What implications does the proposed SEC climate disclosure rule hold?
Currently, the SEC does not require extensive line-item disclosure of ESG matters. All that may soon change, as the proposal calls for ESG reporting that goes well beyond current mandates.
To date, companies have largely relied on 2010 guidance, with disclosures based on materiality. This standard, as set forth in the U.S. Supreme Court 1976 decision, TSC Industries, Inc. v. Northway, Inc., and reaffirmed more than a decade later, in Basic Inc. v. Levinson, offers companies considerable discretion in determining what constitutes appropriate climate-related disclosures. Beyond specified ESG reporting requirements based on materiality, issuers typically make any other ESG disclosures through voluntary frameworks, like sustainability reports.
In a significant departure, the proposed rule would expand climate-related disclosures beyond the materiality standard. Among other requirements, the new rule would mandate public companies delineate climate-related risks totaling 1% or higher of a total line item in relevant year financial statements. This more detailed disclosure framework would require greater internal resources and time commitments to produce and may inadvertently introduce inconsistent information into public filings like the 10-K, as well as annual reports to shareholders. If not carefully executed, the result could be greater investor confusion and expose organizations to legal risks.
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