other financial products to manage its exposure to climate-related
risks, it may need to describe its use of these products.\295\
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    \295\ To the extent loss of insurance coverage or increases in
premiums is reasonably likely to have a material impact on the
registrant, the registrant would be required to disclose that risk
pursuant to proposed Item 1502(a).
---------------------------------------------------------------------------

    The proposed rules would also require a registrant to disclose
whether and how climate-related risks are integrated into the
registrant's overall risk management system or processes.\296\ If a
separate board or management committee is responsible for assessing and
managing climate-related risks, a registrant would be required to
disclose how that committee interacts with the registrant's board or
management committee governing risks.\297\ These proposed disclosures
would help investors assess whether the registrant has centralized the
processes for managing climate-related risks, which may indicate to
investors how the board and management may respond to such risks as
they unfold.
---------------------------------------------------------------------------

    \296\ See proposed 17 CFR 229.1503(b).
    \297\ See id.
---------------------------------------------------------------------------

2. Transition Plan Disclosure
    Adoption of a transition plan to mitigate or adapt to climate-
related risks may be an important part of a registrant's climate-
related risk management strategy, particularly if it operates in a
jurisdiction that has made commitments under the Paris Agreement to
reduce its GHG emissions. Many commenters recommended that we require
disclosure regarding a registrant's transition plan, stating that such
disclosure would help investors evaluate whether a registrant has an
effective strategy to achieve its short-, medium-, or long-term
climate-related targets or goals.\298\
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    \298\ See, e.g., letters from As You Sow; BlackRock; Clean Yield
Asset Management; Climate Advisers; Climate Governance Initiative;
Fiends of the Earth et al.; Institute for Governance and Sustainable
Development; Miller/Howard Investments; Trillium Asset Management;
and World Benchmarking Alliance.
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    The proposed rules would define a ``transition plan'' to mean a
registrant's strategy and implementation plan to reduce climate-related
risks.\299\ A transition plan may include a plan to reduce its GHG
emissions in line with a registrant's commitments or commitments of
jurisdictions within which it has significant operations.\300\
Transition plans may also be important to registrants and their
shareholders to the extent transition risk arises from changes in
customer or business counterparty preferences, technological change, or
changes in market prices. If a registrant has adopted a transition
plan, the proposed rules would require it to describe its plan,
including the relevant metrics and targets used to identify and manage
physical and transition risks.\301\ This information could help
investors understand how a registrant intends to address identified
climate-related risks and any transition to a lower carbon economy
while managing and assessing its business operations and financial
condition.

Because transition planning inherently requires judgments and
predictions about the future, forward-looking statements made as part
of a registrant's discussion of its transition plan would be eligible
for the PSLRA forward-looking statement safe harbors provided all
applicable conditions are met.\302\
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    \299\ See proposed 17 CFR 229.1500(s).
    \300\ See id.
    \301\ See proposed 17 CFR 229.1503(c)(1).
    \302\ See supra note 219.
---------------------------------------------------------------------------

    If a registrant has adopted a transition plan as part of its
climate-related risk management strategy, the proposed rules would
require the registrant to discuss, as applicable, how it plans to
mitigate or adapt to any physical risks identified in the filing,
including but not limited to those concerning exposure to sea level
rise, extreme weather events, wildfires, drought, and severe heat.\303\
For example, a company with significant operations in areas vulnerable
to sea level rise might plan to relocate its vulnerable operations as
part of any transition plan. A company operating in areas subject to
severe storms might have a transition plan that includes reinforcing
its physical facilities to better withstand such weather events, or a
plan to relocate those facilities. An agricultural producer that
operates in areas subject to increasing water stress might discuss its
plans to adjust its business strategy or operations, for example by
developing or switching to drought-resistant crops, developing
technologies to optimize the use of available water, or acquiring land
in other areas.\304\
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    \303\ See proposed 17 CFR 229.1503(c)(2)(i).
    \304\ A registrant would be required to disclose the expected
impact of any potential reduction on its results of operations or
financial condition pursuant to proposed 17 CFR 229.1502 to the
extent it believes the likely impact would be material. Such
quantified disclosure may be eligible for the PSLRA safe harbors if
the conditions of the safe harbors are met.
---------------------------------------------------------------------------

    The proposed rules would also require a registrant that has adopted
a transition plan as part of its climate-related risk management
strategy to discuss, as applicable, how it plans to mitigate or adapt
to any identified transition risks, including the following:
     Laws, regulations, or policies that:
    [cir] Restrict GHG emissions or products with high GHG footprints,
including emissions caps; \305\ or
---------------------------------------------------------------------------

    \305\ See proposed 17 CFR 229.1503(c)(2)(ii)(A)(1).
---------------------------------------------------------------------------

    [cir] Require the protection of high conservation value land or
natural assets; \306\
---------------------------------------------------------------------------

    \306\ See proposed 17 CFR 229.1503(c)(2)(ii)(A)(2).
---------------------------------------------------------------------------

     Imposition of a carbon price; \307\ and
---------------------------------------------------------------------------

    \307\ See proposed 17 CFR 229.1503(c)(2)(ii)(B).
---------------------------------------------------------------------------

     Changing demands or preferences of consumers, investors,
employees, and business counterparties.\308\
---------------------------------------------------------------------------

    \308\ See proposed 17 CFR 229.1503(c)(2)(ii)(C).
---------------------------------------------------------------------------

    While each of these transition risks may not be applicable to each
registrant and its particular transition plan, the above examples are
intended to guide registrants in providing meaningful disclosure about
its risk management strategies that is not generic or boilerplate. In
this regard, it is important for investors to understand how a
registrant plans to mitigate or adapt to any identified transition
risks in its transition plan given the potential associated costs and
burdens and their impact on the registrant's business.
    The proposed rules would require a registrant that has adopted a
transition plan as part of its climate-related management strategy to
update its disclosure about its transition plan each fiscal year by
describing the actions taken during the year to achieve the plan's
targets or goals.\309\ This is intended to provide investors with
information that can help them better understand the registrant's
effectiveness in implementing any transition plan and the potential
risks and costs associated with what it still needs to accomplish.
---------------------------------------------------------------------------

    \309\ See proposed 17 CFR 229.1503(c)(1).
---------------------------------------------------------------------------

    A registrant that has adopted a transition plan as part of its
climate-related risk management strategy may also describe how it plans
to achieve any identified climate-related opportunities, such as:
     The production of products that facilitate the transition
to a lower carbon economy, such as low emission modes of transportation
and supporting infrastructure;
     The generation or use of renewable power;
     The production or use of low waste, recycled, or other
consumer products that require less carbon intensive production
methods;
     The setting of conservation goals and targets that would
help reduce GHG emissions; and
     The provision of goods or services related to any
transition to a lower carbon economy.\310\
---------------------------------------------------------------------------

    \310\ See proposed 17 CFR 229.1503(c)(3)(i) through (v).
---------------------------------------------------------------------------

    For example, an energy company might discuss how, due to actual or
potential regulatory constraints, it intends to take advantage of
climate-related opportunities by increasing the amount of electricity
purchased that is produced using renewable energy sources, reducing its
medium and long-range fossil fuel exploration and production,
increasing the percentage of its products consisting of biofuels and
other lower emissions fuels, or investing in carbon capture and storage
technologies. A transportation company might discuss how, to mitigate
reputational risk, it plans to realize any climate-related
opportunities presented by switching its existing fleet to one composed
of low- or no-emission vehicles by a certain date.\311\
---------------------------------------------------------------------------

    \311\ A registrant would be required to disclose the expected
impact of any transition opportunity on its results of operations or
financial condition, e.g., increased costs or expenditures, pursuant
to proposed 17 CFR 229.1502 to the extent it believes they would be
reasonably likely to have a material impact.
---------------------------------------------------------------------------

Request for Comment
    42. Should we require a registrant to describe its processes for
identifying, assessing, and managing climate-related risks, as
proposed?
    43. When describing the processes for identifying and assessing
climate-related risks, should we require a registrant to disclose, as
applicable, as proposed:
     How the registrant determines the relative significance of
climate-related risks compared to other risks?
     How it considers existing or likely regulatory
requirements or policies, such as emissions limits, when identifying
climate-related risks?
     How it considers shifts in customer or counterparty
preferences, technological changes, or changes in market prices in
assessing potential transition risks?
     How the registrant determines the materiality of climate-
related risks, including how it assesses the potential size and scope
of an identified climate-related risk? Are there other items relevant
to a registrant's identification and assessment of climate-related
risks that we should require it to disclose instead of or in addition
to the proposed disclosure items?
    44. When describing the processes for managing climate-related
risks, should we require a registrant to disclose, as applicable, as
proposed:
     How it decides whether to mitigate, accept, or adapt to a
particular risk?
     How it prioritizes climate-related risks?
     How it determines to mitigate a high priority risk?
    Are there other items relevant to a registrant's management of
climate-related risks that we should require it to disclose instead of
or in addition to the proposed disclosure items?
    45. Should we require a registrant to disclose whether and how the
processes described in response to proposed 17 CFR 229.1503(a) are
integrated into the registrant's overall risk management system or
processes, as proposed? Should we specify any particular aspect of this
arrangement that a registrant

should disclose, such as any interaction between, and corresponding
roles of, the board or any management committee responsible for
assessing climate-related risks, if there is a separate and distinct
committee of the board or management, and the registrant's committee in
charge, generally, of risk assessment and management?
    46. If a registrant has adopted a transition plan, should we
require the registrant to describe the plan, including the relevant
metrics and targets used to identify and manage physical and transition
risks, as proposed? Would this proposed disclosure requirement raise
any competitive harm concerns and, if so, how can we mitigate such
concerns? Would any of the proposed disclosure requirements for a
registrant's transition plan act as a disincentive to the adoption of
such a plan by the registrant?
    47. If a registrant has adopted a transition plan, should we
require it, when describing the plan, to disclose, as applicable, how
the registrant plans to mitigate or adapt to any identified physical
risks, including but not limited to those concerning energy, land, or
water use and management, as proposed? Are there any other aspects or
considerations related to the mitigation or adaption to physical risks
that we should specifically require to be disclosed in the description
of a registrant's transition plan?
    48. If a registrant has adopted a transition plan, should we
require it to disclose, if applicable, how it plans to mitigate or
adapt to any identified transition risks, including the following, as
proposed:
     Laws, regulations, or policies that:
    [cir] Restrict GHG emissions or products with high GHG footprints,
including emissions caps; or
    [cir] Require the protection of high conservation value land or
natural assets?
     Imposition of a carbon price?
     Changing demands or preferences of consumers, investors,
employees, and business counterparts?
    Are there any other transition risks that we should specifically
identify for disclosure, if applicable, in the transition plan
description? Are there any identified transition risks that we should
exclude from the plan description?
    49. If a registrant has adopted a transition plan, when describing
the plan, should we permit the registrant also to discuss how it plans
to achieve any identified climate-related opportunities, including, as
proposed:
     The production of products that facilitate the transition
to a lower carbon economy, such as low emission modes of transportation
and supporting infrastructure?
     The generation or use of renewable power?
     The production or use of low waste, recycled, or
environmentally friendly consumer products that require less carbon
intensive production methods?
     The setting of conservation goals and targets that would
help reduce GHG emissions?
     The provision of services related to any transition to a
lower carbon economy?
    Should we require a registrant to discuss how it plans to achieve
any of the above, or any other, climate-related opportunities when
describing its transition plan?
    50. If a registrant has disclosed its transition plan in a
Commission filing, should we require it to update its transition plan
disclosure each fiscal year by describing the actions taken during the
year to achieve the plan's targets or goals, as proposed? Should we
require a registrant to provide such an update more frequently, and if
so, how frequently? Would the proposed updating requirement act as a
disincentive to the adoption of a transition plan by the registrant?
    51. To the extent that disclosure about a registrant's transition
plan constitutes forward-looking information, the PSLRA safe harbors
would apply. Should we adopt a separate safe harbor for transition plan
disclosure? If so, what disclosures should such a safe harbor cover and
what should the conditions be for such a safe harbor?

