Financial Services Blog

On March 22nd, 2022, the Securities and Exchange Commission released the proposed rule for the Enhancement and Standardization of Climate-Related Disclosures for Investors 1 , colloquially known as the SEC “Climate Disclosure Rule”. The “Climate Disclosure Rule” follows similar regulatory initiatives, globally, to create a disclosure framework influenced by the Task Force on Climate Related Financial Disclosures (TCFD) as well as the GHG Protocol for greenhouse gas emissions disclosures. These frameworks have been widely adopted, with nearly 4,000 TCFD supporters, globally, for FY2022 2 and over 90% of corporate GHG Emissions disclosures aligned with the GHG Protocol.

While it appears that the Climate Disclosure Rule may be delayed due to the significant number of comments and the reopening of the comment period and may not come into force until FY 2024, the “Climate Disclosure Rule” would likely require significant effort to meet both regulatory and investor demand for transparency 3 . Given the investor scrutiny of corporate climate disclosures as well as the gaps in TCFD submissions, the likely delay in the “Climate Disclosure Rule” will provide firms the opportunity to mobilize efforts to ensure compliance with both the “Climate Disclosure Rule” and investor expectations. While this blog is based on the proposed “Climate Disclosure Rule” and the final rule is yet to be released (at the time of writing), there is much to prepare for to meet the FY 2023 or even FY 2024 timelines. This blog will focus on the climate related disclosures with a following blog on GHG Measurement and Disclosures.


The proposed “Climate Disclosure Rule” is expected to require a registrant (both domestic and foreign private issuers) to:

  • Provide the climate-related disclosure in its registration statements and Exchange Act annual reports
  • Provide the Regulation S-X mandated climate-related disclosure in a separate, appropriately captioned, “Climate Related Disclosure” 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”)
  • Provide the Regulation S-X mandated climate-related financial statement metrics and related disclosure in a note to the registrant’s audited financial statements
  • Electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL

Impact: The requirement for the disclosures to be in Extensible Business Reporting Language (XBRL) is consistent with the current technical standard for financial disclosures. Depending on the current technological process for converting and submitting the enhanced disclosures via XBRL, there may be some technical enhancements and testing required to ensure submissions are successful.


The provisions in the proposed “Climate Disclosure Rule” that apply to governance are consistent with the TCFD Governance and Strategy recommendations. As such, the proposed “Climate Disclosure Rule” is expected to require:

  • Identification of any board members or committees responsible for oversight of climate related issues, as well as a disclosure of any board members who have expertise in climate related risks and the nature of that expertise
  • Description of the frequency and the process by which climate related risks are discussed at the board level
  • Disclosure of how the board considers climate related risks as part of the business strategy, risk management and financial oversight, and how it establishes and provides oversight of climate related targets and goals
  • Disclosure of management’s role in assessing and managing climate related risks, as well as identification of positions and /or committees and expertise, consistent with the requirements for the board of directors
  • Disclosure of the processes for monitoring, informing, and escalating climate related risks, as well as the process for informing the board of climate related risks to be disclosed, and where applicable, the process for informing the board of climate related opportunities

Impact: The proposed “Climate Disclosure Rule” seeks to provide information to investors on board engagement and management’s role in providing oversight of climate related risks and opportunities. While many firms have made efforts to incorporate climate related risks and opportunities into the board and management’s agenda, the TCFD’s 2021 annual report found that only 29% and 22% of firms are aligned with the TCFD’s recommendation on Board Oversight and Management’s Role, respectively.

Risk Management

The Risk Management provisions of the proposed “Climate Disclosure Rule” are consistent with TCFD frameworks, as well as similar regulatory guidance, including those drafted by the Basel Committee on Banking Supervision, New York Department of Financial Services. The “Climate Disclosure Rule” is expected to require disclosure of:

  • Processes for identifying, assessing, and managing climate related risks – including how significance is determined, how regulatory requirements or policies are considered, how materiality is determined, and how transition risks (e.g., consumer preference, market prices and technology changes) are considered
  • The time periods that the firm uses to define short-, medium-, and long-term risks
  • How risk mitigation or acceptance is determined, how climate related risks are prioritized, and how the firm would mitigate high priority risks · Risk definitions consistent with the physical and transition risks defined the in the TCFD framework
  • Risks internal to the firm, as well as risks to the Value Chain – including upstream and downstream activities related to the firm’s operations
  • Sufficient detail regarding flood related risks, including percentage of firm assets located in flood hazard areas in addition to their location · A materiality definition that uses the reasonable investor standard, as defined by FASB
  • In addition to disclosure of the climate related risks that are material to a firm, the proposed “Climate Disclosure Rule” is also expected to require a description of the actual and potential impacts of those risks on the strategy, business model and outlook (consistent with TCFD Strategy Recommendations 2b and 2c)
  • Analytical tools, such as scenario analysis, used in the identification and assessment of climate related risks
    • If scenario analysis is performed, the tools and scenarios should be disclosed, as well as parameters, assumptions, analytical choices, and principal financial impacts under each scenario
    • The proposed “Climate Disclosure Rule” notes that given the forward-looking assumptions required for scenario analysis, it will likely be subject to the Private Securities Litigation Reform Act (PSLRA) forward-looking safe harbors

Impact: Many firms have already initiated the process of integrating the climate risk management into risk frameworks in the absence of the regulatory mandate, however, the TCFD status report reveals that 37% of firms have aligned with the TCFD’s recommendation on Integration of Climate related risks into Overall Risk Management. As the risk management disclosures are considered part of the financial statements, firms should consider how risk management policies, procedures and controls have been, or need to be, defined to incorporate the management of climate related risks, as well as in the evaluation of transition related opportunities. For many firms, this process could start with the development of an overall Climate Risk Appetite Statement (RAS), with the risk governance framework modernized to ensure measurement of climate risks, board level reporting and compliance with internal RAS. Collecting data on 3rd party risks and mitigation/resiliency planning represents a significant challenge, but a critical activity, given the potential for material financial impacts. For many firms, this could have implications for the current processes for 3rd party risk management and a need to collect more data on key suppliers. A robust scenario analysis framework should not be limited to a static balance sheet, but should also reflect the firms forward-looking transition plan, with concomitant disclosures.

