Methodology and related assumptions
The proposal would also require disclosure of the following items:
- Methodology, significant inputs, and significant assumptions used to calculate GHG emissions
- Organizational and operational boundaries used in calculating Scope 1 and Scope 2 emissions, which must be consistent with the scope of entities, operations, and assets applied in the consolidated financial statements
- Calculation approach and tools
- Use of third-party data, including the source, regardless of the applicable emissions scope
- To the extent material, any changes in methodology or assumptions from the prior fiscal year
- Any gaps in the data required to calculate emissions
Scope 1 and Scope 2 emissions reported by large accelerated and accelerated filers are subject to phased-in assurance by a GHG emissions attestation provider. Limited assurance would be required beginning with the second reporting period, with a transition to reasonable assurance two years later. See the compliance dates section below for further details.
The proposed amendments would add new Article 14, Climate-related disclosure, to Regulation S-X, which would require a registrant to disclose, for each of the years presented in the financial statements, climate-related financial metrics as well as a discussion of certain estimates and assumptions underlying the preparation of the consolidated financial statements.
A registrant would also be required to disclose contextual information explaining significant assumptions, inputs, and policy decisions related to each metric.
Financial impact metrics
The proposal would require disclosure by financial statement line item of the positive and negative impact of the following:
- Severe weather events and other natural conditions. Examples noted include changes to revenue or cost from business or supply chain disruptions, impairment charges, or changes to loss contingencies or reserves from weather exposure.
- Transition activities, such as changes to revenue or cost due to new emissions regulations, cash flow impacts related to changes in upstream costs, a reduction in the carrying amount of assets due to reduced salvage value or estimated useful life, or changes to interest expense due to climate-linked bonds
In addition, a registrant would disclose the aggregate expense and cost capitalized related to
- Efforts to mitigate risks of severe weather events and other natural conditions. A registrant that has disclosed GHG emissions reduction targets or similar commitments must also disclose the related expense or cost, if any.
- Actions to reduce GHG emissions or transition risks, for example, the cost to research new technologies, purchase energy credits, or improve energy efficiency
Financial estimates and assumptions
Under the proposal, a registrant would be required to indicate, in the notes to the audited financial statements, whether estimates and assumptions used to produce the consolidated financial statements were affected by risks, uncertainties, or known impacts from (1) severe weather or other natural conditions, and (2) the transition to a lower carbon economy or the registrant’s climate-related targets. If a registrant is affected by either (1) or (2), a qualitative discussion of the estimate would be required.
Impact of identified risks and opportunities
A registrant must disclose the actual impact to the above-described financial statement metrics or estimates from any identified physical and transition risks. In addition, a registrant is permitted but not required to disclose the impacts of climate-related opportunities to the above-described financial statement metrics or estimates; however, if provided, such disclosure would be required for all fiscal years presented and must be consistently applied across all financial statement line-items and identified opportunities.
The proposed rule includes phased-in compliance dates to accommodate smaller registrants. The tables below, reproduced from the SEC’s Fact Sheet, provide a summary, assuming the proposed rule is adopted as final in December 2022 and the registrant has a December 31 fiscal year-end.