F. Financial Statement Metrics

1. Overview
    If a registrant is required to file the disclosure required by
subpart 229.1500 in a form that also requires audited financial
statements,\312\ under our proposal it would be required to disclose in
a note to its financial statements certain disaggregated climate-
related financial statement metrics that are mainly derived from
existing financial statement line items.\313\ In particular, the
proposed rules would require disclosure falling under the following
three categories of information:
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    \312\ For example, the climate-related note to the financial
statements would not be required in a Form 10-Q filing. See proposed
17 CFR 210.14-01(a). See infra note 690 and accompanying text, which
discusses the applicability of the proposed rules to foreign private
issuers.
    \313\ See FASB Concepts Statement No. 8, Chapter 8, par. D8
(``[T]he primary purpose of notes to financial statements is to
supplement or further explain the information on the face of
financial statements by providing financial information relevant to
existing and potential investors, lenders, and other creditors for
making decisions about providing resources to an entity.'').
---------------------------------------------------------------------------

     Financial Impact Metrics;
     Expenditure Metrics; and
     Financial Estimates and Assumptions.
    The proposed financial statement metrics disclosures would involve
estimation uncertainties that are driven by the application of
judgments and assumptions, similar to other financial statement
disclosures (e.g., estimated loss contingencies, fair value measurement
of certain assets, etc.). Accordingly, for each type of financial
statement metric, the proposed rules would require the registrant to
disclose contextual information to enable a reader to understand how it
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.\314\
---------------------------------------------------------------------------

    \314\ See proposed 17 CFR 210.14-02(a). Inputs and assumptions
may include the estimation methodology used to disaggregate the
amount of impact on the financial statements between the climate-
related events and activities and other factors. Policy decisions
referenced herein may include a registrant's election to disclose
the impacts from climate-related opportunities. See also infra
Section II.F.2 for an example of contextual information that would
be required.
---------------------------------------------------------------------------

    A number of existing accounting standards could elicit climate-
related disclosure in the financial statements, as highlighted by the
FASB in a Staff Educational Paper and by the IFRS in a similar
document.\315\ Nevertheless, we believe the proposed rules would
benefit registrants by specifying when to provide such disclosures.
Furthermore, the proposed rules may increase the consistency and
comparability of such disclosures by prescribing accounting principles
for preparing the proposed climate-related financial statement metrics
disclosures, including, among other things, provisions that would
specify the basis of calculation for such metrics and their
presentation.\316\
---------------------------------------------------------------------------

    \315\ See FASB Staff Educational Paper, Intersection of
Environmental, Social, and Governance Matters with Financial
Accounting Standards (Mar. 2021), available at https://fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176176379917. See also IFRS,
Effects of climate-related matters on financial statements (Nov.
2020), available at https://www.ifrs.org/content/dam/ifrs/
supporting-implementation/documents/effects-of-climate-related-
matters-on-financial-
statements.pdf#:~:text=IFRS%20Standards%20do%20not%20refer%explicitly
%20to%20climate-
related,significant%20judgements%20and%20estimates%20that%20%20has%20
made.
    \316\ The Commission has broad authority to set accounting
standards and principles. See, e.g., 15 U.S.C. 77s; 15 U.S.C.
7218(c); and Policy Statement: Reaffirming the Status of the FASB as
a Designated Private-Sector Standard Setter, Release No. 33-8221
(Apr. 25, 2003) [68 FR 23333 (May 1, 2003)], at 23334 (``While the
Commission consistently has looked to the private sector in the past
to set accounting standards, the securities laws, including the
Sarbanes-Oxley Act, clearly provide the Commission with authority to
set accounting standards for public companies and other entities
that file financial statements with the Commission.''). See also
FASB Accounting Standards Codification (``FASB ASC'') Topic 105-10-
10-1 (``Rules and interpretive releases of the Securities and
Exchange Commission . . . are also sources of authoritative GAAP for
SEC registrants.'').

---------------------------------------------------------------------------

    To avoid potential confusion, maintain consistency with the rest of
the financial statements, and aid comparability, registrants would be
required to calculate the proposed financial statement metrics using
financial information that is consistent with the scope of the rest of
the registrant's consolidated financial statements included in the
filing.\317\ Therefore, registrants would have to include in any such
calculation financial information from consolidated subsidiaries.\318\
---------------------------------------------------------------------------

    \317\ See proposed 17 CFR 210.14-01(c)(1).
    \318\ See, e.g., 17 CFR 210.3-01(a) (``There shall be filed, for
the registrant and its subsidiaries consolidated, audited balance
sheets as of the end of each of the two most recent fiscal
years.'').
---------------------------------------------------------------------------

    For the avoidance of doubt, and to further promote consistency in
the preparation of the financial statements, the proposed basis of
calculation requirements would also specify that a registrant would be
required to apply the same set of accounting principles that it is
required to apply in preparation of the rest of its consolidated
financial statements included in the filing, whenever applicable.\319\
Although 17 CFR 210.4-01(a)(1) already states that financial statements
filed with the Commission that are not prepared in accordance with GAAP
will be presumed misleading or inaccurate unless the Commission has
otherwise provided, clarifying the application of this concept in the
proposed rules may be helpful, given the possible confusion that may
arise between the current body of GAAP and the proposed
requirements.\320\
---------------------------------------------------------------------------

    \319\ See proposed 17 CFR 210.14-01(c)(2). Foreign private
issuers that file consolidated financial statements under home
country GAAP and reconcile to U.S. GAAP, would be required to use
U.S. GAAP (including the provisions of the proposed rules) as the
basis for calculating and disclosing the proposed climate-related
financial statement metrics. Foreign private issuers that file
consolidated financial statements under IFRS as issued by the IASB,
would apply IFRS and the proposed rules as the basis for calculating
and disclosing the proposed climate-related financial statement
metrics. For simplicity, we do not refer to the corresponding IFRS
in each instance where we refer to a FASB ASC. Accordingly,
references in this release to a FASB ASC should be read to also
refer to the corresponding IFRS for foreign private issuers applying
those standards. See also infra note 690 which discusses proposed
amendments to Form 20-F.
    \320\ See also 17 CFR 210.4-01(a)(2) (discussing the application
of U.S. GAAP, IFRS, and the use of other comprehensive sets of
accounting principles (with reconciliation to U.S. GAAP)).
---------------------------------------------------------------------------

    The proposed rules would also require disclosure to be provided for
the registrant's most recently completed fiscal year and for the
historical fiscal year(s) included in the registrant's consolidated
financial statements in the applicable filing.\321\ For example, a
registrant that is required to include balance sheets as of the end of
its two most recent fiscal years and income statements and cash flow
statements at the end of its three most recent fiscal years would be
required to disclose two years of the climate-related financial
statement metrics that correspond to balance sheet line items and three
years of the climate-related financial statement metrics that
correspond to income statement or cash flow statement line items. If
the registrant is an emerging growth company (``EGC'') \322\ or SRC,
only two years would be required.\323\
---------------------------------------------------------------------------

    \321\ See proposed 17 CFR 210.14-01(d).
    \322\ An EGC is a registrant that had total annual gross
revenues of less than $1.07 billion during its most recently
completed fiscal year and has not met the specified conditions for
no longer being considered an EGC. See 17 CFR 230.405; 17 CFR
240.12b-2; 15 U.S.C. 77b(a)(19); 15 U.S.C. 78c(a)(80); and Inflation
Adjustments and Other Technical Amendments under Titles I and III of
the JOBS Act, Release No. 33-10332 (Mar. 31, 2017) [82 FR 17545
(Apr. 12, 2017)].
    \323\ An EGC is only required to provide audited statements of
comprehensive income and cash flows for each of the two fiscal years
preceding the date of the most recent audited balance sheet (or such
shorter period as the registrant has been in existence). See 17 CFR
210.3-02(a). A similar accommodation is provided to SRCs. See 17 CFR
210.8-02.
---------------------------------------------------------------------------

    A registrant, however, would not need to provide a corresponding
historical metric for a fiscal year preceding its current reporting
fiscal year if it is eligible to take advantage of the accommodation in
17 CFR 230.409 (``Rule 409'') or 17 CFR 240.12b-21 (``Rule 12b-21'').
For example, if a registrant has not previously presented such metric
for such fiscal year and the historical information necessary to
calculate or estimate such metric is not reasonably available to the
registrant without unreasonable effort or expense, the registrant may
be able to rely on Rule 409 or Rule 12b-21 to exclude a corresponding
historical metric. Requiring disclosure of current and, when known or
reasonably available, historical periods, should allow investors to
analyze trends in the climate-related impacts on the consolidated
financial statements and to better evaluate the narrative trend
disclosure provided pursuant to proposed Subpart 1500 of Regulation S-
K.\324\
---------------------------------------------------------------------------

    \324\ See supra Section II.C.
---------------------------------------------------------------------------