Transition Plan

The proposed “Climate Disclosure Rule” introduces a new requirement for disclosure of transition plan, the strategy and implementation plan to reduce climate related risks, as well as corresponding metrics and targets used.

  • Given the assumptions and forecasting needed to create a forward-looking transition plan, the proposed “Climate Disclosure Rule” provides a safe harbor provision under PSLRA. If a transition plan has been adopted, the firm must describe metrics and targets that are used to identify and manage transition and physical risks.
  • The proposed rule also requires the registrant to discuss the management of transition related risks, including regulatory requirements that restrict GHG emissions, protection of high conservation land or natural assets, imposition of a carbon price or changing demands of the companies stakeholders.
  • If firms are using Renewable Energy Certificates (RECs) or carbon offsets as part of its transition planning, these should be disclosed due to their inherent risks
  • Firms that use an internal carbon price for transition planning should disclose the price in units, the total price as well as estimations of change in price, the rationale for the internal carbon price and CO2e measurement boundaries

Impact: Publicly announced net zero commitments should be supported by a plan to achieve those commitments, metrics to measure alignment with the disclosed transition plan, and processes and controls to ensure that public commitments are credible and not intended to mislead investors.

Financial Statement Metrics

The introduction of financial statement metrics is significantly more prescriptive than the TCFD guidance on financial metrics. The financial statement metrics fall under Regulation S-K. In addition, the rule requires that firms include these calculations for consolidated subsidiaries and establishes a requirement to present climate related financial statement metrics for all presented years of consolidated financial statement, effectively making this provision retroactive to prior years if they are presented. The proposed rule does note that for firms where collating financial metrics for prior years may create a significant burden, they be able to receive relief from this requirement under 17 CFR 230.409 (“Rule 409”) of the Securities Act of 1933 or Rule 12b-21 of the Securities Exchange Act of 1934.

  • Financial Impact Metrics
    • The proposed rule requires that firms provide a disaggregated view of the consolidated financial statements (income statement, balance sheet and cash flow statement). The proposed rule establishes a quantitative threshold for the disclosure of financial impacts from climate related risks – as well as opportunities, as some firms may benefit from climate related opportunities – using the summed absolute value of negative and positive financial impacts that exceed 1% of each line item in the consolidated financial statements. The use of an absolute value prevents offsetting and – for example where gains and losses in revenue due to a climate related event may offset – and clarifies the significance of climate related events and transition activities to financial performance and position.
    • The rule also requires a narrative discussion of the presented financial impact metrics, not a singular presentation of financial impacts.
    • Examples of climate related events include, but are not limited to impairment of assets, changes in operating, investing, or financing cash flow resulting from costs, changes in revenue, changes in expected insured losses, etc.
  • Expenditure Metrics
    • The proposed rule also requires the separately aggregate expenditure metrics for expenditures expenses and capitalized costs that are incurred during the fiscal year. This can include transition related costs, costs associated with climate related opportunity generation as well as expenses from a climate related physical event.
    • The quantitative threshold for the disclosure of expenditure metrics is the same as noted for the financial impact metrics.
    • Expenditures associated with physical climate related events include, but are not limited to, costs associated with increasing resilience, reduction in asset useful life, or other activities that may reduce the impact of future events, in addition to expenses incurred through the realization of climate related events
    • Transition related expenditures could include, but is not limited to, Research & Development, asset and infrastructure purchases and energy efficiency initiatives
  • Financial Estimates and Assumptions
    • The proposed rule requires the disclosures to include a qualitative description of the estimates and assumptions used to estimate the financial impact of climate related events, transition risks and opportunities, both positive and negative.
    • For example, forward price assumptions, impairment calculations as well as net zero commitments all require reasonable estimations that should be disclosed for investor transparency

What it means: The financial statement metrics represents a significant change for the finance, accounting, and procurement functions of firms. As the financial statement metrics are changes to Regulation S-X, these will fall under the domain of Internal Control of Financial Reporting and will require updates to the processes, procedures and controls established for financial reporting. In addition, these requirements of the proposed rule will likely necessitate data, technology, and reporting enhancements.

As evidenced above, the SEC “Climate Disclosure Rule” represents a significant milestone in providing transparency and understanding of climate related risks, strategy, and oversight, but it also represents a significant challenge in meeting compliance with the regulatory mandate, even with the potential delay in implementation. Given the harmonious nature of climate disclosures across geographies, the reliance on existing, widely adopted frameworks and strong investor demand for climate disclosures, there should be significant benefit in defining an approach and initiate execution to meet the final rule.

  1. Securities and Exchange Commission. The Enhancement and Standardization of Climate-Related Disclosures for Investors. March 21st, 2022 
  2. Task Force on Climate Related Financial Disclosures, 2022 Status Report, October 2022 
  3. Ramonas, Andrew; Iacone, Amanda. SEC “Climate Disclosure Rule”s Pushed Back Amid Bureacratic, “Legal Woes” October 19th, 2022.  


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