to its

[[Page 21455]]

financial statements, which would be audited. Because the audit of such 
information would be part of the registrant's overall audit of its 
financial statements, we expect the incremental audit costs associated 
with these climate-related financial statement metrics and disclosures 
to be modest.\1043\ We are conservatively estimating that auditing the 
note pertaining to the climate-related financial statement metrics and 
associated disclosures would add audit fees of $15,000 to the overall 
costs associated with the audit of the registrant's financial 
statements. We derived this estimate by first estimating costs as an 
average percentage of total audit fees (1.5%) \1044\ and then applying 
that percentage to median audit fees of $690,000,\1045\ which results 
in $10,350. To be conservative, we have increased this amount to 
$15,000 for estimated audit fees. We believe that this estimate 
represents the average cost of the incremental efforts that may be 
incurred, taking into consideration factors such as the scale and 
complexity of different registrants and the extent of impact by 
climate-related events (e.g., location of operations, nature of 
business). This cost also takes into consideration the need to 
understand and evaluate the registrants' processes and internal 
controls associated with the reporting of the climate-related financial 
statement metrics and associated disclosures.
---------------------------------------------------------------------------

    \1043\ This belief is based on post-implementation review 
observations and activities from accounting standards that provided 
further disaggregation of information and that are analogous to the 
proposed financial statement metrics requirements, as discussed 
supra Section II.F.2.a (e.g., segment reporting and disaggregation 
of revenue). See FASB's post-implementation review report on FASB 
Statement No. 131, Disclosures about Segments of an Enterprise and 
Related Information (Dec. 2012), 11, (``Preparers' incremental costs 
to implement and comply with Statement 131 generally were not 
significant and were in line with expectations''), available at 
https://www.accountingfoundation.org/cs/Satellite?c=Document_C&cid=1176160621900&pagename=Foundation%2FDocument_C%2FDocumentPage. See also FASB's Board Meeting Handout, post-
implementation review of Topic 606, Revenue with Contracts with 
Customers Our (July 28, 2021) (While the post-implementation review 
is still ongoing, most users agreed that the disaggregated [revenue] 
disclosure is helpful (par. 16) and users noted that although they 
incurred costs to become familiar with the new standard, update 
models, or maintain dual models during the transition period, most 
of those costs were nonrecurring. For users that are generalists or 
that cover sectors that did not have significant changes to revenue 
recognition measurement or timing under Topic 606, the costs were 
not significant. (par. 20), available at https://www.fasb.org/cs/ContentServer?c=Document_C&cid=1176176976563&d=&pagename=FASB%2FDocument_C%2FDocumentPage.
    \1044\ The staff estimated a range of 0.5% to 2.5%, which 
averages to 1.5%.
    \1045\ This is based on staff review of Audit Analytics data for 
2020.
---------------------------------------------------------------------------

    The proposed rules would require a registrant that is a large 
accelerated filer \1046\ or an accelerated filer \1047\ 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. Following a one-year phase-in period in which no 
attestation report would be required, for filings made for the second 
and third fiscal years following the compliance date for the GHG 
emissions disclosure requirement, large accelerated filers would be 
required to obtain an attestation report for their Scopes 1 and 2 
emissions disclosure, at minimum, at a limited assurance level. We 
estimate the cost of a limited assurance attestation report covering a 
large accelerated filer's Scopes 1 and 2 emissions to be 
$110,000.\1048\ Commencing with the fourth fiscal year following the 
compliance date and thereafter, a large accelerated filer would be 
required to obtain an attestation report covering its Scopes 1 and 2 
emissions disclosure at a reasonable assurance level. We estimate the 
cost for such a reasonable assurance attestation report to be 
$175,000.\1049\ This results in an initial six-year average \1050\ 
assurance cost for a large accelerated filer's Scopes 1 and 2 emissions 
of $124,167.\1051\
---------------------------------------------------------------------------

    \1046\ Based on staff review of filings made in 2020, large 
accelerated filers filed approximately 31% of domestic forms and 
approximately 37% of Form 20-Fs in 2020. For PRA purposes, we have 
used 37% as a proxy for the percentage of all foreign private issuer 
forms filed by large accelerated filers in 2020.
    \1047\ Based on staff review of filings made in 2020, 
accelerated filers filed approximately 11% of domestic forms and 15% 
of Form 20-Fs in 2020.
    \1048\ See supra Section IV.C.2.a.3. for the basis of this 
limited assurance cost estimate.
    \1049\ See id.
    \1050\ In order to capture three years of the cost of a 
reasonable assurance attestation report required for accelerated 
filers and large accelerated filers, which requirement does not 
commence until the fourth fiscal year following the proposed rules' 
compliance date, we have used a six-year average when calculating 
the estimated paperwork burden effects of the proposed rules.
    \1051\ 0 + $110,000 + $110,000 + $175,000 + $175,000 + $175,000 
= $745,000; $745,000/6 = $124,167.
---------------------------------------------------------------------------

    Following a one-year phase-in period in which no attestation report 
would be required, for filings made for the second and third fiscal 
years following the compliance date for the GHG emissions disclosure 
requirement, accelerated filers would be required to obtain an 
attestation report for their Scopes 1 and 2 emissions disclosure, at 
minimum, at a limited assurance level. We estimate the cost of a 
limited assurance attestation report covering an accelerated filer's 
Scopes 1 and 2 emissions to be $45,000.\1052\ Commencing with the 
fourth fiscal year following the compliance date and thereafter, an 
accelerated filer would be required to obtain an attestation report 
covering its Scopes 1 and 2 emissions disclosure at a reasonable 
assurance level. We estimate the cost for such a reasonable assurance 
attestation report to be $75,000.\1053\ This results in an initial six-
year average assurance cost for an accelerated filer's Scopes 1 and 2 
emissions of $52,500.\1054\
---------------------------------------------------------------------------

    \1052\ See supra Section IV.C.2.a.3. for the basis of this 
limited assurance cost estimate.
    \1053\ See id.
    \1054\ 0 + $45,000 + $45,000 + $75,000 + $75,000 + $75,000 = 
$315,000; $315,000/6 = $52,500.
---------------------------------------------------------------------------

    The proposed rules would require a registrant that is not required 
to include a GHG emissions attestation report to state whether any of 
the registrant's GHG emissions disclosures were subject to third-party 
attestation or verification. If so, the registrant would be required to 
identify the provider of assurance or verification and disclose certain 
additional information, such as the level and scope of assurance or 
verification provided, among other matters.\1055\ The burden and costs 
for this disclosure are encompassed within the estimated overall 
internal burden and costs for the proposed GHG emissions disclosure.
---------------------------------------------------------------------------

    \1055\ See proposed 17 CFR 229.1505(e).
---------------------------------------------------------------------------

    The UK Impact Assessment assumed a 25 percent reduction in hour and 
cost estimates for the work required to comply with the GHG emissions 
metrics and targets disclosure requirement in Year 2 compared to Year 1 
because initial implementation of the metrics and targets framework 
would not need to be repeated. We believe this assumption is reasonable 
and have made a similar reduction after the first year of compliance 
when calculating the four-year average for the estimated paperwork 
burden hour effect of the proposed rules. We also have assumed a 10 
percent reduction in the hour and cost estimates for preparing and 
providing the disclosures for the other TCFD-aligned topics in Years 2 
through 6 compared to Year 1. We believe that this assumption is 
reasonable because the burden hours and costs associated with becoming 
familiar with the other TCFD disclosure topics would not need to be 
repeated.\1056\ We believe that the reduction in the compliance burden 
and costs for the metrics and targets disclosure requirement would be 
greater

[[Page 21456]]

than the reduction for the other TCFD-aligned disclosure topics because 
the initial work to implement a climate data collection and reporting 
framework to comply with the metrics and targets requirement would be 
greater than the initial framework required for the other disclosure 
requirements.
---------------------------------------------------------------------------

    \1056\ S&P Global estimated a similar reduction in costs in 
subsequent years, the magnitude of which depends on the extent of 
material changes to the TCFD-aligned disclosure and the GHG 
emissions metrics.
---------------------------------------------------------------------------

    SRCs, which comprise 50 percent of domestic filers, and 45 percent 
of total affected registrants,\1057\ would bear a lesser compliance 
burden because those registrants would not be subject to the proposed 
disclosure requirement pertaining to Scope 3 emissions, which, of the 
three types of GHG emissions, poses the greatest challenge to calculate 
and report. We accordingly estimate that the increase in the PRA burden 
pertaining to the GHG emissions requirement for SRCs filing on domestic 
forms would be approximately 50% less than the increased burden for the 
GHG emissions requirement for non-SRC registrants.\1058\ Smaller 
foreign private issuers that file on the foreign private issuer forms 
would not be eligible for this adjustment because those foreign private 
issuers are excluded from the definition of, and therefore cannot be, 
SRCs.\1059\
---------------------------------------------------------------------------

    \1057\ In 2020, there were 6,220 domestic filers + 740 foreign 
private issuer (fpi) filers = 6,960 affected filers. 3,110 domestic 
filers + 740 fpi filers = 3,850 non-SRC filers. 3,850/6,960 = 55%. 
3,110 filers were SRCs in 2020. 3,110/6,960 = 45%. See supra Section 
IV.B.
    \1058\ This is generally consistent with some of the cost 
estimates obtained for calculating and reporting Scopes 1, 2, and 3 
emissions. For example, Persefoni indicated that the annual GHG 
emissions costs for a company having experience calculating and 
reporting GHG emissions would double if it included Scope 3 
emissions after calculating Scopes 1 and 2 emissions. See supra note 
1020. In addition, S&P Global indicated that a company's annual 
ongoing reporting costs of Scopes 1 and 2 emissions would, at a 
minimum, increase from $40,000 to $75,000 if it included Scope 3 
emissions. See supra note 1019.
    \1059\ See, e.g., Instruction 2 to the definition of smaller 
reporting company under 17 CFR 230.405.
---------------------------------------------------------------------------

    In addition to requiring the annual climate disclosures, the 
proposed rules would require a registrant to disclose any material 
change to its climate-related disclosures reported in its annual 
Exchange Act annual report (Form 10-K or 20-F) on a Form 10-Q (if a 
domestic filer) or a Form 6-K (if a foreign private issuer filer). We 
would not expect a registrant to report such a material change until 
its second year of compliance, at the earliest. Based on the staff's 
assessment of the amount of time it would take to determine that there 
has been a material change in the previously reported climate 
disclosure, particularly concerning its GHG emissions metrics, and to 
prepare disclosures regarding the material change, if any, we estimate 
a burden hour increase of 40 hours per form, or an initial six-year 
average of 33 hours per form.\1060\
---------------------------------------------------------------------------

    \1060\ 0 + (40 hrs. x 5) = 200 hrs.; 200 hrs./6 = 33 hrs. 
(rounded to nearest whole number).
---------------------------------------------------------------------------

    The following table summarizes the estimated paperwork burden 
effects of the proposed amendments for non-SRC and SRC registrants 
associated with the affected collections of information.