Request for Comment
    52. Should we require a registrant to provide contextual
information, including a description of significant inputs and
assumptions used, and if applicable, policy decisions made by the
registrant to calculate the specified metrics, as proposed? Should we
revise the proposed requirement to provide contextual information to
require specific information instead? We provide some examples of
contextual information disclosure in Sections II.F.2 and II.F.3 below.
Would providing additional examples or guidance assist registrants in
preparing this disclosure?
    53. The proposed rules would specify the basis of calculation for
the climate-related financial statement metrics. Is it clear how to
apply these accounting principles when calculating the proposed
climate-related financial statement metrics, or should we provide
additional guidance? Should we require a registrant to report these
metrics with reference to its consolidated financial statements, as
proposed? If not, how should registrants report these metrics? If we
were to establish accounting principles (e.g., the basis for reporting
these metrics) in a manner that differs from the principles applicable
to the rest of the consolidated financial statements, would the
application of those principles to the proposed metrics make climate-
related disclosures less clear, helpful, or comparable for investors?
    54. Should we also require such metrics to be calculated at a
reportable segment level when a registrant has more than one reportable
segment (as defined by the FASB ASC Topic 280 Segment Reporting)? In
addition, should we require such metrics to be presented by geographic
areas that are consistent with the registrant's reporting pursuant to
FASB ASC Topic 280-10-50-41? How would investors use such information?
    55. The proposed rules would require disclosure for the
registrant's most recently completed fiscal year and for the
corresponding historical fiscal years included in the registrant's
consolidated financial statements in the filing. Should disclosure of
the climate-related financial statement metrics be required for the
fiscal years presented in the registrant's financial statements, as
proposed? Instead, should we require the financial statement metrics to
be calculated only for the most recently

completed fiscal year presented in the relevant filing? Would requiring
historical disclosure provide important or material information to
investors, such as information allowing them to analyze trends? Are
there other approaches we should consider?
    56. Should information for all periods in the consolidated
financial statements be required for registrants that are filing an
initial registration statement or providing climate-related financial
statement metrics disclosure for historical periods prior to the
effective date or compliance date of the rules? Would the existing
accommodation in Rules 409 and 12b-21 be sufficient to address any
potential difficulties in providing the proposed disclosures in such
situations?
    57. Should we provide additional guidance as to when a registrant
may exclude a historical metric for a fiscal year preceding the current
fiscal year?
    58. In several instances, the proposed rules specifically point to
existing GAAP and, in this release, we provide guidance with respect to
the application of existing GAAP. Are there other existing GAAP
requirements that we should reference? Are there instances where it
would be preferable to require an approach based on TCFD guidance or
some other framework, rather than requiring the application of existing
GAAP?
2. Financial Impact Metrics
    As discussed above, proposed Item 1502(d) of Regulation S-K would
require a registrant to provide a narrative discussion of whether and
how any of its identified climate-related risks have affected or are
reasonably likely to affect the registrant's consolidated financial
statements.\325\ The term ``climate-related risks'' would be defined,
in part, as the actual or potential negative impacts of climate-related
conditions and events on a registrant's consolidated financial
statements.\326\ ``Climate-related risks'' would also be defined to
include physical risks, such as extreme weather events, and transition
risks.\327\ To complement this proposed requirement in Regulation S-K
to provide narrative disclosure about impacts on a registrant's
consolidated financial statements, we are proposing to amend Regulation
S-X to require a registrant to include disaggregated information about
the impact of climate-related conditions and events, and transition
activities, on the consolidated financial statements included in the
relevant filing,\328\ unless such impact is below a specified
threshold.
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    \325\ See proposed 17 CFR 229.1502(d).
    \326\ See supra Section II.B.1 (discussing the definition of
``climate-related risks'').
    \327\ See proposed 17 CFR 229.1500(c) (defining ``climate
related risks'' to include ``physical risks'' and ``transition
risks'').
    \328\ For example, the impact on the income statement line items
for the periods presented in the financial statements in a
registrant's Form 10-K.
---------------------------------------------------------------------------

    We are proposing to require disclosure of the impacts from severe
weather events and other natural conditions and transition activities,
which should capture a broad spectrum of these two types of climate-
related risks (physical risks and transition risks). In addition, the
proposed rules would require disclosure of the impacts of any climate-
related risks identified pursuant to proposed Item 1502(a)--both
physical risks (``identified physical risks'') and transition risks
(``identified transition risks'')--on any of the financial statement
metrics.\329\ Among the examples of severe weather events and other
natural conditions that we have highlighted in the proposed rule are
those that the Commission identified more than a decade ago in the 2010
Guidance as potentially affecting a registrant's operations and
results.\330\ In addition, although not specifically mentioned in the
2010 Guidance, we are including wildfires as an example because it is
well recognized as another type of natural event that can have
significant impacts on a registrant's financial statements.\331\
Providing examples of severe weather events, other natural conditions,
and transition activities in the proposed rule would aid in the
comparability of the resulting disclosure while assisting issuers in
making the disclosures.
---------------------------------------------------------------------------

    \329\ See proposed 17 CFR 210.14-02(i).
    \330\ See, e.g., 2010 Guidance, 26 (``Significant physical
effects of climate change, such as effects on the severity of
weather (for example, floods or hurricanes), [and] sea levels . . .
have the potential to affect a registrant's operations and
results.''). Temperature extremes and drought are also discussed in
the 2010 Guidance. See, e.g., id. at 6-7.
    \331\ See, e.g., Aurora A. Gutierrez et al., Wildfire response
to changing daily temperature extremes in California's Sierra
Nevada, Science Advances, Vol. 7, Issue 47 (Nov. 17, 2021) (``Our
work supports the conclusion that considerable potential exists for
an increase in fire activity as a consequence of climate warming in
the absence of changes in fire and ecosystem management.''); U.S.
Geological Survey, Will global warming produce more frequent and
more intense wildfires? (``[R]esearchers have found strong
correlations between warm summer temperatures and large fire years,
so there is general consensus that fire occurrence will increase
with climate change.''), available at https://www.usgs.gov/faqs/will-global-warming-produce-more-frequent-and-more-intense-wildfires.
---------------------------------------------------------------------------

    Specifically, we are proposing that impacts on any relevant line
item in the registrant's consolidated financial statements during the
fiscal years presented arising from severe weather events and natural
conditions, and the identified physical risks (collectively, ``climate-
related events''), would trigger the proposed disclosure requirement
discussed below. Specific examples of such severe weather events and
natural conditions may include the following:
     Flooding;
     Drought;
     Wildfires;
     Extreme temperatures; and
     Sea level rise.\332\
---------------------------------------------------------------------------

    \332\ See proposed 17 CFR 210.14-02(c).
---------------------------------------------------------------------------

    As discussed, above, there has been increased recognition of the
current and potential effects, both positive and negative, of these
events and the associated physical risks on a registrant's business as
well as its financial performance and position. For example, as
mentioned above, the 2010 Guidance discusses the potential impacts on a
registrant's business and financial performance from climate-related
events, including, for example, severe weather events, that could
negatively impact a registrant's supply chain or distribution chain and
lead to higher input costs or delayed product deliveries.\333\ The 2010
Guidance also points to credit risks for banks driven by borrowers with
assets located in high risk coastal areas.\334\ More recently, the
FSOC's Report on Climate-Related Financial Risk 2021 discusses
significant costs from the types of events included in proposed Rule
14-02(c).\335\ The TCFD, in a recent publication, also discusses the
potential financial impacts of such climate-related events.\336\
Furthermore, the TCFD provides examples of disclosures already being
made by some companies (including registrants) of the financial
statement impact of the climate-related events discussed above in their
standalone sustainability (or equivalent) reports.\337\
---------------------------------------------------------------------------

    \333\ See 2010 Guidance, 6.
    \334\ See id.
    \335\ See, e.g., 2021 FSOC Report, Chapter 1: From Climate-
related Physical Risks to Financial Risks (discussing the listed
events and other risks).
    \336\ TCFD, Implementing the Recommendations of the Task Force
on Climate-related Financial Disclosures (Oct. 2021), Section A.4
Assessing Financial Impacts of Climate-Related Risks and
Opportunities.
    \337\ See, e.g., TCFD, Guidance on Metrics, Targets, and
Transition Plans (Oct. 2021), 23 (Figure C6), Appendix 2, available
at https://assets.bbhub.io/company/sites/60/2021/07/2021-Metrics_Targets_Guidance-1.pdf (providing examples, mostly from
sustainability (or equivalent) reports, that illustrate the
feasibility of some of the disclosures that would be required by the
proposed rules).
---------------------------------------------------------------------------

    Generally, climate-related events such as severe weather events and
other natural conditions, and climate-related risks more generally, are
linked to negative impacts on a registrant's financial performance and
position.

There could be situations, however, where such events result in
positive impacts. For example, if a registrant's business is to conduct
post-disaster cleanup and reconstruction, the occurrence of such severe
weather events would generate additional revenues for the registrant.
    In addition to the physical risks associated with climate change,
registrants and investors also face climate-related transition risks.
As government leaders across the globe have made public commitments to
transition to a lower carbon economy, investors have sought information
about the impact such a transition may have on registrants.\338\ In
addition to public commitments, these impacts may be prompted by
regulatory, technological, market (including changing consumer,
business counterparty, and investor preferences), liability,
reputational, or other transition-related factors.\339\ For example,
significant shifts in modes of production may occur in GHG intensive
economic sectors, such as the transportation, electricity generation,
and heavy manufacturing sectors.\340\ A registrant that is engaged in
transition activities may experience business losses or, conversely,
may benefit from such transition activities.\341\ In response, some
companies are already providing disclosure of the impact of transition-
related activities on their financial statements and some have publicly
made commitments related to this transition.\342\ In light of these
transition risks, the proposed rules would also require a registrant to
disclose the financial impact of the impact of any identified
transition risks and any efforts to reduce GHG emissions or otherwise
mitigate exposure to transition risks (collectively, ``transition
activities'') on any relevant line items in the registrant's
consolidated financial statements during the fiscal years
presented.\343\
---------------------------------------------------------------------------

    \338\ See supra Section I.C.1.
    \339\ See supra Section II.B.
    \340\ See, e.g., 2021 FSOC Report, Chapter 1, From Climate-
related Transition Risks to Financial Risks.
    \341\ See id.
    \342\ See, e.g., TCFD, Guidance on Metrics, Targets, and
Transition Plans (Oct. 2021), Appendix 2.
    \343\ See proposed 17 CFR 210.14-02(d).
---------------------------------------------------------------------------

    A registrant may also disclose the impact of any opportunities
arising from severe weather events and other natural conditions, any
impact of efforts to pursue climate-related opportunities associated
with transition activities, and the impact of any other climate-related
opportunities, including those identified by the registrant pursuant to
proposed Item 1502(a), on any of the financial statement metrics.\344\
If a registrant makes a policy decision to disclose the impact of a
climate-related opportunity on the proposed financial statement
metrics, it must do so consistently (e.g., for each fiscal year
presented in the consolidated financial statements, for each financial
statement line item, for all relevant opportunities identified by the
registrant) and must follow the same presentation and disclosure
threshold requirements applicable to the required disclosures related
to financial impact metrics and expenditure metrics, as discussed
below.\345\
---------------------------------------------------------------------------

