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The U.S. Securities and Exchange Commission (SEC) has proposed rules that, if adopted, would require most U.S. reporting companies1 to report detailed climate-related information in certain SEC filings. Most of the proposed rules would not apply to Canadian companies that report under the multijurisdictional disclosure system (MJDS). The deadline for commenting on the SEC proposal has been extended to June 17, 2022.
The proposed SEC rules would apply to U.S. reporting companies, including SEC foreign issuers other than Canadian MJDS filers, and would require such issuers to include prescribed climate-related disclosures in specified registration statements for securities offerings (Forms F-1, S-1, F-3 and S-3) and M&A transactions (Forms F-4 and S-4), annual reports on Forms 10-K (for domestic U.S. reporting companies) and 20-F (for foreign non-MJDS issuers), and audited financial statements. In addition, domestic U.S. reporting companies would be required to disclose in their quarterly reports on Form 10-Q any material changes to their previous climate-related disclosure.
Although the SEC is not proposing to amend Form 40-F, the annual reporting form that Canadian MJDS issuers use, it has requested feedback on whether Form 40-F filers should be required to comply with the SEC’s proposed climate-related disclosure requirements.
If the SEC’s proposed rules are adopted, a Canadian issuer planning to go public in the U.S. that was not eligible to use the southbound MJDS system would be required to provide climate-related disclosures in its initial SEC registration statement and in its annual reports thereafter, unless and until it became MJDS-eligible. By contrast, an MJDS-eligible Canadian company completing a cross-listing in the U.S. would not have to comply with the SEC rules as currently proposed in connection with its initial SEC registration or thereafter (unless and until MJDS status was lost).
The SEC has not proposed any changes to Form 8-K, the form of current report for U.S. domestic reporting companies. It is proposing, however, to amend Form 6-K, which is the form of current report that foreign private issuers (including MJDS issuers) furnish to the SEC in lieu of Form 8-K. In Form 6-K, “climate-related disclosure” would be added as an item that might trigger a requirement to furnish a report on Form 6-K to the extent the information is material and the issuer:
Consistent with other disclosure requirements in Form 6-K, the proposed amendments to Form 6-K do not specify whether or when a foreign private issuer must report material climate-related information or what the content should be of such disclosure. Instead, the form and content of any such climate-related disclosure that would be attached to the Form 6-K generally would be determined by home country disclosure requirements.
Some Canadian public companies already disclose climate-related information pursuant to general securities law or stock exchange requirements to disclose material information or voluntarily, for example, in alignment with TCFD or general sustainability reporting frameworks. As Canadian climate-related disclosure requirements evolve, Canadian companies that are also U.S. reporting companies will need to consider, among other things, whether the climate-related information they are required to make public, file under stock exchange rules or distribute to their securityholders is material and should be furnished to the SEC on Form 6-K.
The SEC’s proposed rules may also have implications for M&A transactions. For example, the proposed rules require climate-related disclosures with respect to the company being acquired under certain circumstances and do not contemplate any transition period in respect of newly acquired companies. (However, the SEC has asked commentators if transitional relief should be provided in respect of recently acquired companies.)
The SEC is proposing to require U.S. reporting companies (other than Canadian MJDS issuers) to disclose in the notes to their annual financial statements certain disaggregated climate-related financial statement metrics and related disclosures. The disclosures would be required for the company’s most recently completed fiscal year and for the fiscal years included in the consolidated financial statements for the relevant filing. The scope of the proposed disclosures would encompass matters such as:
The SEC is also proposing to require companies to quantify any such impact if the positive or negative effect exceeded 1% for any financial statement line item in the relevant fiscal period. In addition, for each type of financial statement metric, the company would also have to disclose contextual information to enable the reader to understand how the company 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. Companies would also be required to provide a qualitative discussion of the impact of any severe weather events or transition activities on estimates and assumptions used in the financial statements.
As part of the financial statements, the climate-related metrics would be subject to audit by the company’s independent public accounting firm and come within the scope of the company’s internal controls over financial reporting.
The CSA has not proposed any climate-related financial statement disclosure requirements.