[[Page 21457]]

                                         PRA Table 1--Estimated Paperwork Burden Effects of the Proposed Amendments for Non-SRC and SRC Registrants \1\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Estimated PRA
                                          Estimated PRA                    burden hour    Estimated PRA   Estimated PRA   Estimated PRA  Estimated average  Estimated average  Estimated average
                                           burden hour    Estimated PRA  effect for non-   burden hour     burden hour     burden hour    annual assurance   annual assurance   annual assurance
    Collections of         Proposed      effect for non-   burden hour         SRC       effect for SRC  effect for non- effect for SRC  costs for climate-  costs for Scopes   costs for Scopes
     information        disclosure item        SRC       effect for SRC    registrants     registrants         SRC       registrants (6  related financial  1 and 2 emissions  1 and 2 emissions
                                           registrants     registrants   (for each year  (for each year  registrants (6   year average)  statement metrics  disclosure by AFs    disclosure by
                                         (year 1) (hrs)  (year 1) (hrs)   2 through 6)    2 through 6)    year average)       (hrs)       (6 year average)     \2\ (6 year      LAFs \3\ (6 year
                                                                              (hrs)           (hrs)           (hrs)                                              average)           average)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Forms S-1,S-4, S-      Climate-related           +2,217          +2,217          +1,995          +1,995          +2,032          +2,032           +$15,000           +$52,500           $124,167
 11,10, and 10-K.       disclosures
                        regarding
                        governance,
                        strategy, and
                        risk management.
                       Financial                    +70             +70             +63             +63             +64             +64
                        statement                                                                                +1,703
                        metrics.
                       GHG emissions             +2,151          +1,076          +1,613            +807            +852
                        metrics and
                        targets.
                      --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Total............  ................          +4,438          +3,363          +3,671          +2,865          +3,799          +2,948           +$15,000           +$52,500           $124,167
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Forms F-1, F-4, and    Climate-related           +2,217              NA          +1,995             NA.          +2,032              NA           +$15,000           +$52,500           $124,167
 20-F.                  disclosures                 +70                             +63                             +64
                        regarding                +2,151                          +1,613                          +1,703
                        governance,
                        strategy, and
                        risk management.
                       Financial
                        statement
                        metrics.
                       GHG emissions
                        metrics and
                        targets.
                       Financial                    +70  ..............             +63  ..............             +64
                        statement
                        metrics.
                       GHG emissions             +2,151  ..............          +1,613  ..............          +1,703
                        metrics and
                        targets.
                      --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Total............  ................          +4,438  ..............          +3,671  ..............          +3,799  ..............           +$15,000           +$52,500           $124,167
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Forms 10-Q and 6-K...  Material change                0  ..............             +40  ..............             +33  ..............                  0                  0                  0
                        to 10-K/20-F.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ All numbers rounded to nearest whole number.
\2\ Accelerated Filers.
\3\ Large Accelerated Filers.

[[Page 21458]]

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

    Below we estimate the incremental and aggregate increase in 
paperwork burden resulting from the proposed amendments. These 
estimates represent the average burden for all issuers, both large and 
small. In deriving our estimates, we recognize that the burdens will 
likely vary among individual registrants based on a number of factors, 
including the nature of their business, the size and complexity of 
their operations, and whether they are subject to similar climate-
related disclosure requirements in other jurisdictions or already 
preparing similar disclosures on a voluntary basis. For purposes of the 
PRA, the burden is to be allocated between internal burden hours and 
outside professional costs. The table below sets forth the percentage 
estimates we typically use for the burden allocation for each affected 
collection of information. We also estimate that the average cost of 
retaining outside professionals is $400 per hour.\1061\
---------------------------------------------------------------------------

    \1061\ We recognize that the costs of retaining outside 
professionals may vary depending on the nature of the professional 
services, but for purposes of this PRA analysis, we estimate that 
such costs would be an average of $400 per hour.

     PRA Table 2--Standard Estimated Burden Allocation for Specified
                       Collections of Information
------------------------------------------------------------------------
                                                              Outside
        Collection of information          Internal (%)    professionals
                                                                (%)
------------------------------------------------------------------------
Forms S-1, F-1, S-4, F-4, S-11, 10, and               25              75
 20-F...................................
Forms 10-K, 10-Q, and 6-K...............              75              25
------------------------------------------------------------------------

    We estimate that the proposed amendments would change the burden 
per response, but not the frequency, of the existing collections of 
information. The burden increase estimates for each collection of 
information were calculated by multiplying the number of responses by 
the increased estimated average amount of time it would take to prepare 
and review the disclosure required under the affected collection of 
information (using the estimated three-year average increase). Since 50 
percent of the domestic filers in 2020 were non-SRCs and 50 percent 
were SRCs, we assume for purposes of our PRA estimates that 50 percent 
of each domestic collection of information was filed by non-SRCs and 50 
percent by SRCs. The table below illustrates the incremental change to 
the annual compliance burden of the affected collections of 
information, in hours and costs.

[[Page 21459]]

                                                  PRA Table 3--Calculation of the Incremental Change in Burden Estimates of Current Responses Resulting from the Proposed Amendments\1\
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                               Climate-related
                                                                                          Burden hour     Increase in      Increase in        Increase in         financial                                               Increase in
                                                                Number of  estimated        annual       burden hours    internal burden      professional    statement metrics    GHG emissions      GHG emissions       professional
     Collection of  information             Filed by            affected respondents     increase per    for affected       hours  for         hours  for       assurance costs   assurance costs    assurance costs       costs for
                                                                                           affected       respondents        affected           affected         for affected       for AFs \3\        for LAFs \4\         affected
                                                                                          respondent                       respondents        respondents      respondents \2\                                            respondents
                                     ......................  (A)......................             (B)     (C) = (A) x   (D) = (C) x 0.25        (E) = (C) x        (F) = (A) x        (G) = (A) x   (H) = (A) x 0.31   (I) = (E) x $400
                                                                                                                   (B)            or 0.75       0.75 or 0.25            $15,000       0.11 or 0.15          or 0.37 x  + (F) + (G) + (H)
                                                                                                                                                                                         x $52,500           $124,167
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
S-1................................  Non-SRCs..............  447......................           3,799       1,698,153  .................  .................  .................  .................  .................  .................
S-1................................  SRCs..................  447......................           2,948       1,317,756  .................  .................  .................  .................  .................  .................
                                                            ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    S-1 (Total)....................  ......................  894......................  ..............       3,015,909            753,977          2,261,932        $13,410,000         $5,145,000        $34,394,259       $957,722,059
S-4................................  Non-SRCs..............  294......................           3,799       1,116,906  .................  .................  .................  .................  .................  .................
S-4................................  SRCs..................  294......................           2,948         866,712  .................  .................  .................  .................  .................  .................
                                                            ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    S-4 (Total)....................  ......................  588......................  ..............       1,983,618            495,905          1,487,714          8,820,000          3,412,500         22,598,394        629,916,494
S-11...............................  Non-SRCs..............  34.......................           3,799         129,166  .................  .................  .................  .................  .................  .................
S-11...............................  SRCs..................  33.......................           2,948          97,284  .................  .................  .................  .................  .................  .................
                                                            ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    S-11 (Total)...................  ......................  67.......................  ..............         226,450             56,613            169,838          1,005,000            367,500          2,607,507         71,915,207
10.................................  Non-SRCs..............  108......................           3,799         410,292  .................  .................  .................  .................  .................  .................
10.................................  SRCs..................  108......................           2,948         318,384  .................  .................  .................  .................  .................  .................
                                                            ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    10 (Total).....................  ......................  216......................  ..............         728,676            182,169            546,507          3,240,000          1,260,000          8,319,189        231,421,989
10-K...............................  Non-SRCs..............  4,146....................           3,799      15,750,654  .................  .................  .................  .................  .................  .................
10-K...............................  SRCs..................  4,146....................           2,948      12,222,408  .................  .................  .................  .................  .................  .................
                                                            ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    10-K (Total)...................  ......................  8,292....................  ..............      27,973,062         20,979,797          6,993,266        124,380,000         47,880,000        319,233,357      3,288,799,757
10-Q...............................  Non-SRCs..............  11,463...................              33         378,279  .................  .................  .................  .................  .................  .................
10-Q...............................  SRCs..................  11,462...................              33         378,246  .................  .................  .................  .................  .................  .................
                                                            ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    10-Q (Total)...................  ......................  22,925...................  ..............         756,525            567,394            189,131                  0                  0                  0         75,652,400
F-1................................  Both..................  66.......................           3,799         250,734             62,684            188,051            990,000            525,000          2,980,008         79,715,408
F-4................................  Both..................  39.......................           3,799         148,161             37,040            111,121            585,000            315,000          1,738,338         47,086,738
20-F...............................  Both..................  729......................           3,799       2,769,471            692,368          2,077,103         10,935,000          5,722,500         33,525,090        881,023,790
6-K................................  Both..................  34,794...................              33       1,148,202            861,152            287,051                  0                  0                  0        114,820,400
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ All numbers rounded to nearest whole number.
\2\ We have not assumed assurance costs for Form 10-Q or Form 6-K because these forms typically have only marginal assurance costs. We expect these forms to be filed in the 2nd year, at the earliest.
\3\ AFs filed 11% of domestic forms and 15% of foreign private issuer forms in 2020.
\4\ LAFs filed 31% of domestic forms and 37% of foreign private issuer forms in 2020.