    \344\ See proposed 17 CFR 210.14-02(j).
    \345\ See id.
---------------------------------------------------------------------------

    The financial impact metric disclosure requirements in proposed
Rules 14-02(c), (d), and (i) would require a registrant to disclose the
financial impacts of severe weather events, other natural conditions,
transition activities, and identified climate-related risks on the
consolidated financial statements included in the relevant filing
unless the aggregated impact of the severe weather events, other
natural conditions, transition activities, and identified climate-
related risks is less than one percent of the total line item for the
relevant fiscal year.\346\ The proposed threshold would provide a
bright-line standard for registrants and should reduce the risk of
underreporting such information. The proposed quantitative threshold
could also promote comparability and consistency among a registrant's
filings over time and among different registrants compared to a
principles-based approach. The Commission has used similar one percent
thresholds in other contexts.\347\ More generally, in addition to the
approach in Article 5 of Regulation S-X discussed below, other rules
such as 17 CFR 229.103 and 17 CFR 229.404 use quantitative disclosure
thresholds to facilitate comparability, consistency, and clarity in
determining when information must be disclosed.\348\
---------------------------------------------------------------------------

    \346\ See proposed 17 CFR 210.14-02(b). The registrant would be
required to evaluate the impact on a line-by-line basis consistent
with the line items presented in its consolidated financial
statements. See proposed 17 CFR 210.14-02(c) and (d).
    \347\ The Commission currently uses a 1% threshold in other
contexts for disclosure of certain items within the financial
statements and without. See, e.g., 17 CFR 210.5-03.1(a) (stating
that if the total of sales and revenues reported under this caption
includes excise taxes in an amount equal to 1% or more of such
total, the amount of such excise taxes shall be shown on the face of
the statement parenthetically or otherwise); 17 CFR 210.12-13
(requiring disclosure of open option contracts by management
investment companies using a 1% of net asset value threshold, based
on the notional amounts of the contracts); and 17 CFR 229.404(d)
(requiring disclosure of transactions between a SRC and related
persons in which the amount involved exceeds the lesser of $120,000
or 1% of the average of the SRC's total assets at year-end for the
last two completed fiscal years).
    \348\ See 17 CFR 229.103(b)(2), (c)(3)(iii) and 17 CFR
229.404(a).
---------------------------------------------------------------------------

    A registrant would be required to determine the impacts of the
severe weather events, other natural conditions, transition activities,
and identified climate-related risks described above on each
consolidated financial statement line item.\349\ Within each category
(i.e., climate-related events or transition activities), impacts would,
at a minimum, be required to be disclosed on an aggregated, line-by-
line basis for all negative impacts and, separately, on an aggregated,
line-by-line basis for all positive impacts.\350\ However, for purposes
of determining whether the disclosure threshold has been met, a
registrant would be required to aggregate the absolute value of the
positive and negative impacts on a line-by-line basis, which we believe
would better reflect the significance of the impact of the climate-
related events and transition activities on a registrant's financial
performance and position.\351\
---------------------------------------------------------------------------

    \349\ Examples of such line items include revenue, cost of
revenue, selling, general and administrative expenses, sale of
property, plant, and equipment (in statement of cash flows),
inventories, intangible assets, long-term debt, or contingent
liabilities.
    \350\ See proposed 17 CFR 210.14-02(c) and (d).
    \351\ See proposed 17 CFR 210.14-02(b).
---------------------------------------------------------------------------

    For example, when evaluating the line-by-line impact, a registrant
may determine that its cost of revenue is impacted by Events A, B, and
C, and Transition Activity D in the following manner:
     Cost of revenue was impacted negatively by Events A and B
by $300,000, driven by increased input costs impacted by severe weather
events that strained the registrant's main supplier;
     Cost of revenue was impacted positively by Event C by
$70,000, driven by technology that improved the registrant's ability to
manage the impact of severe heat on certain raw materials, which
resulted in more efficient production; and
     Cost of revenue was impacted positively by Transition
Activity D, which reduced production costs for certain products by
$90,000 through advanced technology that improved energy efficiency
during the production process.\352\
---------------------------------------------------------------------------

    \352\ This example illustrates a situation where the registrant
has elected to include impacts from transition opportunities.

---------------------------------------------------------------------------

    For purposes of determining whether the impacts from the example
above would trigger the disclosure threshold requirements, the
registrant would perform the analysis illustrated in the following
table:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            F/S balance
                                                               (from                                         Impact of
                      F/S line-item                        consolidated      Impact of       Impact of      transition    Absolute value    Percentage
                                                             financial    events A and B      event C       activity D      of impacts        impact
                                                            statements)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cost of revenue.........................................     $10,000,000       -$300,000        +$70,000        +$90,000        $460,000            4.6%
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Although some of the impacts (e.g., impact of Event C, impact of
Transition Activity D) do not individually meet the one percent
threshold, the absolute value of the aggregated impacts from the events
and transition activities on the line item in the above example is
$460,000 and thus exceeds one percent of the corresponding line-item
threshold; therefore, disclosure for that specific line item would be
required. The registrant's disclosure of such impacts may be provided,
for example, as illustrated in the following table (excluding
disclosure of contextual information):
    Note X. Climate-related financial metrics:

----------------------------------------------------------------------------------------------------------------
                                                                             Total negative     Total positive
                                                                               impact from   impact from climate-
                                      Total negative       Total positive       climate-      related transition
          F/S line-item            impact from climate- impact from climate-     related        activities and
                                      related events       related events      transition      climate-related
                                                                               activities      opportunities *
----------------------------------------------------------------------------------------------------------------
Cost of revenue..................  (Debit) $300,000...  (Credit) $70,000...  ..............  (Credit) $90,000
----------------------------------------------------------------------------------------------------------------
* As discussed earlier, a registrant may elect to include the impact of climate-related opportunities when
  calculating its climate-related financial impact metrics. This example illustrates a situation where the
  registrant has elected to include impacts from transition opportunities.

    In this example, contextual information may include disclosure such
as the registrant's election to include the impact from opportunities
in its disclosure analysis and calculation, the specific events that
were aggregated for purposes of determining the impact on the cost of
revenue and, if applicable, a discussion of the estimation methodology
used to disaggregate the amount of impact on the cost of revenue
between the climate-related events, transition activities, and other
factors.
    To provide additional clarity, the proposed rule would include the
following examples of disclosures that may be required to reflect the
impact of the severe weather events and other natural conditions on
each line item of the registrant's consolidated financial statements
(e.g., line items of the consolidated income statement, balance sheet,
or cash flow statement): \353\
---------------------------------------------------------------------------

    \353\ The examples below, like all of the examples in this
release (including examples in the text of the proposed rules), are
non-exclusive and should not be interpreted as a checklist for
compliance with any proposed rule.
---------------------------------------------------------------------------

     Changes to revenue or costs from disruptions to business
operations or supply chains;
     Impairment charges and changes to the carrying amount of
assets (such as inventory, intangibles, and property, plant and
equipment) due to the assets being exposed to severe weather, flooding,
drought, wildfires, extreme temperatures, and sea level rise;
     Changes to loss contingencies or reserves (such as
environmental reserves or loan loss allowances) due to impact from
severe weather events; and
     Changes to total expected insured losses due to flooding
or wildfire patterns.\354\
---------------------------------------------------------------------------

    \354\ See proposed 17 CFR 210.14-02(c)(1) through (4).
---------------------------------------------------------------------------

    With respect to the financial impacts of transition activities, the
proposed rule would include the following examples of potential
impacts:
     Changes to revenue or cost due to new emissions pricing or
regulations resulting in the loss of a sales contract;
     Changes to operating, investing, or financing cash flow
from changes in upstream costs, such as transportation of raw
materials;
     Changes to the carrying amount of assets (such as
intangibles and property, plant, and equipment), for example, due to a
reduction of the asset's useful life or a change in the asset's salvage
value by being exposed to transition activities; and
     Changes to interest expense driven by financing
instruments such as climate-linked bonds issued where the interest rate
increases if certain climate-related targets are not met.\355\
---------------------------------------------------------------------------

    \355\ See proposed 17 CFR 210.14-02(d)(1) through (4).
---------------------------------------------------------------------------

    Many commenters stated that climate-related financial disclosure is
material and should be reflected separately in the financial
statements.\356\ For example, one commenter stated that it is critical
to investors and others in assessing a company's risk profile,
estimating its risk-adjusted returns, and completing other relevant
financial analyses to include information on how climate-related risks
and climate-related opportunities may affect companies' income
statements, cash flow statements, and balance sheets.\357\
---------------------------------------------------------------------------

    \356\ See, e.g., letters from Americans for Financial Reform
Education Fund et al.; BlackRock; CalPERS; Ceres; Climate Accounting
Project; Climate Governance Initiative; Eni SpA; Friends of the
Earth, Amazon Watch and RainForest Coalition; Initiative on Climate
Risk and Resilience Law; International Corporate Governance Network;
Investment Company Institute; Natural Resources Defense Council;
Policy Working Group; Sens. Brian Schatz and Sheldon Whitehouse
(June 10, 2021); Ted Atwood; The Forum for Sustainable and
Responsible Investment; The Revolving Door Project; The Washington
State Investment Board; UNEP--FI; Union of Concerned Scientists; and
WBCSD.
    \357\ See letter from Bloomberg.
---------------------------------------------------------------------------

    Other commenters, however, generally expressed the view that if
such disclosures are material, they would already be required by
existing financial statement disclosure requirements.\358\ For example,
some of these commenters stated that they opposed new climate-specific
disclosure rules because, in their view, the traditional concept of
materiality already requires the disclosure of climate-related impacts
that materially

affect the issuer's financial condition and results of operations.\359\
---------------------------------------------------------------------------

    \358\ See, e.g., letters from the American Fuel Petrochemical
Manufacturers (June 13, 2021); Environmental Bankers Association;
Heritage Foundation; National Mining Association (June 11, 2021);
Society for Mining, Metallurgy, & Exploration (June 13, 2021); and
The Associated General Contractors of America.
    \359\ See letters from American Fuel Petrochemical
Manufacturers; Environmental Bankers Association; and The Associated
General Contractors of America.
---------------------------------------------------------------------------

    Although we agree that registrants are currently required to
disclose material financial impacts on the financial statements, the
proposed climate-related financial statement metrics should provide
additional transparency into the impact of climate-related events on
information reported in the financial statements that would be relevant
to investors when making investment or voting decisions.\360\ Such
disclosure would also provide investors with additional insights into
the nature of a registrant's business, the implementation of the
registrant's targets and goals, and material trends in climate-related
impacts. Furthermore, separately stating the financial statement
impacts from the climate-related events and transition activities could
improve comparability across both the registrant's year-to-year
disclosures and the disclosures of different registrants.
---------------------------------------------------------------------------

