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Cleary Gottlieb Discusses SEC’s Proposed Climate-Change Disclosure Rules: The Climate Note to Audited Financial Statements

On March 21, 2022, the U.S. Securities and Exchange Commission issued for public comment a rule proposal that, if adopted, would require reporting companies to provide certain climate-related information in their registration statements and annual reports filed with the SEC. This memorandum addresses part of the proposal — the proposed amendments to Regulation S-X to require a new footnote in audited financial statements – and concludes with some general takeaways and possible issues for inclusion in comment letters on the proposal. Please see the other two memoranda in this series for a discussion of the GHG emissions and attestation report disclosure requirements and the Regulation S-K governance, business, risk and targets disclosure requirements.

The comment period for the proposed rule is quite short: comments will be due on May 20, 2022, or 30 days after the proposal is published in the Federal Register, whichever is later.  We expect that the SEC will aim to release the final rules before the end of 2022.

I.         Proposed Changes to Regulation S-X

A.        Introduction

The SEC’s climate-related disclosures proposal would create a new Article 14 of Regulation S-X requiring a registrant to include specific climate-related financial disclosure in the notes to its audited financial statements.[1] Regulation S-X contains requirements for financial statements that are included in registration statements, periodic reports and other filings under the Securities Act of 1933 and the Securities Exchange Act of 1934. It applies regardless of whether the registrant uses the forms for domestic issuers (e.g., Form 10-K) or for foreign private issuers (e.g., Form 20-F), and regardless of whether the registrant uses U.S. GAAP or IFRS. Proposed Article 14 would not apply to interim financial statements.

Because these disclosures would be located in the audited financial statements, they would be subject to audit by the registrant’s independent public accountants, and they would fall within the scope of the registrant’s internal control over financial reporting (ICFR).

Proposed Article 14 is closely related to proposed Subpart 1500 of Regulation S-K, which contains requirements for disclosures outside the financial statements. It cross-references Subpart 1500 and uses terms defined there. Like Subpart 1500, it uses concepts drawn from the TCFD (Task Force on Climate-Related Financial Disclosures) disclosure framework, notably the concepts of climate-related risks, which are potential negative effects (divided between physical risks and transition risks),[2] and climate-related opportunities, which are potential positive effects.[3] Generally the disclosures relating to opportunities are optional, but a registrant that chooses to disclose them must do so consistently across years, line items and opportunities.

B.         Required Metrics

1.              Four Types of Required Metrics

The proposed rules use the word “metrics” to refer to quantitative disclosures. They require disclosure of two kinds of metrics (“financial impact” metrics and expenditure metrics) for each of two categories (physical risks and transition risks), resulting in four types of information:

Financial impact metrics

Expenditure metrics

2.              Financial Impact Metrics:  Line-by-Line Basis; 1% Threshold

Each of the financial impact metrics must be presented “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.” If the impact on a given line item is less than 1%, the impact may be omitted. (Rule 14-02(b)(1).) As explained (with illustrations) in the proposing release, this means that:

3.              Expenditure Metrics:  Separation of Expensed and Capitalized Expenditures; 1% Threshold

The proposed rules’ treatment of expenditure metrics requires separate analysis of amounts that are expensed in the current year and amounts that are capitalized. For each of the two metrics, the note must “[d]isclose separately the aggregate amount of expenditure expensed and the aggregate amount of capitalized costs incurred.” However, no disclosure is required for expensed climate-related expenditures if they are less than 1% of total expensed expenditures; and similarly no disclosure is required for capitalized climate-related expenditures if they are less than 1% of total capitalized expenditures. (Rule 14-02(b)(2).)

4.              Periods To Be Presented

Under the proposed rules, the financial metrics are required for all periods for which financial statements are presented – typically two years for the balance sheet and three years for the income statement, subject to the usual accommodation for emerging growth companies. The proposing release acknowledges that this information may be difficult to obtain for periods prior to the current period – a problem that will be particularly likely to arise when the proposed rules first take effect – and it notes that historical information that was not previously required to be presented might fall within two existing rules: Securities Act Rule 409 and Exchange Act Rule 12b-21. Both permit the omission of information that is not reasonably available without unreasonable effort or expense, although the threshold for reliance on them is generally thought to be high.

5.              General Considerations Relating to Financial Metrics

The disclosure of financial metrics must be consistent with the general presentation of the financial statements. The financial metrics must use information for the same companies and applying the same set of accounting principles as are applied to the rest of the financial statements.

The registrant must also provide contextual information describing how each metric was derived, including specific inputs, assumptions and policy decisions.

B.         Impacts on Financial Estimates and Assumptions

The proposed rules would require that the registrant provide qualitative information on how climate-related risks have affected the estimates and assumptions used to produce the financial statements. This disclosure is required as to both physical risks (“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”) and transition risks (“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 the registrant identifies such impacts, it must provide disclosure on how the risks may affect the judgments made in preparation of the financial statements. The proposing release gives as examples such matters as impairment testing and commodity price assumptions.

C.        Impact of Opportunities

The mandatory disclosures under the proposed rules relate to impacts of climate-related physical risk and transition risk, but the proposed rules would also permit disclosure about climate-related opportunities and their impact on the other required disclosures. (Rule 14-02(j).)  If the registrant discloses the impact of an opportunity, it must do so consistently for all years, line items and opportunities.

II.        Key Takeaways

Annex 1 : Proposed New Article 14 of Regulation S-X

[Rule 14-01] Climate-related disclosure instructions.

[Rule 14-02] Climate-related metrics.


[1] The proposal is set forth in the SEC’s March 21, 2022 release, available here.

[2] Climate related risks are defined in proposed Item 1500(c) as “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.”  The definition then proceeds to identify physical risks, acute risks and chronic risks.

[3] Climate-related opportunities are defined in proposed Item 1500(c) as “the actual or potential positive impacts of climate-related conditions and events on a registrant’s consolidated financial statements, business operation, or value chains, as a whole.”

This post comes to us from Cleary Gottlieb Steen & Hamilton LLP. It is based on the firm’s memorandum, “SEC’s Proposed Climate-Related Disclosure Rules: The Climate Note to Audited Financial Statements,” dated April 5, 2022, and available here. Jonathan Povilonis, Yuan He, and Cleary’s Sustainability Working Group also contributed to the memorandum. 

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