[[Page 21460]]

    The table below illustrates the program change expected to result 
from the proposed rule amendments together with the total requested 
change in reporting burden and costs.

[[Page 21461]]

                                                              PRA Table 4--Requested Paperwork Burden Under the Proposed Amendments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Current burden                                     Program change                               Requested change in burden
                                        --------------------------------------------------------------------------------------------------------------------------------------------------------
       Collection of Information                             Current                           Number of       Change in
                                         Current annual     internal      Current external     affected        internal         Change in          Annual         Internal       External cost
                                            responses     burden hours      cost burden        responses     burden hours     external costs      responses     burden hours         burden
                                                    (A)             (B)                (C)             (D)             (E)                (F)             (G)     (H) = (B) +    (I) = (C) + (F)
                                                                                                                                                                          (E)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
S-1....................................             894         146,067       $178,922,043             894         753,977       $957,722,059             894         900,044     $1,134,929,102
S-4....................................             588         562,362        677,255,579             588         495,905        629,916,494             588       1,058,267      1,306,034,573
S-11...................................              67          12,229         14,943,768              67          56,613         71,915,207              67          68,842         86,736,475
10.....................................             216          11,855         14,091,488             216         182,169        231,421,989             216         194,024        245,093,477
10-K...................................           8,292      14,188,040      1,893,793,119           8,292      20,979,797      3,288,799,757           8,292      35,167,837      5,166,632,876
10-Q...................................          22,925       3,182,333        421,490,754          22,925         567,394         75,652,400          22,925       3,749,727        497,143,154
F-1....................................              66          26,707         32,293,375              66          62,684         79,715,408              66          89,391        111,833,783
F-4....................................              39          14,049         17,073,825              39          37,040         47,086,738              39          51,089         64,055,563
20-F...................................             729         479,261        576,824,025             729         692,368        881,023,790             729       1,171,629      1,455,940,315
6-K....................................          34,794         227,031         30,270,780          34,794         861,152        114,820,400          34,794       1,088,183        145,091,180
                                        --------------------------------------------------------------------------------------------------------------------------------------------------------
    Total..............................  ..............      18,849,934      3,856,958,756  ..............      24,689,099      6,378,073,242  ..............      43,539,033     10,235,031,998
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 21462]]

D. Request for Comment

    We request comment in order to:
     Evaluate whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
agency, including whether the information would have practical utility;
     Evaluate the accuracy of our estimate of the burden of the 
proposed collections of information, including any assumptions used;
     Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected;
     Evaluate whether there are ways to minimize the burden of 
the collections of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology; and
     Evaluate whether the proposed amendments would have any 
effects on any other collections of information not previously 
identified in this section.\1062\
---------------------------------------------------------------------------

    \1062\ We request comment pursuant to 44 U.S.C. 3506(c)(2)(B).
---------------------------------------------------------------------------

    Any member of the public may direct to us any comments about the 
accuracy of these burden estimates and any suggestions for reducing 
these burdens. Persons submitting comments on the collection of 
information requirements should direct the comments to the Office of 
Management and Budget, Attention: Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and should send a copy to Vanessa A. Countryman, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090, with reference to File No. S7-10-22. 
Requests for materials submitted to OMB by the Commission with regard 
to these collections of information should be in writing, refer to File 
No. S7-10-22, and be submitted to the Securities and Exchange 
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 
20549-2736. OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication of 
this release. Consequently, a comment to OMB is best assured of having 
its full effect if OMB receives it within 30 days of publication.

VI. Initial Regulatory Flexibility Act Analysis

    This Initial Regulatory Flexibility Act Analysis (``IRFA'') has 
been prepared, and made available for public comment, in accordance 
with the Regulatory Flexibility Act (``RFA'').\1063\ It relates to the 
proposal to add new subpart 1500 to Regulation S-K and new Article 14 
to Regulation S-X, which would require registrants to provide certain 
climate-related disclosures in their Securities Act and Exchange Act 
registration statements and Exchange Act reports. As required by the 
RFA, this IRFA describes the impact of these proposed amendments of 
Regulations S-K and S-X on small entities.\1064\
---------------------------------------------------------------------------

    \1063\ 5 U.S.C. 601 et seq.
    \1064\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

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

    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 decision-useful information to investors to 
enable them to make informed judgments about the impact of climate-
related risks on current and potential investments. Information about 
climate-related risks 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 advisors, 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 voluntarily 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 voluntary disclosures of climate-related 
risks do not adequately protect investors. For this reason, mandatory 
disclosures may be necessary or appropriate to improve the consistency, 
comparability, and reliability of this information. The reasons for, 
and objectives of, the proposed amendments are discussed in more detail 
in Section II above.

B. Legal Basis

    We are proposing the amendments contained in this release under the 
authority set forth in Sections 7, 10, 19(a), and 28 of the Securities 
Act, as amended, and Sections 3(b), 12, 13, 15, 23(a), and 36 of the 
Exchange Act, as amended.

C. Small Entities Subject to the Proposed Rules

    The proposed amendments would affect some issuers that are small 
entities. The RFA defines ``small entity'' to mean ``small business,'' 
``small organization,'' or ``small governmental jurisdiction.'' \1065\ 
For purposes of the RFA, under 17 CFR 240.0-10(a), an issuer, other 
than an investment company, is a ``small business'' or ``small 
organization'' if it had total assets of $5 million or less on the last 
day of its most recent fiscal year and, under 17 CFR 230.157, is also 
engaged or proposing to engage in an offering of securities that does 
not exceed $5 million.
---------------------------------------------------------------------------

    \1065\ 5 U.S.C. 601(6).
---------------------------------------------------------------------------

    The proposed rules would apply to a registrant when filing a 
Securities Act or Exchange Act registration statement or an Exchange 
Act annual or other periodic report. We estimate that there are 1,004 
registrants that are small entities that would be affected by the 
proposed rules.

D. Reporting, Recordkeeping, and Other Compliance Requirements

    The proposed amendments would require a registrant, including a 
small entity, to disclose certain climate-related information, 
including data about their GHG emissions, when filing a Securities Act 
or Exchange Act registration statement or Exchange Act annual or other 
periodic report. In particular, like larger registrants, small entities 
would be required to disclose information about: The oversight of their 
boards and management regarding climate-related risks; any material 
impacts of climate-related risks on their consolidated financial 
statements, business, strategy, and outlook; their risk management of 
climate-related risks; climate-related targets or goals, if any; and 
certain financial statement metrics. In addition, like other 
registrants, small entities would be required to disclose their Scopes 
1 and 2 emissions. We anticipate that the nature of any benefits or 
costs associated with the above proposed amendments would be similar 
for large and small entities. Accordingly, we refer to the discussion 
of the proposed amendments' economic effects on all affected parties, 
including small entities, in Section IV.C. Consistent with that 
discussion, we anticipate that the economic benefits and costs likely 
would vary widely among small entities based on a number of factors, 
including the nature and conduct of their businesses, which makes it 
difficult to

[[Page 21463]]

project the economic impact on small entities with precision. However, 
we request comment on how the proposed amendments would affect small 
entities.
    While small entities would not be exempt from the full scope of the 
proposed amendments, they would be exempt from the Scope 3 emissions 
disclosure requirements, which would likely impose the greatest 
compliance burden for registrants due to the complexity of data 
gathering, calculation, and assessment required for that type of 
emissions.\1066\ Small entities would also have a longer transition 
period to comply with the proposed rules than other registrants.\1067\ 
We believe that these accommodations would reduce the proposed rules' 
compliance burden for small entities that, compared to larger 
registrants with more resources, may be less able to absorb the costs 
associated with reporting of Scope 3 emissions and may need additional 
time to allocate the resources necessary to begin providing climate-
related disclosures.
---------------------------------------------------------------------------

    \1066\ See supra Section II.G.3 and II.L (discussing the 
proposed exemption from Scope 3 emissions disclosure for smaller 
reporting companies).
    \1067\ See supra Section II.L (discussing the proposed 
additional two years for smaller reporting companies to comply with 
the proposed rules compared to large accelerated filers).
---------------------------------------------------------------------------

E. Duplicative, Overlapping, or Conflicting Federal Rules

    The proposed rules do not duplicate or conflict with other existing 
federal rules. As discussed in Section IV, some registrants currently 
report certain GHG emissions via the EPA's 2009 mandatory Greenhouse 
Gas Reporting Program. However, as discussed above, the reporting 
requirements of the EPA's program and the resulting data are different 
and more suited to the purpose of building a national inventory of GHG 
emissions rather than allowing investors to assess emissions-related 
risks to individual registrants.