    \360\ Certain commenters, in response to FASB's 2021 Agenda
Consultation, were also supportive of more disaggregated disclosures
within the financial statements. See, e.g., letters from CalPERS
(Sept. 22, 2021); CFA Institute (Oct. 7, 2021); and CII (Sept. 16,
2021). Comment letters in response to FASB's invitation to comment
are available at https://www.fasb.org/jsp/FASB/CommentLetter_C/CommentLetterPage&cid=1218220137090&project_id=2021-004&page_number=1.
---------------------------------------------------------------------------

    We further note that the proposed requirement to separately
disclose the financial impacts of the climate-related events and
transition activities may be necessary not only because climate-related
risks may have significant impacts on individual registrants, but also
because the risks presented by the climate-related events and
transition activities may be correlated across different, similarly
situated registrants.\361\ Climate-related risks present the potential
for a high correlation and therefore concentration of risk within a
portfolio. Separate disclosure of climate-related risks could help to
provide investors with information to help them more effectively
evaluate their portfolio risk. In this regard, we note that an
analogous approach to disaggregated, or separately stated, disclosure
has been taken in other contexts within the financial statements and
elsewhere.\362\ For example, in segment reporting, a registrant must
present within its consolidated financial statements a separate
presentation of certain financial statement line items for each
segment.\363\ The Commission has noted the importance of disaggregated
disclosure in the segment reporting context, stating that it ``has long
been aware of the importance of meaningful segment information to
reasoned investment decision-making.'' \364\
---------------------------------------------------------------------------

    \361\ See, e.g., Madison Condon, Market Myopia's Climate Bubble,
2022 Utah L. Rev. 63 (2021). See also 2020 CFTC Advisory
Subcommittee Report (``Climate change is expected to affect multiple
sectors, geographies, and assets in the United States, sometimes
simultaneously and within a relatively short timeframe. As mentioned
earlier, transition and physical risks--as well as climate and non-
climate-related risks--could interact with each other, amplifying
shocks and stresses. This raises the prospect of spillovers that
could disrupt multiple parts of the financial system
simultaneously.'').
    \362\ The analogies presented are not intended to imply that
FASB ASC Topic 280, IFRS 8 or other concepts would have to be
applied when accounting for and disclosing the climate-related
financial statement metrics. The analogies are also not intended to
imply that the determination of when disclosure may be required and
how that determination is made is the same across all of these
concepts. See, e.g., infra note 363 (discussing management's
evaluation under FASB ASC Topic 280 Segment Reporting and IFRS 8
Operating Segments) and the discussion below of FASB ASC Topic 606,
IFRS 15, and Article 5 of Regulation S-X.
    \363\ See FASB ASC Topic 280 Segment Reporting and IFRS 8
Operating Segments (requiring segment reporting disclosures to be
included in the audited financial statements). FASB ASC 280-10-10-1
states that the objective of segment reporting is to provide
information about the different types of business activities in
which a registrant engages and the different economic environments
in which it operates to help users of financial statements: (i)
Better understand the public entity's performance; (ii) better
assess its prospects for future net cash flows; and (iii) make more
informed judgments about the public entity as a whole. FASB ASC
Topic 280 and IFRS 8 focus on the chief operating decision maker's
view when evaluating the registrant and prescribes certain
qualitative and quantitative considerations when determining what
constitutes an operating segment. Similarly, the proposed rule would
require an initial determination by the registrant of the relevant
climate-related events and transition activities, and their impact
on the registrant's financial statements.
    \364\ See Industry and Homogenous Geographic Segment Reporting,
Release No. 33-6514 (Feb. 15, 1984) [49 FR 6737-01 (Feb. 23, 1984)],
at 6738. Robust segment reporting disclosures are important as they
can provide crucial transparency to investors that are reviewing
financial statements. See also Gary Buesser, For the Investor:
Segment Reporting, FASB OUTLOOK (Apr. 2019) (``[I]nvestors normally
model a company at the segment level rather than at the consolidated
level. More segments and greater information about an operating
segment improve an analyst's ability to forecast a company's
revenue, margins and assets--which serves as the basis for valuing a
company.'').
---------------------------------------------------------------------------

    The importance of disaggregated disclosure in a registrant's
financial statements is also supported by the concepts set forth in
FASB ASC Topic 606 Revenue from Contracts with Customers and IFRS 15
Revenue from Contracts with Customers, which require, among other
things, disclosure of disaggregated revenue recognized from contracts
with customers into categories that depict how the nature, amount,
timing, and uncertainty of revenue and cash flows are affected by
economic factors. As noted earlier, the Commission also requires
disaggregation of certain financial statement line items in Article 5
of Regulation S-X. Specifically, Article 5 requires separate
disclosures of specific balance sheet and income statement line items
when practicable or when certain percentage thresholds are met,
depending on the nature of the information.\365\ Those conditions on
when separate disclosure is required are analogous to the proposed
condition that financial impacts result from the climate-related events
and transition activities.
---------------------------------------------------------------------------

    \365\ See supra note 347 for examples of the Commission's use of
a 1% threshold in other contexts.
---------------------------------------------------------------------------

Request for Comment
    59. Should we require registrants to disclose the financial impact
metrics, as proposed? Would presenting climate-specific financial
information on a separate basis based on climate-related events (severe
weather events and other natural conditions and identified physical
risks) and transition activities (including identified transition
risks) elicit decision-useful or material information for investors?
Are there different metrics that would result in disclosure of more
useful information about the impact of climate-related risks and
climate-related opportunities on the registrant's financial performance
and position?
    60. Would the impact from climate-related events and transition
activities yield decision-useful information for investors? Would the
climate-related events (including the examples provided) and transition
activities result in impacts that are easier to quantify or
disaggregate than climate-related risks more generally? Would a
registrant be able to quantify and provide the proposed disclosure when
the impact may be the result of a mixture of factors (e.g., a factory
shutdown due to an employee strike that occurs simultaneously with a
severe weather event)? If there are situations where disaggregation
would not be practicable, should we require a registrant to disclose
that it was unable to make the required determination and why, or to
make a reasonable estimate and provide disclosure about the assumptions
and information that resulted in the estimate?
    61. Alternatively, should we not require disclosure of the impacts
of identified climate-related risks and only require disclosure of
impacts from

severe weather events and other natural conditions? Should we require a
registrant to disclose the impact on its consolidated financial
statements of only certain examples of severe weather events and other
natural conditions? If so, should we specify which severe weather
events and other natural conditions the registrant must include? Would
requiring disclosure of the impact of a smaller subset of climate-
related risks be easier for a registrant to quantify without
sacrificing information that would be material to investors?
    62. Should impact from climate-related opportunities be required,
instead of optional, as proposed? We are proposing to require a
registrant that elects to disclose the impact of an opportunity to do
so consistently (e.g., for each fiscal year presented in the
consolidated financial statements, for each financial statement line
item, and for all relevant opportunities identified by the registrant).
Are there any other requirements that we should include to enhance
consistency? Should we only require consistency between the first
fiscal period in which opportunities were disclosed and subsequent
periods?
    63. Is it clear which climate-related events would be covered by
``severe weather events and other natural conditions''? If not, should
we provide additional guidance or examples about what events would be
covered? Should we clarify that what is considered ``severe weather''
in one region may differ from another region? For example, high levels
of rainfall may be considered ``severe weather'' in a typically arid
region.
    64. Are the proposed requirements for calculating and presenting
the financial impact metrics clear? Should the analysis be performed
and disclosed in a manner other than on a line-by-line basis referring
to the line items of the registrant's consolidated financial
statements?
    65. We are proposing to allow a registrant to aggregate the
absolute value of negative and positive impacts of all climate-related
events and, separately, transition activities on a financial statement
line item. Should we instead require separate quantitative disclosure
of the impact of each climate-related event or transition activity?
Should we require separate disclosure of the impact of climate-related
opportunities that a registrant chooses to disclose?
    66. The proposed financial impact metrics would not require
disclosure if the absolute value of the total impact is less than one
percent of the total line item for the relevant fiscal year. Is the
proposed threshold appropriate? Should we use a different percentage
threshold (e.g., three percent, five percent) or use a dollar threshold
(e.g., less than or greater than $1 million)? Should we use a
combination of a percentage threshold and a dollar threshold? Should we
only require disclosure when the financial impact exceeds the
threshold, as proposed, or should we also require a determination of
whether an impact that falls below the proposed quantitative threshold
would be material and should be disclosed?
    67. For purposes of determining whether the disclosure threshold
has been met, should impacts on a line item from climate-related events
and transition activities be permitted to offset (netting of positive
and negative impacts), instead of aggregating on an absolute value
basis as proposed? Should we prescribe how to analyze positive and
negative impacts on a line item resulting from the same climate-related
event or the same transition activity (e.g., whether or not netting is
permitted at an event or activity level)? Should we permit registrants
to determine whether or not to offset as a policy decision (netting of
the positive and negative impact within an event or activity) and
provide relevant contextual information? Should we require the
disclosure threshold to be calculated separately for the climate-
related events and transition activities, rather than requiring all of
the impacts to be aggregated as proposed?
    68. Instead of including a quantitative threshold, as proposed,
should we require disaggregated disclosure of any impact of climate-
related risks on a particular line item of the registrant's
consolidated financial statements? Alternatively, should we just use a
materiality standard?
    69. Should we require a registrant to disclose changes to the cost
of capital resulting from the climate-related events? If so, should we
require a registrant to disclose its weighted average cost of capital
or any internal cost of capital metrics? Would such disclosure elicit
decision-useful or material information for investors?
    70. We have not proposed defining the term ``upstream costs'' as
used in the proposed examples for the financial impact metrics and
elsewhere. Should we define that term or any others? If so, how should
we define them?
    71. Are the proposed examples in the financial impact metrics
helpful for understanding the types of disclosure that would be
required? Should we provide different or additional examples or
guidance?
3. Expenditure Metrics
    The proposed expenditure metrics would refer to the positive and
negative impacts associated with the same climate-related events,
transition activities, and identified climate-related risks as the
proposed financial impact metrics.\366\ As proposed, the expenditure
metrics would require a registrant to separately aggregate amounts of
(i) expenditure expensed and (ii) capitalized costs incurred during the
fiscal years presented.\367\ For each of those categories, a registrant
would be required to disclose separately the amount incurred during the
fiscal years presented (i) toward positive and negative impacts
associated with the climate-related events (i.e., severe weather events
and other natural conditions and identified physical risks) and (ii)
toward transition activities, specifically, to reduce GHG emissions or
otherwise mitigate exposure to transition risks (including identified
transition risks).\368\ The registrant may also choose to disclose the
impact of efforts to pursue climate-related opportunities associated
with transition activities.\369\ As discussed above, if a registrant
elects to disclose the impact of an opportunity, it must do so
consistently and must follow the same presentation and disclosure
threshold requirements applicable to the required disclosures of
expenditure metrics associated with transition risks. The amount of
expenditure disclosed pursuant to the proposed metrics would be a
portion, if not all, of the registrant's total recorded expenditure
(expensed or capitalized), as calculated pursuant to the accounting
principles applicable to the registrant's financial statements.\370\
---------------------------------------------------------------------------