Like the CSA, the SEC is proposing to require U.S. reporting companies (other than Canadian MJDS issuers) to disclose how the board oversees climate-related risks, as well as management’s role in assessing and managing climate-related risks, both of which are key TCFD recommendations. Also like the CSA, the SEC is not proposing to set any materialitity threshold for such disclosures.
The SEC’s proposed rules specify in significantly more detail than the CSA’s proposed rules what companies must disclose regarding their governance structures and processes relating to climate-related risks. For example, the SEC is proposing to require disclosure, of among other things:
The SEC is proposing to require U.S. reporting companies (other than Canadian MJDS issuers) to describe climate-related risks (whether physical or transitional) that are reasonably likely to have a material impact over the short, medium and long term (Identified Climate Risks) and how any Identified Climate Risks have affected or are likely to affect the company’s strategy, financial planning, capital allocation, business model and outook. These proposed requirements are generally consistent with the CSA proposal.
The SEC is also proposing to require descriptions of companies’ 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 (without regard to materiality). These requirements (including the lack of a materiality qualifier) are broadly similar to the CSA’s proposed requirements.
The SEC’s proposed rules specify in significantly more detail what must be disclosed about the nature, extent, severity and potential impacts of Identified Climate Risks and regarding their risk identification, assessment and management practices and strategies. For example, companies would be required to disclose:
Under the SEC proposal, companies would also be required to provide current and forward-looking disclosure of whether and how any Identified Climate Risks affected, or would be reasonably likely to affect, their consolidated financial statements, including the climate-related financial metrics described above and regarding the resilience of the company’s business strategy in light of potential future changes in climate-related risks.
The SEC is proposing to require U.S. reporting companies (other than Canadian MJDS issuers) to disclose:
These disclosures would be required for the current fiscal year in which the report was made. For historical financial years included in the report, such disclosures would be required only if “reasonably available”.
In addition, certain U.S. reporting companies (other than Canadian MJDS issuers) would be subject to independent third-party attestation requirements in respect of their emissions disclosure, depending on their filer status.
In respect of Scope 3 emissions disclosures, the SEC is proposing a safe harbour that would provide that disclosure of Scope 3 emissions by or on behalf of a company would be deemed not to be a fraudulent statement unless it was shown that the statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith.
The CSA proposed a comply-or-explain approach to Scope 1, 2 and 3 GHG emissions disclosure, while indicating that it was also considering mandatory reporting of Scope 1 emissions.
Unlike the SEC, the CSA did not propose any requirements relating to attestation reports.
The SEC is proposing to require U.S. reporting companies (other than Canadian MJDS issuers) that have publicly set climate-related targets or goals to disclose information about the scope, time horizon and strategy to meet such targets as well as performance against such targets. The proposal would also require disclosure of the use of carbon offsets and renewable energy credits to the extent they play a role in the company’s climate-related strategy. In addition, if a company used an internal carbon price, information about that price and how it is set would have to be disclosed.
The CSA’s approach to targets and metrics differs in several respects. For example, disclosure regarding the metrics that a company uses to assess climate-related risks and opportunities, the targets used by the company to manage such risks and opportunities and the company’s performance against such targets would be required only if the information was material. Second, the CSA’s proposed rules do not specifically address internal carbon prices, renewable energy credits or the use of carbon offsets.
The SEC rule proposal makes it clear that to the extent any climate-related disclosures constitute “forward-looking statements”, the safe harbours in the U.S. Private Securities Litigation Reform Act (PSLRA) would apply, if the other prescribed conditions for such safe harbours were met. For example, the PSLRA’s safe harbours are not available for initial public offerings or offerings by partnerships.
The SEC’s proposed climate-related disclosure requirements would be phased in over several years, with the compliance deadline depending on the company’s filer status and the specific disclosure requirement. For example, if the rules become effective before the end of 2022:
Similar to the SEC, the CSA is proposing to phase in its climate-related disclosure requirements. Assuming that the CSA’s rules are finalized before the end of 2022, non-venture issuers with a December 31 year-end would have to comply in their annual filings due in 2024 (in respect of fiscal 2023). Venture issuers would have a three-year transition phase. For example, venture issuers with a December 31 year end would need to comply in their annual filings due in 2026 (in respect of fiscal year 2025).
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