F. Significant Alternatives

    The RFA directs us to consider alternatives that would accomplish 
our stated objectives, while minimizing any significant economic impact 
on small entities. In connection with the proposed amendments, we 
considered the following alternatives:
     Establishing different compliance or reporting 
requirements that take into account the resources available to small 
entities;
     Clarifying, consolidating, or simplifying compliance and 
reporting requirements under the rules for small entities;
     Using performance rather than design standards; and
     Exempting small entities from all or part of the 
requirements.
    As discussed above, the proposed amendments would exempt small 
entities from certain GHG emissions disclosure requirements that would 
likely impose the greatest compliance burden on registrants compared to 
other proposed disclosure requirements. In addition, while there would 
be a transition period for all registrants to comply with the proposed 
amendments, small entities would have an additional two more years to 
comply with the proposed rules than large accelerated filers and an 
additional year compared to other registrants. We believe that this 
scaled and phased-in approach would help minimize the economic impact 
of the proposed amendments on small entities. We are not, however, 
proposing a complete exemption from the proposed amendments for SRCs 
because, due to their broad impact across industries and jurisdictions, 
climate-related risks may materially impact the operations and 
financial condition of domestic and foreign issuers, both large and 
small.
    For similar reasons, other than the exemption for reporting Scope 3 
emissions by SRCs, we are not proposing to clarify, consolidate, or 
simplify the proposed disclosure requirements for small entities. A key 
objective of the proposed amendments is to elicit consistent, 
comparable and reliable information about climate-related risks across 
registrants. Alternative compliance requirements for small entities 
could undermine that goal.
    The proposed amendments are primarily based on performance 
standards with some provisions that are more like design standards. For 
example, while the proposed amendments include certain concepts, such 
as scopes, developed by the GHG Protocol, they do not require a 
registrant to use the GHG Protocol's methodology when calculating its 
GHG emissions if another methodology better suits its circumstances. 
Using a performance standard for calculation of GHG emissions would 
provide registrants with some flexibility regarding how to comply with 
the proposed GHG emissions requirement while still providing useful 
information for investors about the various scopes of emissions. 
Similarly, the proposed amendments would require a registrant that is a 
large accelerated filer or an accelerated filer to include an 
attestation report covering its Scopes 1 and 2 emissions that would 
require the report to meet certain minimum criteria while permitting 
the filer, at its option, to obtain additional levels of assurance. In 
contrast, the proposed amendments would require all registrants, 
including small entities, to express their GHG emissions both 
disaggregated by each constituent greenhouse gas and in the aggregate, 
expressed in terms of carbon dioxide equivalent (CO2e). 
Using a design standard for the expression of a registrant's GHG 
emissions would enhance the comparability of this disclosure for 
investors.
Request for Comment
    We encourage the submission of comments with respect to any aspect 
of this IRFA. In particular, we request comments regarding:
     How the proposed rule and form amendments can achieve 
their objective while lowering the burden on small entities;
     The number of small entity companies that may be affected 
by the proposed rule and form amendments;
     The existence or nature of the potential effects of the 
proposed amendments on small entity companies discussed in the 
analysis;
     How to quantify the effects of the proposed amendments; 
and
     Whether there are any federal rules that duplicate, 
overlap, or conflict with the proposed amendments.
    Commenters are asked to describe the nature of any effect and 
provide empirical data supporting the extent of that effect. Comments 
will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposed rules are adopted, and will be 
placed in the same public file as comments on the proposed rules 
themselves.

VII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\1068\ the Commission must advise OMB as to 
whether the proposed amendments constitute a ``major'' rule. Under 
SBREFA, a rule is considered ``major'' where, if adopted, it results in 
or is likely to result in:
---------------------------------------------------------------------------

    \1068\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

     An annual effect on the U.S. economy of $100 million or 
more;
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment, or 
innovation.
    We request comment on whether our proposal would be a ``major 
rule'' for purposes of SBREFA. In particular, we request comment and 
empirical data on:

[[Page 21464]]

     The potential effect on the U.S. economy on an annual 
basis;
     Any potential increase in costs or prices for consumers or 
individual industries; and
     Any potential adverse effect on competition, investment, 
or innovation.

VIII. Statutory Authority

    The amendments contained in this release are being proposed under 
the authority set forth in Sections 7, 10, 19(a), and 28 of the 
Securities Act, as amended, and Sections 3(b), 12, 13, 15, 23(a), and 
36 of the Exchange Act, as amended.

List of Subjects in 17 CFR Parts 210, 229, 232, 239, and 249

    Accountants; Accounting; Administrative practice and procedure, 
Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, the Commission is 
proposing to amend title 17, chapter II of the Code of Federal 
Regulations as follows:

PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL 
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 
1934, INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 
1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

0
1. The authority citation for part 210 continues to read as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77aa(25), 77aa(26), 77nn(25), 77nn(26), 78c, 78j-1, 78l, 78m, 78n, 
78o(d), 78q, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a20, 80a-29, 80a-30, 
80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, and sec. 102(c), 
Pub. L. 112-106, 126 Stat. 310 (2012), unless otherwise noted.

0
2. Amend Sec.  210.8-01 by revising paragraph (b) to read as follows:

Sec.  210.8-01  General requirements for Article 8.

* * * * *
    (b) Smaller reporting companies electing to prepare their financial 
statements with the form and content required in Article 8 need not 
apply the other form and content requirements in 17 CFR part 210 
(Regulation S-X) with the exception of the following:
    (1) The report and qualifications of the independent accountant 
shall comply with the requirements of Sec. Sec.  210.2-01 through 
210.2-07 (Article 2); and
    (2) The description of accounting policies shall comply with Sec.  
210.4-08(n);
    (3) Smaller reporting companies engaged in oil and gas producing 
activities shall follow the financial accounting and reporting 
standards specified in Sec.  210.4-10 with respect to such activities; 
and
    (4) Sections 210.14-01 and 210.14-02 (Article 14).
* * * * *
0
3. Add an undesignated center heading and Sec. Sec.  210.14-01 and 
210.14-02 to read as follows:

Article 14--Climate-Related Disclosure

Sec.  210.14-01  Climate-related disclosure instructions.

    (a) General. A registrant must include disclosure pursuant to Sec.  
210.14-02 in any filing that is required to include disclosure pursuant 
to subpart 229.1500 of this chapter and that also requires the 
registrant to include its audited financial statements. The disclosure 
pursuant to Sec.  210.14-02 must be included in a note to the financial 
statements included in such filing.
    (b) Definitions. The definitions in Sec.  229.1500 (Item 1500 of 
Regulation S-K) apply to this Article 14 of Regulation S-X.
    (c) Basis of calculation. When calculating the metrics in this 
Article 14, except where otherwise indicated, a registrant must:
    (1) Use financial information that is consistent with the scope of 
the rest of its consolidated financial statements included in the 
filing; and
    (2) Whenever applicable, apply the same accounting principles that 
it is required to apply in preparation of the rest of its consolidated 
financial statements included in the filing.
    (d) Historical periods. Disclosure must be provided for the 
registrant's most recently completed fiscal year, and for the 
historical fiscal year(s) included in the consolidated financial 
statements in the filing (e.g., 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 as of the end of 
its three most recent fiscal years would be required to disclose two 
years of the climate-related metrics that correspond to balance sheet 
line items and three years of the climate-related metrics that 
correspond to income statement or cash flow statement line items).

Sec.  210.14-02  Climate-related metrics.

    (a) Contextual information. Provide contextual information, 
describing how each specified metric was derived, including a 
description of significant inputs and assumptions used, and, if 
applicable, policy decisions made by the registrant to calculate the 
specified metrics.
    (b) Disclosure thresholds. (1) Disclosure of the financial impact 
on a line item in the registrant's consolidated financial statements 
pursuant to paragraphs (c) and (d) of this section (including any 
impacts included pursuant to paragraphs (i) and (j) of this section) is 
not required if the sum of the absolute values of all the impacts on 
the line item is less than one percent of the total line item for the 
relevant fiscal year.
    (2) Disclosure of the aggregate amount of expenditure expensed or 
the aggregate amount of capitalized costs incurred pursuant to 
paragraphs (e) and (f) of this section (including any impacts included 
pursuant to paragraphs (i) and (j) of this section) is not required if 
such amount is less than one percent of the total expenditure expensed 
or total capitalized costs incurred, respectively, for the relevant 
fiscal year.
    (c) Financial impacts of severe weather events and other natural 
conditions. Disclose the impact of severe weather events and other 
natural conditions, such as flooding, drought, wildfires, extreme 
temperatures, and sea level rise on any relevant line items in the 
registrant's consolidated financial statements during the fiscal years 
presented. Disclosure must be presented, at a minimum, on an aggregated 
line-by-line basis for all negative impacts and, separately, at a 
minimum, on an aggregated line-by-line basis for all positive impacts. 
Impacts may include, for example:
    (1) Changes to revenues or costs from disruptions to business 
operations or supply chains;
    (2) 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;
    (3) Changes to loss contingencies or reserves (such as 
environmental reserves or loan loss allowances) due to impact from 
severe weather events; and
    (4) Changes to total expected insured losses due to flooding or 
wildfire patterns.
    (d) Financial impacts related to transition activities. Disclose 
the impact of any efforts to reduce GHG emissions or otherwise mitigate 
exposure to transition risks on any relevant line items in the 
registrant's consolidated financial statements during the fiscal years 
presented. Disclosure must be presented, at a minimum, on an aggregated 
line-by-line basis for all negative impacts and, separately, at a 
minimum, on an aggregated line-by-line

[[Page 21465]]

basis for all positive impacts. Impacts may include, for example:
    (1) Changes to revenue or cost due to new emissions pricing or 
regulations resulting in the loss of a sales contract;
    (2) Changes to operating, investing, or financing cash flow from 
changes in upstream costs, such as transportation of raw materials;
    (3) Changes to the carrying amount of assets (such as intangibles 
and property, plant, and equipment) due to, among other things, a 
reduction of the asset's useful life or a change in the asset's salvage 
value by being exposed to transition activities; and
    (4) 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.
    (e) Expenditure to mitigate risks of severe weather events and 
other natural conditions. Disclose separately the aggregate amount of 
expenditure expensed and the aggregate amount of capitalized costs 
incurred during the fiscal years presented to mitigate the risks from 
severe weather events and other natural conditions, such as flooding, 
drought, wildfires, extreme temperatures, and sea level rise. For 
example, a registrant may be required to disclose the amount of expense 
or capitalized costs, as applicable, 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.
    (f) Expenditure related to transition activities. Disclose 
separately the aggregate amount of expenditure expensed and the 
aggregate amount of capitalized costs incurred during the fiscal years 
presented to reduce GHG emissions or otherwise mitigate exposure to 
transition risks. For example, a registrant may be required to disclose 
the amount of expense or capitalized costs, as applicable, 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. A registrant that has 
disclosed GHG emissions reduction targets or other climate-related 
commitments must disclose the expenditures and costs related to meeting 
its targets, commitments, and goals, if any, in the fiscal years 
presented.
    (g) Financial estimates and assumptions impacted by severe weather 
events and other natural conditions. Disclose whether the estimates and 
assumptions the registrant used to produce the consolidated financial 
statements were impacted by exposures to 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 yes, provide a qualitative 
description of how the development of such estimates and assumptions 
were impacted by such events.
    (h) Financial estimates and assumptions impacted by transition 
activities. Disclose whether the estimates and assumptions the 
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 disclosed by the registrant. If yes, provide a 
qualitative description of how the development of such estimates and 
assumptions were impacted by such a potential transition or the 
registrant's disclosed climate-related targets.
    (i) Impact of identified climate-related risks. A registrant must 
also include the impact of any climate-related risks (separately by 
physical risks and transition risks, as defined in Sec.  229.1500(c) of 
this chapter), identified by the registrant pursuant to Sec.  
229.1502(a) of this chapter, on any of the financial statement metrics 
disclosed pursuant to paragraphs (c) through (h) of this section.
    (j) Impact of climate-related opportunities. A registrant may also 
include 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 Sec.  229.1502(a) of 
this chapter, on any of the financial statement metrics disclosed 
pursuant to paragraphs (c) through (h) of this section. If a registrant 
makes a policy decision to disclose the impact of an opportunity, it 
must do so consistently for the fiscal years presented, including for 
each financial statement line item and all relevant opportunities 
identified by the registrant.