    \366\ See proposed 17 CFR 210.14-02(e), (f), and (i).
    \367\ See id. These metrics are focused on expenditures
(spending) incurred in each reported fiscal year(s). We therefore
believe the number of periods of the expenditure metrics should
correspond to the number of years of income statement or cash flow
statement presented in the consolidated financial statements.
    \368\ See id.
    \369\ See proposed 17 CFR 210.14-02(j).
    \370\ See 17 CFR 210.4-01(a)(1) and (2).
---------------------------------------------------------------------------

    The proposed expenditure metrics would be subject to the same
disclosure threshold as the financial impact metrics, which we believe
would promote comparability, consistency, and clarity in determining
when information must be disclosed. For purposes of calculating the
disclosure threshold for the expenditure metrics, a registrant would be
permitted to separately determine the amount of expenditure expensed
and the amount of expenditure capitalized; however, a registrant would
be required to

aggregate expenditure related to climate-related events and transition
activities within the categories of expenditure (i.e., amount
capitalized and amount expensed). This approach should better reflect
the significance of climate-related expenditure compared to a
calculation approach that would allow for a disclosure threshold to be
measured at the individual event or activity level, which may result in
more limited disclosures.
    For example, assume a registrant capitalized $200,000 of
expenditure incurred related to Event D and capitalized another
$100,000 of expenditure incurred related to Activity E. The registrant
also expensed $25,000 of expenditure incurred related to Event F (which
is an identified transition risk disclosed by the registrant). The
registrant would determine whether the impacts would trigger the
disclosure requirements based on the proposed thresholds, as
illustrated below:

----------------------------------------------------------------------------------------------------------------
                                  Current fiscal
                                   year balances
                                       (from                                                        Percentage
      Expenditure category         consolidated       Event D       Activity E        Event F         impact
                                     financial
                                   statements) *
----------------------------------------------------------------------------------------------------------------
Capitalized costs (total              $8,000,000        $200,000        $100,000  ..............        ** 3.85%
 expenditure incurred during the
 year that was capitalized).....
Expense (total expenditure            $3,000,000  ..............  ..............         $25,000            0.8%
 incurred during the year that
 was expensed)..................
----------------------------------------------------------------------------------------------------------------
* As expenditures capitalized and expensed are recorded in various financial statement line items, we expect the
  ``total'' to be used for disclosure threshold calculation purposes for each category to represent the
  aggregated expenditures capitalized during the fiscal year and aggregated expenditures expensed during the
  fiscal year. See below for additional discussion regarding associated contextual information that may be
  required.
** Calculated based on total impact on capitalized costs from Event D ($200,000), Activity E ($100,000), and
  Event F ($0): $300,000/$8,000,000.

    In the above example, the expenditure incurred toward Event D was
$200,000 (capitalized) and the expenditure incurred toward Activity E
and Event F were $100,000 (capitalized) and $25,000 (expensed). The
amount of capitalized costs equaled the proposed one percent threshold,
and thus the disclosure would be required for that category of
expenditure. No disclosure would be required for the expenditure
incurred that was expensed (related to Event F in this example),
because it was below the one percent threshold. The registrant's
resulting disclosure of such expenditure (capitalized or expensed) may
be provided, for example, as illustrated in the following table
(excluding disclosure of contextual information):
    Note X. Climate-related financial metrics:

------------------------------------------------------------------------
                                                          Expenditure
                                      Expenditure        incurred for
                                     incurred for       climate-related
                                    climate-related       transition
                                        events            activities
------------------------------------------------------------------------
Capitalized costs...............           $200,000            $100,000
------------------------------------------------------------------------

    In this example, contextual information may include disclosure such
as the specific climate-related events and transition activities that
were aggregated for purposes of determining the impacts on the
capitalized or expensed expenditure amounts and, if applicable, policy
decisions made by a registrant to determine the amount of climate-
related events or transition activities that are categorized as
expenditure capitalized versus expenditure expensed or whether impact
from pursuing any climate-related opportunities are included in the
analysis. Contextual information may also include a discussion of the
composition of the total expenditure expensed and total expenditure
capitalized, which were used to calculate whether the disclosure
threshold was met, and, if applicable, a discussion of the estimation
methodology used to disaggregate the amount of impact between the
climate-related events, transition activities, and other factors,
including if an event or an activity impacted both capitalized and
expensed costs.
    The proposed rules would clarify that a registrant may be required
to disclose the amount of expenditure expensed or capitalized costs, as
applicable, incurred for the climate-related events to increase the
resilience of assets or operations, retire or shorten the estimated
useful lives of impacted assets, relocate assets or operations at risk,
or otherwise reduce the future impact of severe weather events and
other natural conditions on business operations.\371\ The proposed
rules would also clarify that a registrant may be required to disclose
the amount of expenditure expensed or capitalized costs, as applicable,
incurred for climate-related transition activities related to research
and development of new technologies, purchase of assets,
infrastructure, or products that are intended to reduce GHG emissions,
increase energy efficiency, offset emissions (purchase of energy
credits), or improve other resource efficiency.\372\
---------------------------------------------------------------------------

    \371\ See proposed 17 CFR 210.14-02(e).
    \372\ See proposed 17 CFR 210.14-02(f).
---------------------------------------------------------------------------

    Several commenters recommended taking a similar approach, stating
that we should require disclosure of climate-related capital
expenditure (i.e., capitalized assets),\373\ or both climate-related
expenses and capitalized assets.\374\ Consistent with these comments,
and for similar reasons to those stated above with respect to the
financial impact metrics, separate disclosure of total expense and
total capitalized costs incurred toward the climate-related events and
transition activities should provide important

information to help investors make better informed investment or voting
decisions. Moreover, the financial impacts of expenditure typically
appear in different places within the financial statements (e.g., in an
asset line item(s) on the balance sheet or in an expense line item(s)
in the income statement). The proposed approach is intended to address
this dispersed presentation by requiring registrants to first identify
the relevant climate-related expenditures and then compile those
impacts in one location. Similar to the proposed financial impact
metrics, such an approach should provide insight into, and context for
understanding, the nature of a registrant's business, including any
disclosed strategy for addressing and managing the specified risks--
particularly in the context of transition planning.\375\
---------------------------------------------------------------------------

    \373\ See, e.g., letters from Amalgamated Bank; Interfaith
Center on Corporate Responsibility; and Natural Resources Defense
Council.
    \374\ See, e.g., letters from Calvert; Climate Risk Disclosure
Lab; and World Benchmarking Alliance.
    \375\ See supra Section II.C, which discusses our proposals to
require the registrant to describe the actual and potential impacts
of the identified climate-related risks (and climate-related
opportunities if the registrant elects to do so) on its strategy,
business model, and outlook. Further, such disclosure could also
provide additional context to other narrative disclosures such as
the discussion of risk factors required by 17 CFR 229.105.
---------------------------------------------------------------------------

Request for Comment
    72. Should we require registrants to disclose the expenditure
metrics, as proposed? Would presenting the expenditure metrics
separately in one location provide decision-useful information to
investors? Is there a different type of metric that would result in
more useful disclosure of the expense or capitalized costs incurred
toward climate-related events and transition activities or toward
climate-related risks more generally?
    73. Would the disclosure required by the expenditure metrics
overlap with the disclosure required by the financial impact metrics?
If so, should we require the disclosure to be provided pursuant to only
one of these types of metrics?
    74. Should the same climate-related events (including severe
weather events and other natural conditions and identified physical
risks) and transition activities (including identified transition
risks) that we are proposing to use for the financial impact metrics
apply to the expenditure metrics, as proposed? Alternatively, should we
not require a registrant to disclose expenditure incurred towards
identified climate-related risks and only require disclosure of
expenditure relating to severe weather events and other natural
conditions? Should we require a registrant to disclose the expenditure
incurred toward only certain examples of severe weather events and
other natural conditions? If so, should we specify which severe weather
events and other natural conditions the registrant must include? Would
requiring disclosure of the expenditure relating to a smaller subset of
climate-related risks be easier for a registrant to quantify without
sacrificing information that would be material to investors?
    75. Should the proposed rules instead require a registrant to
disclose the aggregate amounts of expensed and capitalized costs
incurred toward any climate-related risks? Should expenditures incurred
towards climate-related opportunities be optional based on a
registrant's election to disclose such opportunities, as proposed?
    76. Should we apply the same disclosure threshold to the
expenditure metrics and the financial impact metrics? Is the proposed
threshold for expenditure metrics appropriate? Should we use a
different percentage threshold (e.g., three percent, five percent) or
use a dollar threshold (e.g., less than or greater than $1 million)?
Should we use a combination of a percentage threshold and a dollar
threshold? Should we only require disclosure when the amount of
climate-related expenditure exceeds the threshold, as proposed, or
should we also require a determination of whether an amount of
expenditure that falls below the proposed quantitative threshold would
be material and should be disclosed? Should we require separate
aggregation of the amount of expense and capitalized costs for purposes
of the threshold, as proposed? Should we require separate aggregation
of expenditure relating to the climate-related events and transition
activities, as proposed?
    77. Instead of including a quantitative threshold, as proposed,
should we require disaggregated disclosure of any amount of expense and
capitalized costs incurred toward the climate-related events and
transition activities, during the periods presented? Alternatively,
should we just use a materiality standard?
    78. Are the proposed requirements for calculating and presenting
the expenditure metrics clear? Should the analysis be performed and
disclosed in a different manner, other than separately based on
capitalized costs and amount of expenditure expensed and separately
based on the climate-related events and transition activities? Should
disclosure of expenditure incurred be required for both the amount of
capitalized costs and the amount of expenditure expensed if only one of
the two types of expenditure meets the disclosure threshold? Should we
require separate disclosure of expenditure incurred toward each
climate-related event and transition activity?
    79. The proposed rule does not specifically address expensed or
capitalized costs that are partially incurred towards the climate-
related events and transition activities (e.g., the expenditure relates
to research and development expenses that are meant to address both the
risks associated with the climate-related events and other risks).
Should we prescribe a particular approach to disclosure in such
situations? Should we require a registrant to provide a reasonable
estimate of the amount of expense or capitalized costs incurred toward
the climate-related events and transition activities and to provide
disclosure about the assumptions and information that resulted in the
estimate?
    80. Are the proposed terms and examples used in the expenditure
metrics helpful for understanding the types of disclosures that would
be required? Should we provide different or additional examples?
4. Financial Estimates and Assumptions
    The proposed rules would require a registrant to disclose whether
the estimates and assumptions used to produce the consolidated
financial statements were impacted by exposures to risks and
uncertainties associated with, or known impacts from, climate-related
events (including identified physical risks and severe weather events
and other natural conditions), such as flooding, drought, wildfires,
extreme temperatures, sea level rise.\376\ If so, the registrant would
be required to provide a qualitative description of how such events
have impacted the development of the estimates and assumptions used by
the registrant in the preparation of such financial statements. Similar
to the other proposed financial statement metrics, the proposed rules
would include a provision that would require separate disclosure
focused on transition activities (including identified transition
risks).\377\ Further, if a registrant elects to disclose the impact of
an opportunity on its financial estimates and assumptions, it must do
so consistently and must follow the same presentation and disclosure
requirements applicable to the required disclosures herein.\378\
---------------------------------------------------------------------------

    \376\ See proposed 17 CFR 210.14-02(g) and (i).
    \377\ See proposed 17 CFR 210.14-02(h) and (i).
    \378\ See proposed 17 CFR 210.14-02(j).
---------------------------------------------------------------------------

    If the estimates and assumptions a registrant used to produce the
consolidated financial statements were

impacted by risks and uncertainties associated with, or known impacts
from, a potential transition to a lower carbon economy or any climate-
related targets it has disclosed, the registrant would be required to
provide a qualitative description of how the development of the
estimates and assumptions were impacted by such a potential transition
or the registrant's disclosed climate-related targets.
    Estimates and assumptions are currently required for accounting and
financial reporting purposes (e.g., projected financial information
used in impairment calculations, estimated loss contingencies,
estimated credit risks, commodity price assumptions, etc.). The
proposed disclosures could provide decision-useful information and
transparency to investors about the impact of the climate-related
events and transition activities, including disclosed targets and
goals,\379\ on such estimates and assumptions. Moreover, in addition to
providing insight into impacts on the registrant's financial
statements, such disclosure could allow investors to evaluate the
reasonableness of the registrant's estimates and assumptions, which are
used to prepare the registrant's financial statements. Although current
accounting standards require registrants to consider how climate-
related matters may intersect with and affect the financial statements,
including their impact on estimates and assumptions,\380\ the nature of
the climate-related events and transition activities discussed in the
proposed rules, which may manifest over a longer time horizon,
necessitate targeted disclosure requirements to elicit decision-useful
information for investors in a consistent manner. We also note that
some registrants have already provided disclosure along the lines of
the proposed requirements, which lends support to the feasibility of
making such disclosures.\381\
---------------------------------------------------------------------------

    \379\ See proposed 17 CFR 229.1506.
    \380\ See FASB Staff Educational Paper, Intersection of
Environmental, Social and Governance Matters with Financial
Accounting Standards (Mar. 2021), available at https://fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176176379917. See also IFRS,
Effects of climate-related matters on financial statements (Nov.
2020), available at https://www.ifrs.org/content/dam/ifrs/
supporting-implementation/documents/effects-of-climate-related-
matters-on-financial-
statements.pdf#:~:text=IFRS%20Standards%20do%20not%20refer%explicitly
%20to%20climate-
related,significant%20judgements%20and%20estimates%20that%20%20has%20
made. We also remind registrants of the requirements under FASB ASC
Topic 250-10-50-4 for disclosures of changes in accounting
estimates, including the requirement that if a change in estimate
does not have a material effect in the period of change, but is
reasonably certain to have a material effect in later periods, a
description of that change in estimate must be disclosed whenever
the financial statements of the period of change are presented.
    \381\ See letter from Carbon Tracker (stating that some
companies in the European Union and United Kingdom (several of which
are registrants) are already providing this information and
providing examples).
---------------------------------------------------------------------------

    By way of example, the proposed climate-related events and impacts
relating to a transition away from greenhouse gas producing products
and activities could affect a registrant's asset values and may result
in asset impairments. The effect on asset values and the resulting
impairments could, in turn, affect a registrant's assumptions when
calculating depreciation expenses or asset retirement obligations
associated with the retirement of tangible, long-lived assets.
Providing related disclosure could help an investor understand if a
registrant would be responsible for removing equipment or cleaning up
hazardous materials sooner than originally planned due to a severe
weather event. Similarly, a registrant's climate-related targets and
related commitments, such as a commitment to achieve net-zero emissions
by 2040, may impact certain accounting estimates and assumptions. For
example, if a registrant announced a commitment that would require
decommissioning an asset by a target year, then the registrant's
depreciation expense should reflect alignment with that commitment. If
the registrant believes it can execute a strategy that would allow it
to meet the commitment and continue to operate the asset past the
target date, then the proposed disclosure requirement could facilitate
an investor's understanding and own assessment of the feasibility of
that strategy. Other financial statement estimates and assumptions that
may require disclosure pursuant to the proposed rules may include those
related to the estimated salvage value of certain assets, estimated
useful life of certain assets, projected financial information used in
impairment calculations, estimated loss contingencies, estimated
reserves (such as environmental reserve or loan loss allowances),
estimated credit risks, fair value measurement of certain assets, and
commodity price assumptions.
    Several commenters stated that it was important to provide
investors with an understanding of how climate-related events and
activities are considered when a registrant develops the assumptions
and estimates used to prepare its financial statements.\382\ In
particular, one commenter stated that investors may face ``substantial
risk'' if disclosure on the impact of ``decarbonization'' on the
estimates and assumptions underlying asset valuations is not
disclosed.\383\ Another commenter stated that ``current corporate
disclosure is not sufficient, is not readily available in existing
financial disclosures, and does not allow investors to make comparable
assessments of how companies are evaluating and responding to climate-
related risks and opportunities.'' \384\
---------------------------------------------------------------------------

    \382\ See, e.g., letters from Carbon Tracker; Climate Accounting
Project; ICCR; and Institute for Policy Integrity, Environmental
Defense Fund, Initiative on Climate Risk & Resilience Law.
    \383\ See letter from Carbon Tracker.
    \384\ See letter from ICCR.
---------------------------------------------------------------------------

Request for Comment

    81. Should we require disclosure of financial estimates and
assumptions impacted by the climate-related events and transition
activities (including disclosed targets), as proposed? How would
investors use this information?
    82. Should we instead require disclosure of only significant or
material estimates and assumptions that were impacted by the climate-
related events and transition activities? Alternatively, should we
require disclosure of only estimates and assumptions that were
materially impacted by the climate-related events and transition
activities?
    83. Should we instead require disclosure of financial estimates and
assumptions impacts by a subset of climate-related events and
transition activities, such as not requiring disclosure related to
identified climate-related risks or only requiring disclosure with
respect to a subset of severe weather events and natural conditions? If
so, how should the subset be defined?
    84. Should we instead utilize terminology and thresholds consistent
with the critical accounting estimate disclosure requirement in 17 CFR
229.303(b)(3), such as ``estimates made in accordance with generally
accepted accounting principles that involve a significant level of
estimation uncertainty and have had or are reasonably likely to have a
material impact on the financial condition or results of operations of
the registrant''? If so, should we only require disclosures of whether
and how the climate-related events and transition activities impacted
such critical accounting estimates? Should we require only a
qualitative description of how the estimates and assumptions were
impacted by the climate-related events and transition activities, as
proposed? Should we require quantitative disclosures as well? If so,
should we require such disclosure

only if practicable or subject to another qualifier?
    85. Should the disclosure of financial estimates and assumptions
impacted by climate-related opportunities be optional, as proposed?
    86. For the proposed financial statement metrics, should we require
a registrant to disclose material changes in estimates, assumptions, or
methodology among fiscal years and the reasons for those changes? If
so, should we require the material changes disclosure to occur on a
quarterly, or some other, basis? Should we require disclosure beyond a
discussion of the material changes in assumptions or methodology and
the reasons for those changes? Do existing required disclosures already
elicit such information? What other approaches should we consider?
5. Inclusion of Climate-Related Metrics in the Financial Statements
    The proposed financial statement metrics would be required in the
financial statements, and therefore would be (i) included in the scope
of any required audit of the financial statements in the relevant
disclosure filing, (ii) subject to audit by an independent registered
public accounting firm, and (iii) within the scope of the registrant's
ICFR.
    As discussed above, the proposed disclosures share many
characteristics with other complex financial statement disclosures. The
financial statement metrics present financial data that is derived from
the registrant's consolidated balance sheets, income statements, and
statements of cash flows, and would be presented in a similar way to
existing financial statement disclosures.\385\ Requiring certain
climate-related information to be included in a note to the financial
statements, and therefore subject to audit and within the scope of
ICFR, should enhance the reliability of the proposed financial
statement metrics.
---------------------------------------------------------------------------

    \385\ See supra Section II.F.2 for additional discussion of
shared characteristics that the financial statement metrics have
with existing financial statement disclosures and commenters' views.
---------------------------------------------------------------------------