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

0
4. The authority citation for part 229 continues to read as follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78 mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-
31(c), 80a37, 80a-38(a), 80a-39, 80b-11 and 7201 et seq.; 18 U.S.C. 
1350; sec. 953(b), Pub. L. 111-203, 124 Stat. 1904 (2010); and sec. 
102(c), Pub. L. 112-106, 126 Stat. 310 (2012).

0
5. Add subpart 229.1500 (``Climate-Related Disclosure'') to read as 
follows:
Subpart 229.1500--Climate-Related Disclosure
Sec.
229.1500 (Item 1500) Definitions.
229.1501 (Item 1501) Governance.
229.1502 (Item 1502) Strategy, business model, and outlook.
229.1503 (Item 1503) Risk management.
229.1504 (Item 1504) GHG emissions metrics.
229.1505 (Item 1505) Attestation of Scope 1 and Scope 2 emissions 
disclosure.
229.1506 (Item 1506) Targets and goals.
229.1507 (Item 1507) Interactive data requirement.

Subpart 229.1500--Climate-Related Disclosure

Sec.  229.1500   (Item 1500) Definitions.

    As used in this subpart, these terms have the following meanings:
    (a) Carbon offsets represents an emissions reduction or removal of 
greenhouse gases (``GHG'') in a manner calculated and traced for the 
purpose of offsetting an entity's GHG emissions.
    (b) Climate-related opportunities means 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.
    (c) 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. Climate-related risks include the following:
    (1) Physical risks include both acute risks and chronic risks to 
the registrant's business operations or the operations of those with 
whom it does business.
    (2) Acute risks are event-driven and may relate to shorter term 
extreme weather events, such as hurricanes, floods, and tornadoes, 
among other events.

[[Page 21466]]

    (3) Chronic risks relate to 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.
    (4) Transition risks are 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, such as increased costs attributable to changes 
in law or policy, reduced market demand for carbon-intensive products 
leading to decreased 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, consumer preferences or 
behavior, and registrant behavior.
    (d) Carbon dioxide equivalent (``CO2e'') means the 
common unit of measurement to indicate the global warming potential 
(``GWP'') of each greenhouse gas, expressed in terms of the GWP of one 
unit of carbon dioxide (``CO2'').
    (e) Emission factor means 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. Examples of activity data 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.
    (f) Global warming potential (``GWP'') means a factor describing 
the global warming impacts of different greenhouse gases. It is a 
measure of how much energy will be absorbed in the atmosphere over a 
specified period of time as a result of the emission of one ton of a 
greenhouse gas, relative to the emissions of one ton of carbon dioxide 
(CO2).
    (g) Greenhouse gases (``GHG'') means carbon dioxide 
(CO2), methane (``CH4''), nitrous oxide 
(``N2O''), nitrogen trifluoride (``NF3''), 
hydrofluorocarbons (``HFCs''), perfluorocarbons (``PFCs''), and sulfur 
hexafluoride (``SF6'').
    (h) GHG emissions means direct and indirect emissions of greenhouse 
gases expressed in metric tons of carbon dioxide equivalent 
(CO2e), of which:
    (1) Direct emissions are GHG emissions from sources that are owned 
or controlled by a registrant.
    (2) Indirect emissions are GHG emissions that result from the 
activities of the registrant, but occur at sources not owned or 
controlled by the registrant.
    (i) GHG intensity (or carbon intensity) means a ratio that 
expresses the impact of GHG emissions per unit of economic value (e.g., 
metric tons of CO2e per unit of total revenues, using the 
registrant's reporting currency) or per unit of production (e.g., 
metric tons of CO2e per product produced).
    (j) Internal carbon price means an estimated cost of carbon 
emissions used internally within an organization.
    (k) Location means a ZIP code or, in a jurisdiction that does not 
use ZIP codes, a similar subnational postal zone or geographic 
location.
    (l) Operational boundaries means the boundaries that determine the 
direct and indirect emissions associated with the business operations 
owned or controlled by a registrant.
    (m) Organizational boundaries means the boundaries that determine 
the operations owned or controlled by a registrant for the purpose of 
calculating its GHG emissions.
    (n) Renewable energy credit or certificate (``REC'') means a credit 
or certificate representing each megawatt-hour (1 MWh or 1,000 
kilowatt-hours) of renewable electricity generated and delivered to a 
power grid.
    (o) Scenario analysis means a process for identifying and assessing 
a potential range of outcomes of various possible future climate 
scenarios, and how climate-related risks may impact a registrant's 
operations, business strategy, and consolidated financial statements 
over time. For example, registrants might use scenario analysis to test 
the resilience of their strategies under certain future climate 
scenarios, such as those that assume global temperature increases of 3 
[deg]C, 2 [deg]C, and 1.5 [deg]C above pre-industrial levels.
    (p) Scope 1 emissions are direct GHG emissions from operations that 
are owned or controlled by a registrant.
    (q) Scope 2 emissions are 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.
    (r) Scope 3 emissions are 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.
    (1) Upstream activities in which Scope 3 emissions might occur 
include:
    (i) A registrant's purchased goods and services;
    (ii) A registrant's capital goods;
    (iii) A registrant's fuel and energy related activities not 
included in Scope 1 or Scope 2 emissions;
    (iv) Transportation and distribution of purchased goods, raw 
materials, and other inputs;
    (v) Waste generated in a registrant's operations;
    (vi) Business travel by a registrant's employees;
    (vii) Employee commuting by a registrant's employees; and
    (viii) A registrant's leased assets related principally to 
purchased or acquired goods or services.
    (2) Downstream activities in which Scope 3 emissions might occur 
include:
    (i) Transportation and distribution of a registrant's sold 
products, goods or other outputs;
    (ii) Processing by a third party of a registrant's sold products;
    (iii) Use by a third party of a registrant's sold products;
    (iv) End-of-life treatment by a third party of a registrant's sold 
products;
    (v) A registrant's leased assets related principally to the sale or 
disposition of goods or services;
    (vi) A registrant's franchises; and
    (vii) Investments by a registrant.
    (s) Transition plan means a registrant's strategy and 
implementation plan to reduce climate-related risks, which may include 
a plan to reduce its GHG emissions in line with its own commitments or 
commitments of jurisdictions within which it has significant 
operations.
    (t) Value chain means the upstream and downstream activities 
related to a registrant's operations. Upstream activities in connection 
with a value chain may 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 in 
connection with a value chain may 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).

[[Page 21467]]

Sec.  229.1501  (Item 1501) Governance.

    (a)(1) Describe the board of director's oversight of climate-
related risks. Include the following, as applicable:
    (i) The identity of any board members or board committee 
responsible for the oversight of climate-related risks;
    (ii) Whether any member of the board of directors has expertise in 
climate-related risks, with disclosure in such detail as necessary to 
fully describe the nature of the expertise;
    (iii) The processes by which the board of directors or board 
committee discusses climate-related risks, including how the board is 
informed about climate-related risks, and the frequency of such 
discussion;
    (iv) Whether and how the board of directors or board committee 
considers climate-related risks as part of its business strategy, risk 
management, and financial oversight; and
    (v) Whether and how the board of directors 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.
    (2) If applicable, a registrant may also describe the board of 
director's oversight of climate-related opportunities.
    (b)(1) Describe management's role in assessing and managing 
climate-related risks. Include the following, as applicable:
    (i) 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;
    (ii) The processes by which such positions or committees are 
informed about and monitor climate-related risks; and
    (iii) Whether and how frequently such positions or committees 
report to the board or a committee of the board on climate-related 
risks.
    (2) If applicable, a registrant may also describe management's role 
in assessing and managing climate-related opportunities.

Sec.  229.1502  (Item 1502) Strategy, business model, and outlook.

    (a) Describe any climate-related risks 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. If applicable, a registrant may also disclose 
the actual and potential impacts of any climate-related opportunities 
when responding to any of the provisions in this section.
    (1) Discuss such climate-related risks, specifying whether they are 
physical or transition risks and the nature of the risks presented.
    (i) For physical risks, describe the nature of the risk, including 
if it may be categorized as an acute or chronic risk, and the location 
and nature of the properties, processes, or operations subject to the 
physical risk.
    (A) If a risk concerns the flooding of buildings, plants, or 
properties located in flood hazard areas, disclose the percentage of 
those assets (square meters or acres) that are located in flood hazard 
areas in addition to their location.
    (B) If a risk concerns the location of assets in regions of high or 
extremely high water stress, disclose the amount of assets (e.g., book 
value and as a percentage of total assets) located in those regions in 
addition to their location. Also disclose the percentage of the 
registrant's total water usage from water withdrawn in those regions.
    (ii) For transition risks, describe the nature of the risk, 
including whether it relates 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. A registrant that 
has significant operations in a jurisdiction that has made a GHG 
emissions reduction commitment may be exposed to transition risks 
related to the implementation of the commitment.
    (2) Describe how the registrant 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 climate-related planning processes and 
goals.
    (b) Describe the actual and potential impacts of any climate-
related risks identified in response to paragraph (a) of this section 
on the registrant's strategy, business model, and outlook.
    (1) Include impacts on the registrant's:
    (i) Business operations, including the types and locations of its 
operations;
    (ii) Products or services;
    (iii) Suppliers and other parties in its value chain;
    (iv) Activities to mitigate or adapt to climate-related risks, 
including adoption of new technologies or processes;
    (v) Expenditure for research and development; and
    (vi) Any other significant changes or impacts.
    (2) Include the time horizon for each described impact (i.e., in 
the short, medium, or long term, as defined in response to paragraph 
(a) of this section).
    (c) Discuss whether and how any impacts described in response to 
paragraph (b) of this section are considered as part of the 
registrant's business strategy, financial planning, and capital 
allocation. 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 any resources 
are being used to mitigate climate-related risks. Include in this 
discussion how any of the metrics referenced in Sec.  210.14-02 of this 
chapter and Sec.  229.1504 or any of the targets referenced in Sec.  
229.1506 relate to the registrant's business model or business 
strategy. If applicable, include in this discussion the role that 
carbon offsets or RECs play in the registrant's climate-related 
business strategy.
    (d) Provide a narrative discussion of whether and how any climate-
related risks described in response to paragraph (a) of this section 
have affected or are reasonably likely to affect the registrant's 
consolidated financial statements. The discussion should include any of 
the climate-related metrics referenced in Sec.  210.14-02 of this 
chapter that demonstrate that the identified climate-related risks have 
had a material impact on reported financial condition or operations.
    (e)(1) If a registrant maintains an internal carbon price, 
disclose:
    (i) The price in units of the registrant's reporting currency per 
metric ton of CO2e;
    (ii) The total price, including how the total price is estimated to 
change over time, if applicable;
    (iii) The boundaries for measurement of overall CO2e on 
which the total price is based if different from the GHG emission 
organizational boundary required pursuant to Sec.  229.1504(e)(2); and
    (iv) The rationale for selecting the internal carbon price applied.
    (2) Describe how the registrant uses any internal carbon price 
described in response to paragraph (e)(1) of this section to evaluate 
and manage climate-related risks.
    (3) If a registrant uses more than one internal carbon price, it 
must provide the disclosures required by this section for each internal 
carbon price, and disclose its reasons for using different prices.

[[Page 21468]]

    (f) Describe the resilience of the registrant's business strategy 
in light of potential future changes in climate-related risks. 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, and to support the resilience of its 
strategy and business model. If the registrant uses scenario analysis 
to assess the resilience of its business strategy to climate-related 
risks, disclose the scenarios considered (e.g., an increase of no 
greater than 3 [deg]C, 2 [deg]C, or 1.5 [deg]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 
qualitative and quantitative information.

Sec.  229.1503  (Item 1503) Risk management.

    (a) Describe any processes the registrant has for identifying, 
assessing, and managing climate-related risks. If applicable, a 
registrant may also describe any processes for identifying, assessing, 
and managing climate-related opportunities when responding to any of 
the provisions in this section.
    (1) When describing any processes for identifying and assessing 
climate-related risks, disclose, as applicable, how the registrant:
    (i) Determines the relative significance of climate-related risks 
compared to other risks;
    (ii) Considers existing or likely regulatory requirements or 
policies, such as GHG emissions limits, when identifying climate-
related risks;
    (iii) Considers shifts in customer or counterparty preferences, 
technological changes, or changes in market prices in assessing 
potential transition risks; and
    (iv) Determines the materiality of climate-related risks, including 
how it assesses the potential scope and impact of an identified 
climate-related risk, such as the risks identified in response to Sec.  
229.1502.
    (2) When describing any processes for managing climate-related 
risks, disclose, as applicable, how the registrant:
    (i) Decides whether to mitigate, accept, or adapt to a particular 
risk;
    (ii) Prioritizes whether to address climate-related risks; and
    (iii) Determines how to mitigate any high priority risks.
    (b) Disclose whether and how any processes described in response to 
paragraph (a) of this section 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 should disclose how that committee 
interacts with the registrant's board or management committee governing 
risks.
    (c)(1) If the registrant has adopted a transition plan as part of 
its climate-related risk management strategy, describe the plan, 
including the relevant metrics and targets used to identify and manage 
any physical and transition risks. To allow for an understanding of the 
registrant's progress to meet the plan's targets or goals over time, a 
registrant must update its disclosure about the transition plan each 
fiscal year by describing the actions taken during the year to achieve 
the plan's targets or goals.
    (2) If the registrant has adopted a transition plan, discuss, as 
applicable:
    (i) 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;
    (ii) How the registrant plans to mitigate or adapt to any 
identified transition risks, including the following:
    (A) Laws, regulations, or policies that:
    (1) Restrict GHG emissions or products with high GHG footprints, 
including emissions caps; or
    (2) Require the protection of high conservation value land or 
natural assets;
    (B) Imposition of a carbon price; and
    (C) Changing demands or preferences of consumers, investors, 
employees, and business counterparties.
    (3) If applicable, 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:
    (i) The production of products that may facilitate the transition 
to a lower carbon economy, such as low emission modes of transportation 
and supporting infrastructure;
    (ii) The generation or use of renewable power;
    (iii) The production or use of low waste, recycled, or other 
consumer products that require less carbon intensive production 
methods;
    (iv) The setting of conservation goals and targets that would help 
reduce GHG emissions; and
    (v) The provision of services related to any transition to a lower 
carbon economy.

Sec.  229.1504  (Item 1504) GHG emissions metrics.

    (a) General. Disclose a registrant's GHG emissions, as defined in 
Sec.  229.1500(h), for its most recently completed fiscal year, and for 
the historical fiscal years included in its consolidated financial 
statements in the filing, to the extent such historical GHG emissions 
data is reasonably available.
    (1) For each required disclosure of a registrant's Scopes 1, 2, and 
3 emissions, disclose the emissions both disaggregated by each 
constituent greenhouse gas, as specified in Sec.  229.1500(g), and in 
the aggregate, expressed in terms of CO2e.
    (2) When disclosing a registrant's Scopes 1, 2, and 3 emissions, 
exclude the impact of any purchased or generated offsets.
    (b) Scopes 1 and 2 emissions. (1) Disclose the registrant's total 
Scope 1 emissions and total Scope 2 emissions separately after 
calculating them from all sources that are included in the registrant's 
organizational and operational boundaries.
    (2) When calculating emissions pursuant to paragraph (b)(1) of this 
section, a registrant may 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.
    (c) Scope 3 emissions. (1) Disclose the registrant's total Scope 3 
emissions if material. A registrant must also disclose its Scope 3 
emissions if it has set a GHG emissions reduction target or goal that 
includes its Scope 3 emissions. Disclosure of a registrant's Scope 3 
emissions must be separate from disclosure of its Scopes 1 and 2 
emissions. If required to disclose Scope 3 emissions, identify the 
categories of upstream or downstream activities that have been included 
in the calculation of the Scope 3 emissions. If any category of Scope 3 
emissions is significant to the registrant, identify all such 
categories and provide Scope 3 emissions data separately for them, 
together with the registrant's total Scope 3 emissions.
    (2) If required to disclose Scope 3 emissions, describe the data 
sources used to calculate the registrant's Scope 3 emissions, including 
the use of any of the following:
    (i) 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;
    (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

[[Page 21469]]

chain, including industry averages of emissions, activities, or 
economic data.
    (3) A smaller reporting company, as defined by Sec. Sec.  
229.10(f)(1), 230.405, and 240.12b-2 of this chapter, is exempt from, 
and need not comply with, the disclosure requirements of this paragraph 
(c).
    (d) GHG intensity. (1) Using the sum of Scope 1 and 2 emissions, 
disclose GHG intensity in terms of metric tons of CO2e per 
unit of total revenue (using the registrant's reporting currency) and 
per unit of production relevant to the registrant's industry for each 
fiscal year included in the consolidated financial statements. Disclose 
the basis for the unit of production used.
    (2) If Scope 3 emissions are otherwise disclosed, separately 
disclose GHG intensity using Scope 3 emissions only.
    (3) If a registrant has no revenue or unit of production for a 
fiscal year, it must disclose another financial measure of GHG 
intensity or another measure of GHG intensity per unit of economic 
output, as applicable, with an explanation of why the particular 
measure was used.
    (4) A registrant may also disclose other measures of GHG intensity, 
in addition to metric tons of CO2e per unit of total revenue 
(using the registrant's reporting currency) and per unit of production, 
if it includes an explanation of why a particular measure was used and 
why the registrant believes such measure provides useful information to 
investors.
    (e) Methodology and related instructions. (1) A registrant must 
describe the methodology, significant inputs, and significant 
assumptions used to calculate its GHG emissions. The description of the 
registrant's methodology must include the registrant's organizational 
boundaries, operational boundaries (including any approach to 
categorization of emissions and emissions sources), calculation 
approach (including any emission factors used and the source of the 
emission factors), and any calculation tools used to calculate the GHG 
emissions. A registrant's description of its approach to categorization 
of emissions and emissions sources should explain 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.
    (2) The organizational boundary and any determination of whether a 
registrant owns or controls a particular source for GHG emissions must 
be consistent with the 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, the 
registrant's consolidated financial statements.
    (3) A registrant must use the same organizational boundaries when 
calculating its Scope 1 emissions and Scope 2 emissions. If required to 
disclose Scope 3 emissions, a registrant must also 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. Once a registrant has determined its 
organizational and operational boundaries, a registrant must be 
consistent in its use of those boundaries when calculating its GHG 
emissions.
    (4) 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.
    (i) When disclosing its GHG emissions for its most recently 
completed fiscal year, if actual reported data is not reasonably 
available, a registrant may 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.
    (ii) In addition to the use of reasonable estimates, 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.
    (5) A registrant must 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. When 
disclosing the use of third-party data, it must identify the source of 
such data and the process the registrant undertook to obtain and assess 
such data.
    (6) A registrant must disclose any material change to the 
methodology or assumptions underlying its GHG emissions disclosure from 
the previous fiscal year.
    (7) A registrant must disclose, to the extent material and as 
applicable, any gaps in the data required to calculate its GHG 
emissions. 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. If a registrant discloses any 
data gaps encountered when calculating its GHG emissions, it must also 
discuss whether it used proxy data or another method to address such 
gaps, and how its accounting for any data gaps has affected the 
accuracy or completeness of its GHG emissions disclosure.
    (8) 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.
    (9) If required to disclose Scope 3 emissions, when calculating 
those emissions, if there was any significant overlap in the categories 
of activities producing the Scope 3 emissions, a registrant must 
describe the overlap, how it accounted for the overlap, and the effect 
on its disclosed total Scope 3 emissions.
    (f) Liability for Scope 3 emissions disclosures. (1) A statement 
within the coverage of paragraph (f)(2) of this section that is made by 
or on behalf of a registrant is deemed not to be a fraudulent statement 
(as defined in paragraph (f)(3) of this section), unless it is shown 
that such statement was made or reaffirmed without a reasonable basis 
or was disclosed other than in good faith.
    (2) This paragraph (f) applies to any statement regarding Scope 3 
emissions that is disclosed pursuant to Sec. Sec.  229.1500 through 
229.1506 and made in a document filed with the Commission.
    (3) For the purpose of this paragraph (f), the term fraudulent 
statement shall 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 of 1933 or the 
Securities Exchange Act of 1934 or the rules or regulations promulgated 
thereunder.

Sec.  229.1505  Attestation of Scope 1 and Scope 2 emissions 
disclosure.

    (a) Attestation. (1) A registrant that is required to provide Scope 
1 and Scope 2 emissions disclosure pursuant to

[[Page 21470]]

Sec.  229.1504 and that is an accelerated filer or a large accelerated 
filer must include an attestation report covering such disclosure in 
the relevant filing. For filings made by an accelerated filer or a 
large accelerated filer for the second and third fiscal years after the 
compliance date for Sec.  229.1504, the attestation engagement must, at 
a minimum, be at a limited assurance level and cover the registrant's 
Scope 1 and Scope 2 emissions disclosure. For filings made by an 
accelerated filer or large accelerated filer for the fourth fiscal year 
after the compliance date for Sec.  229.1504 and thereafter, the 
attestation engagement must be at a reasonable assurance level and, at 
a minimum, cover the registrant's Scope 1 and Scope 2 emissions 
disclosures.
    (2) Any attestation report required under this section must 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. An accelerated filer or a large accelerated filer 
obtaining voluntary assurance prior to the first required fiscal year 
must comply with subparagraph (e) of this section. Voluntary assurance 
obtained by an accelerated filer or a large accelerated filer 
thereafter must follow the requirements of paragraphs (b) through (d) 
of this section and must use the same attestation standard as the 
required assurance over Scope 1 and Scope 2.
    (b) GHG emissions attestation provider. The GHG emissions 
attestation report required by paragraph (a) of this section must be 
prepared and signed by a GHG emissions attestation provider. A GHG 
emissions attestation provider means a person or a firm that has all of 
the following characteristics:
    (1) 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:
    (i) Perform engagements in accordance with professional standards 
and applicable legal and regulatory requirements; and
    (ii) Enable the service provider to issue reports that are 
appropriate under the circumstances.
    (2) 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.
    (i) 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.
    (ii) In determining whether a GHG emissions attestation provider is 
independent, the Commission will consider:
    (A) 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 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
    (B) 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.
    (iii) The term ``affiliates'' as used in this section has the 
meaning provided in 17 CFR 210.2-01, except that references to 
``audit'' are deemed to be references to the attestation services 
provided pursuant to this section.
    (iv) The term ``attestation and professional engagement period'' as 
used in this section means both:
    (A) The period covered by the attestation report; and
    (B) 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''). The professional engagement period 
begins when the GHG attestation service provider either signs an 
initial engagement letter (or other agreement to attest a registrant's 
GHG emissions) or begins attest procedures, whichever is earlier.
    (c) Attestation report requirements. The GHG emissions attestation 
report required by paragraph (a) of this section must be included in 
the separately captioned ``Climate-Related Disclosure'' section in the 
filing. The form and content of the attestation report must follow the 
requirements set forth by the attestation standard (or standards) used 
by the GHG emissions attestation provider. Notwithstanding the 
foregoing, at a minimum the report must include the following:
    (1) An identification or description of the subject matter or 
assertion being reported on, including the point in time or period of 
time to which the measurement or evaluation of the subject matter or 
assertion relates;
    (2) An identification of the criteria against which the subject 
matter was measured or evaluated;
    (3) A statement that identifies the level of assurance provided and 
describes the nature of the engagement;
    (4) A statement that identifies the attestation standard (or 
standards) used;
    (5) A statement that describes the registrant's responsibility to 
report on the subject matter or assertion being reported on;
    (6) A statement that describes the attestation provider's 
responsibilities in connection with the preparation of the attestation 
report;
    (7) A statement that the attestation provider is independent, as 
required by paragraph (a) of this section;
    (8) For a limited assurance engagement, a description of the work 
performed as a basis for the attestation provider's conclusion;
    (9) A statement that describes significant inherent limitations, if 
any, associated with the measurement or evaluation of the subject 
matter against the criteria;
    (10) The GHG emissions attestation provider's conclusion or 
opinion, based on the applicable attestation standard(s) used;
    (11) The signature of the attestation provider (whether by an 
individual or a person signing on behalf of the attestation provider's 
firm);
    (12) The city and state where the attestation report has been 
issued; and
    (13) The date of the report.
    (d) Additional disclosures by the registrant. In addition to 
including the GHG emissions attestation report required by paragraph 
(a) of this section, a large accelerated filer and an accelerated filer 
must disclose the following information within the separately captioned 
``Climate-Related Disclosure'' section in the filing, after requesting 
relevant information from any GHG emissions attestation provider as 
necessary:
    (1) Whether the attestation provider has a license from any 
licensing or accreditation body to provide assurance, and if so, 
identify the licensing or accreditation body, and whether the 
attestation provider is a member in good standing of that licensing or 
accreditation body;
    (2) Whether the GHG emissions attestation engagement is subject to 
any oversight inspection program, and if so, which program (or 
programs); and
    (3) Whether the attestation provider is subject to record-keeping 
requirements with respect to the work performed for

[[Page 21471]]

the GHG emissions attestation engagement and, if so, identify the 
record-keeping requirements and the duration of those requirements.
    (e) Disclosure of voluntary attestation. A registrant that is not 
required to include a GHG emissions attestation report pursuant to 
paragraph (a) of this section must 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:
    (1) Identify the provider of such attestation or verification;
    (2) Describe the attestation or verification standard used;
    (3) Describe the level and scope of attestation or verification 
provided;
    (4) Briefly describe the results of the attestation or 
verification;
    (5) 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
    (6) Disclose any oversight inspection program to which the service 
provider is subject (e.g., the AICPA's peer review program).

Sec.  229.1506  (Item 1506) Targets and goals.

    (a)(1) A registrant must provide disclosure pursuant to this 
section if it has set any targets or goals related to the reduction of 
GHG emissions, or any other climate-related target or goal (e.g., 
regarding energy usage, water usage, conservation or ecosystem 
restoration, or revenues from low-carbon products) such as actual or 
anticipated regulatory requirements, market constraints, or other goals 
established by a climate-related treaty, law, regulation, policy, or 
organization.
    (2) A registrant may provide the disclosure required by this 
section as part of its disclosure in response to Sec.  229.1502 or 
Sec.  229.1503.
    (b) If the registrant has set climate-related targets or goals, 
disclose the targets or goals, including, as applicable, a description 
of:
    (1) The scope of activities and emissions included in the target;
    (2) The unit of measurement, including whether the target is 
absolute or intensity based;
    (3) 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;
    (4) The defined baseline time period and baseline emissions against 
which progress will be tracked with a consistent base year set for 
multiple targets;
    (5) Any interim targets set by the registrant; and
    (6) How the registrant intends to meet 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.
    (c) Disclose relevant data to indicate whether the registrant is 
making progress toward meeting the target or goal and how such progress 
has been achieved. A registrant must update this disclosure each fiscal 
year by describing the actions taken during the year to achieve its 
targets or goals.
    (d) If carbon offsets or RECs have been used as part of a 
registrant's plan to achieve climate-related targets or goals, 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.

Sec.  229.1507  (Item 1507) Interactive data requirement.

    Provide the disclosure required by this Subpart 1500 in an 
Interactive Data File as required by Sec.  232.405 of this chapter 
(Rule 405 of Regulation S-T) in accordance with the EDGAR Filer Manual.

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR 
ELECTRONIC FILINGS

0
6. The general authority citation for part 232 continues to read as 
follows:

    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c), 
80a-8, 80a-29, 80a-30, 80a-37, 7201 et seq.; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *
0
7. Amend Sec.  232.405 by adding paragraphs (b)(1)(iii), (b)(3)(i)(C), 
and (b)(4) as follows:

Sec.  232.405  Interactive Data File submissions.

* * * * *
    (b) * * *
    (1) * * *
    (iii) As applicable, the disclosure set forth in paragraph (4) of 
this section.
* * * * *
    (3) * * *
    (i) * * *
    (C) The disclosure set forth in paragraph (4) of this section.
    (4) An Interactive Data File must consist of the disclosure 
provided under 17 CFR 229 (Regulation S-K) and related provisions that 
is required to be tagged, including, as applicable:
    (i) The climate-related information required by Subpart 1500 of 
Regulation S-K (Sec. Sec.  229.1500 through 229.1507 of this chapter).
* * * * *

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

0
8. The general authority citation for part 239 continues to read as 
follows:

    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77sss, 78c, 78l, 78m,78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll, 
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 
80a-29, 80a-30, and 80a-37; and sec. 107, Pub. L. 112-106, 126 Stat. 
312, unless otherwise noted.
* * * * *
0
9. Amend Form S-1 (referenced in Sec.  239.11) by adding Item 11(o) to 
Part I to read as follows:

    Note: The text of Form S-1 does not, and these amendments will 
not, appear in the Code of Federal Regulations.

FORM S-1

* * * * *

PART I--INFORMATION REQUIRED IN PROSPECTUS

* * * * *
Item 11. Information With Respect to the Registrant.
* * * * *
    (o) Information required by Subpart 1500 of Regulation S-K (17 CFR 
229.1500 through 229.1507), in a part of the registration statement 
that is separately captioned as Climate-Related Disclosure. Pursuant to 
Rule 411 (17 CFR 230.411) and General Instruction VII of this form, a 
registrant may incorporate by reference disclosure from other parts of 
the registration statement (e.g., Risk Factors, Business, Management's 
Discussion and Analysis, or the financial statements) or from a 
separately filed annual report or other periodic report into the 
Climate-Related Disclosure item if it is responsive to the topics 
specified in Items 1500 through 1507 of Regulation S-K.
* * * * *
0
10. Amend Form S-11 (referenced in Sec.  239.18) by adding Item 9 to 
Part I to read as follows:

    Note: The text of Form S-11 does not, and these amendments will 
not, appear in the Code of Federal Regulations.

[[Page 21472]]

FORM S-11

* * * * *

PART I. INFORMATION REQUIRED IN PROSPECTUS

* * * * *
    Item 9. Climate-related disclosure. Provide the information 
required by Subpart 1500 of Regulation S-K (17 CFR 229.1500 through 
229.1507), in a part of the registration statement that is separately 
captioned as Climate-Related Disclosure. Pursuant to Rule 411 (17 CFR 
230.411) and General Instruction H of this form, a registrant may 
incorporate by reference disclosure from other parts of the 
registration statement (e.g., Risk Factors, Management's Discussion and 
Analysis, or the financial statements) or from a separately filed 
annual report or other periodic report into the Climate-Related 
Disclosure item if it is responsive to the topics specified in Items 
1500 through 1507 of Regulation S-K.
* * * * *
0
11. Amend Form S-4 (referenced in Sec.  239.25) by:
0
a. Adding paragraph (k) to Item 14 to Part I; and
0
b. Adding paragraph (b)(11) to Item 17 to Part I.
    The additions read as follows:

    Note: The text of Form S-4 does not, and these amendments will 
not, appear in the Code of Federal Regulations.

FORM S-4

* * * * *

PART I

INFORMATION REQUIRED IN THE PROSPECTUS

* * * * *
    Item 14. Information With Respect to Registrants Other Than S-3 
Registrants.
* * * * *
    (k) Information required by Subpart 1500 of Regulation S-K (17 CFR 
229.1500 through 229.1507), in a part of the registration statement 
that is separately captioned as Climate-Related Disclosure. Pursuant to 
Rule 411 (17 CFR 230.411) a registrant may incorporate by reference 
disclosure from other parts of the registration statement (e.g., Risk 
Factors, Description of Business, Management's Discussion and Analysis, 
or the financial statements) into the Climate-Related Disclosure item 
if it is responsive to the topics specified in Items 1500 through 1507 
of Regulation S-K.
* * * * *
Item 17. Information With Respect to Companies Other Than S-3 
Companies.
* * * * *
    (b) * * *
    (11) Information required by Items 1500-1507 of Regulation S-K (17 
CFR 229.1500 through Sec.  229.1507), in a part of the registration 
statement that is separately captioned as Climate-Related Disclosure of 
Company Being Acquired.
* * * * *
0
12. Amend Form F-4 (referenced in Sec.  239.34) by:
0
a. Adding paragraph (k) to Item 14 to Part I; and
0
b. Amending paragraph (3) to Item 17(b) to Part I.
    The additions read as follows:

    Note: The text of Form F-4 does not, and these amendments will 
not, appear in the Code of Federal Regulations.

FORM F-4

* * * * *

PART I

INFORMATION REQUIRED IN THE PROSPECTUS

* * * * *
Item 14. Information With Respect to Foreign Registrants Other Than F-3 
Registrants.
* * * * *
    (k) Item 3.E of Form 20-F, climate-related disclosure.
* * * * *
Item 17. Information With Respect to Foreign Companies Other Than F-3 
Companies.
* * * * *
    (b) * * *
    (3) Item 3.E of Form 20-F, climate-related disclosure;
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
13. The authority citation for part 249 continues to read as follows:

    Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b) Pub. L. 111-203, 124 Stat. 
1904; Sec. 102(a)(3) Pub. L. 112-106, 126 Stat. 309 (2012), Sec. 107 
Pub. L. 112-106, 126 Stat. 313 (2012), Sec. 72001 Pub. L. 114-94, 
129 Stat. 1312 (2015), and secs. 2 and 3 Pub. L. 116-222, 134 Stat. 
1063 (2020), unless otherwise noted.
* * * * *
    Section 249.220f is also issued under secs. 3(a), 202, 208, 302, 
306(a), 401(a), 401(b), 406 and 407, Pub. L. 107-204, 116 Stat. 745, 
and secs. 2 and 3, Pub. L. 116-222, 134 Stat. 1063.
    Section 249.308a is also issued under secs. 3(a) and 302, Pub. L. 
107-204, 116 Stat. 745.
* * * * *
    Section 249.310 is also issued under secs. 3(a), 202, 208, 302, 406 
and 407, Pub. L. 107-204, 116 Stat. 745.
* * * * *
0
14. Amend Form 10 (referenced in Sec.  249.210) by adding Item 3.A 
(``Climate-Related Disclosure'') to read as follows:

    Note: The text of Form 10 does not, and these amendments will 
not, appear in the Code of Federal Regulations.

FORM 10

* * * * *
    Item 3.A Climate-Related Disclosure. Provide the information 
required by Subpart 1500 of Regulation S-K (17 CFR 229.1500 through 
229.1507), in a part of the registration statement that is separately 
captioned as Climate-Related Disclosure. Pursuant to Exchange Act Rule 
12b-23 (17 CFR 240.12b-23) and General Instruction F of this form, a 
registrant may incorporate by reference disclosure from other parts of 
the registration statement (e.g., Risk Factors, Business, Management's 
Discussion and Analysis, or the financial statements) into the Climate-
Related Disclosure item if it is responsive to the topics specified in 
Item 1500 through 1507 of Regulation S-K.
* * * * *
0
15. Amend Form 20-F (referenced in Sec.  249.220f) by adding Item 3.E 
(``Climate-related disclosure'') to Part I to read as follows:

    Note: The text of Form 20-F does not, and these amendments will 
not, appear in the Code of Federal Regulations.

FORM 20-F

* * * * *

PART I

* * * * *
Item 3. Key Information
* * * * *

E. Climate-Related Disclosure

    1. Required disclosure. The company must provide disclosure 
responsive to the topics specified in Subpart 1500 of Regulation S-K 
(17 CFR 229.1500 through 229.1507) in a part of the registration 
statement or annual report that is separately captioned as Climate-
Related Disclosure.
    2. Incorporation by reference. Pursuant to Rule 12b-23 (17 CFR 
240.12b-23), the company may incorporate by reference disclosure from 
other parts of the registration statement

[[Page 21473]]

or annual report (e.g., Risk Factors, Information on the Company, 
Operating and Financial Review and Prospects, or the financial 
statements) into the Climate-Related Disclosure item if it is 
responsive to the topics specified in Item 1500 through 1507 of 
Regulation S-K.
* * * * *
0
16. Amend Form 6-K (referenced in Sec.  249.306) by adding the phrase 
``climate-related disclosure;'' before the phrase ``and any other 
information which the registrant deems of material importance to 
security holders.'' in the second paragraph of General Instruction B.
0
17. Amend Form 10-Q (referenced in Sec.  249.308a) by adding Item 1.B 
(``Climate-Related disclosure'') to Part II (``Other Information'') to 
read as follows:

    Note: The text of Form 10-Q does not, and these amendments will 
not, appear in the Code of Federal Regulations.

FORM 10-Q

* * * * *
    Item 1B. Climate-Related Disclosure. Disclose any material changes 
to the disclosures provided in response to Item 6 (``Climate-related 
disclosure'') of Part II to the registrant's Form 10-K (17 CFR 
229.310).
* * * * *
0
18. Amend Form 10-K (referenced in Sec.  249.310) by:
0
a. Revising paragraph (1)(g) of General Instruction J (``Use of this 
Form by Asset-backed Issuers''); and
0
b. Adding Item 6 (``Climate-Related Disclosure'') to Part II to read as 
follows:
    The revision and addition read as follows:

    Note: The text of Form 10-K does not, and these amendments will 
not, appear in the Code of Federal Regulations.

FORM 10-K

* * * * *

GENERAL INSTRUCTIONS

* * * * *

J. Use of This Form by Asset-Backed Issuers.

* * * * *
    (1) * * *
    (g) Item 6, Climate-Related Disclosure;
* * * * *
    Part II
* * * * *
Item 6. Climate-Related Disclosure
    Provide the disclosure required by Subpart 1500 of Regulation S-K 
(17 CFR 229.1500 through 229.1507) in a part of the annual report that 
is separately captioned as Climate-Related Disclosure. Pursuant to Rule 
12b-23 (17 CFR 240.12b-23) and General Instruction G of this form, a 
registrant may incorporate by reference disclosure from other parts of 
the registration statement or annual report (e.g., Risk Factors, 
Business, Management's Discussion and Analysis, or the financial 
statements) into the Climate-Related Disclosure item if it is 
responsive to the topics specified in Item 1500 through 1507 of 
Regulation S-K.
* * * * *

    By the Commission.

    Dated: March 21, 2022.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2022-06342 Filed 4-8-22; 8:45 am]
BILLING CODE 8011-01-P