Request for Comment
    87. We are proposing to require the financial statement metrics to
be disclosed in a note to the registrant's audited financial
statements. Should we require or permit the proposed financial
statement metrics to be disclosed in a schedule to the financial
statements? If so, should the metrics be disclosed in a schedule to the
financial statements, similar to the schedules required under Article
12 of Regulation S-X, which would subject the disclosure to audit and
ICFR requirements? Should we instead require the metrics to be
disclosed as supplemental financial information, similar to the
disclosure requirements under FASB ASC Topic 932-235-50-2 for
registrants that have significant oil- and gas-producing activities? If
so, should such supplemental schedule be subject to assurance or ICFR
requirements?
    88. Instead of requiring the financial statement metrics to be
disclosed in a note to the registrant's audited financial statements,
should we require a new financial statement for such metrics? For
example, should a ``consolidated climate statement'' be created in
addition to the consolidated balance sheets, statements of
comprehensive income, cash flows, and other traditional financial
statements? Would including the proposed metrics in a new financial
statement provide more clarity to investors given that the metrics are
intended to follow the structure of the existing financial statements
(including the line items)? What complications or unintended
consequences may arise in practice if such a climate statement is
created?
    89. Should we require the disclosure to be provided outside of the
financial statements? Should we require all of the disclosure to be
provided in the proposed separately captioned item in the specified
forms?
    90. Should we require any additional metrics or disclosure to be
included in the financial statements and subject to the auditing and
ICFR requirements as described above? For example, should any of the
disclosures we are proposing to require outside of the financial
statements (such as GHG emissions metrics) be included in the financial
statements? If so, should such metrics be disclosed in a note or a
schedule to the financial statements? If in a schedule, should such
schedule be similar to the schedules required under Article 12 of
Regulation S-X and subject to audit and ICFR requirements? Should we
instead require the metrics to be disclosed as supplemental financial
information in a supplemental schedule? If so, should such supplemental
schedule be subject to assurance or ICFR requirements?
    91. Under the proposed rules, PCAOB auditing standards would be
applicable to the financial statement metrics that are included in the
audited financial statements, consistent with the rest of the audited
financial statements. What, if any, additional guidance or revisions to
such standards would be needed in order to apply PCAOB auditing
standards to the proposed financial statement metrics? For example,
would guidance on how to apply existing requirements, such as
materiality, risk assessment, or reporting, be needed? Would revisions
to the auditing standards be necessary? What additional guidance or
revisions would be helpful to auditors, preparers, audit committee
members, investors, and other relevant participants in the audit and
financial reporting process?
    92. Would it be clear that the climate-related financial statement
metrics would be included in the scope of the audit when the registrant
files financial statements prepared in accordance with IFRS as issued
by the IASB? Would it be clear that the proposed rules would not alter
the basis of presentation of the financial statements as referred to in
an auditor's report? Should we amend Form 20-F, other forms, or our
rules to clarify the scope of the audit or the basis of presentation in
this context? For example, should we amend Form 20-F to state
specifically that the scope of the audit must include any notes
prepared pursuant to Article 14 of Regulation S-X? What are the costs
for accounting firms to provide assurance with respect to the financial
statement metrics? Would those costs decrease over time?

G. GHG Emissions Metrics Disclosure

1. GHG Emissions Disclosure Requirement
a. Overview
    In addition to the other proposed climate-related disclosures, the
proposed rules would require a registrant to disclose its GHG emissions
for its most recently completed fiscal year.\386\ As institutional
investors and other commenters have indicated, GHG emissions
information is important to investment decisions for various reasons,
including because GHG emissions data is quantifiable and comparable
across industries and can be particularly useful in conducting a
transition risk analysis; \387\ it can be used to evaluate the progress
in meeting net-zero commitments and assessing any associated risks;
\388\ and it may be relevant to investment or voting decisions because
GHG emissions could impact the company's access to financing, as well
as its ability to reduce

its carbon footprint in the face of regulatory, policy, and market
constraints.\389\ Thus, while the justifications for the proposed GHG
emissions disclosures overlap in some respects with the justifications
for the other proposed climate-related disclosure rules, the GHG
emissions requirements are intended to address separate challenges and
are supported by the particular justifications discussed in detail in
the following sections.
---------------------------------------------------------------------------

    \386\ See proposed 17 CFR 229.1504(a). As discussed below, the
proposed rules would also require a registrant to disclose its GHG
emissions for the historical fiscal years included in its
consolidated financial statements.
    \387\ See, e.g., infra note 432 and accompanying text.
    \388\ See, e.g., infra, note 433 and accompanying text.
    \389\ See, e.g., infra note 455 and accompanying text.
---------------------------------------------------------------------------

    The proposed rules would establish certain requirements regarding
the measurement and reporting of GHG emissions that would promote the
comparability of such disclosure. We have based the proposed GHG
emissions disclosure rules on the concept of scopes, which are
themselves based on the concepts of direct and indirect emissions,
developed by the GHG Protocol. We also have proposed definitions of
Scope 1, Scope 2, and Scope 3 emissions that are substantially similar
to the corresponding definitions provided by the GHG Protocol.
Commenters indicated that the GHG Protocol has become the leading
accounting and reporting standard for GHG emissions.\390\ By sharing
certain basic concepts and a common vocabulary with the GHG Protocol,
the proposed rules should help limit the compliance burden for those
registrants that are already disclosing their GHG emissions pursuant to
the GHG Protocol.\391\ Similarly, to the extent that registrants elect
to follow GHG Protocol standards and methodologies, investors already
familiar with the GHG Protocol may also benefit.
---------------------------------------------------------------------------

    \390\ See supra note 112 and accompanying text.
    \391\ In addition, as discussed in Section II.G.2.d, the
proposed rules would permit a registrant, if actual reported data is
not reasonably available, to use a reasonable estimate of its GHG
emissions for its fourth fiscal quarter, together with actual,
determined GHG emissions data for the first three fiscal quarters,
as long as the registrant promptly discloses in a subsequent filing
any material difference between the estimate used and the actual,
determined GHG emissions data for the fourth fiscal quarter. See
proposed 17 CFR 229.1504(e)(4)(i). This proposed provision should
also help mitigate the GHG emissions compliance burden for
registrants.
---------------------------------------------------------------------------

    The proposed rules would define ``greenhouse gases'' as carbon
dioxide (``CO2''); methane (``CH4''); nitrous
oxide (``N2O''); nitrogen trifluoride (``NF3'');
hydrofluorocarbons (``HFCs''); perfluorocarbons (``PFCs''); and sulfur
hexafluoride (``SF6'').\392\ The greenhouse gases included
in the proposed definition reflect the gases that are currently
commonly referenced by international, scientific, and regulatory
authorities as having significant climate impacts. In addition to being
consistent with the GHG Protocol,\393\ the list of constituent
greenhouse gases would be consistent with the gases identified by
widely used frameworks, such as the Kyoto Protocol, the UN Framework
Convention on Climate Change, the U.S. Energy Information
Administration, and the EPA.\394\
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    \392\ See proposed 17 CFR 229.1500(g).
    \393\ In Feb. 2013 the GHG Protocol amended the required
greenhouse gas inventory list to align with the seven gases required
by the Kyoto Protocol (consistent with the proposed definition of
greenhouse gases). See GHG Protocol, Required Greenhouse Gases in
Inventories: Accounting and Reporting Standard Amendment (Feb.
2013), available at https://www.ghgprotocol.org/sites/default/files/ghgp/NF3-Amendment_052213.pdf. Nevertheless, the GHG Protocol's
Corporate Accounting and Reporting Standard, which was updated in
2015, continues to refer to only six greenhouse gases. We believe
the common understanding of the GHG Protocol's Corporate Accounting
and Reporting Standard is that the earlier amendment (reflecting
seven gases) applies despite the subsequent 2015 update to the
standard.
    \394\ See UN Framework Convention on Climate Change
(``UNFCCC'')--Reporting requirements (last visited Nov. 4, 2021),
available at https://unfccc.int/process-and-meetings/transparency-and-reporting/reporting-and-review-under-the-convention/greenhouse-gas-inventories-annex-i-parties/reporting-requirements. The Kyoto
Protocol is the international agreement linked to the UNFCCC. See
also U.S. Energy Information Administration--Where greenhouse gases
come from (last updated May 21, 2021), available at https://www.eia.gov/energyexplained/energy-and-the-environment/where-greenhouse-gases-come-from.php; and EPA--Overview of Greenhouse
Gases (last visited Nov. 4, 2021), available at https://www.epa.gov/ghgemissions/overview-greenhouse-gases.
---------------------------------------------------------------------------

    The proposed rules would define GHG emissions to mean direct and
indirect emissions of greenhouse gases.\395\ Pursuant to the proposed
definition of GHG emissions, direct emissions are GHG emissions from
sources that are owned or controlled by a registrant,\396\ whereas
indirect emissions are GHG emissions that result from the activities of
the registrant, but occur at sources not owned or controlled by the
registrant.\397\ Similar to the GHG Protocol, the proposed rules would
define: \398\
---------------------------------------------------------------------------

    \395\ See proposed 17 CFR 229.1500(h).
    \396\ See proposed 17 CFR 229.1500(h)(1).
    \397\ See proposed 17 CFR 229.1500(h)(2).
    \398\ Sources of emissions can include transportation,
electricity production, industrial processes, commercial and
residential use, agriculture, and land use changes (including
deforestation). See, e.g., EPA, Sources of Greenhouse Gas Emissions,
available at https://www.epa.gov/ghgemissions/sources-greenhouse-gas-emissions.).
---------------------------------------------------------------------------

     Scope 1 emissions as direct GHG emissions from operations
that are owned or controlled by a registrant; \399\
---------------------------------------------------------------------------

    \399\ See proposed 17 CFR 229.1500(p).
---------------------------------------------------------------------------

     Scope 2 emissions as indirect GHG emissions from the
generation of purchased or acquired electricity, steam, heat, or
cooling that is consumed by operations owned or controlled by a
registrant; \400\ and
---------------------------------------------------------------------------

    \400\ See proposed 17 CFR 229.1500(q).
---------------------------------------------------------------------------

     Scope 3 emissions as all indirect GHG emissions not
otherwise included in a registrant's Scope 2 emissions, which occur in
the upstream and downstream activities of a registrant's value
chain.\401\ Upstream emissions include emissions attributable to goods
and services that the registrant acquires, the transportation of goods
(for example, to the registrant), and employee business travel and
commuting. Downstream emissions include the use of the registrant's
products, transportation of products (for example, to the registrant's
customers), end of life treatment of sold products, and investments
made by the registrant.
---------------------------------------------------------------------------

    \401\ See proposed 17 CFR 229.1500(r).
---------------------------------------------------------------------------

    As previously noted, the EPA uses the concept of scopes, and refers
to the GHG Protocol, when providing guidance to companies regarding
their GHG emissions inventories.\402\ Because GHG emissions data
compiled for the EPA's own GHG emissions reporting program would be
consistent with the GHG Protocol's standards, and thus with the
proposed rules, a registrant may use that data in partial fulfillment
of its GHG emissions disclosure obligations pursuant to the proposed
rules.
---------------------------------------------------------------------------

    \402\ See supra note 113. The EPA requires the disclosure of
direct GHG emissions primarily from large industrial sources as well
as emissions from fuel and industrial gas suppliers and
CO2 injection sites in the United States. See EPA,
Greenhouse Gas Reporting Program, available at https://www.epa.gov/ghgreporting.
---------------------------------------------------------------------------

    The proposed rules would require a registrant to disclose its total
Scope 1 emissions separately from its total Scope 2 emissions after
calculating them from all sources that are included in the registrant's
organizational and operational boundaries.\403\ A registrant would also
be required to disclose separately its total Scope 3 emissions for the
fiscal year if those emissions are material, or if it has set a GHG
emissions reduction target or goal that includes its Scope 3
emissions.\404\ For each of its Scopes 1, 2, and 3 emissions, the
proposed rules would require a registrant to disclose the emissions
both disaggregated by each constituent greenhouse gas (e.g., by carbon
dioxide

(CO2), methane (CH4), nitrous oxide
(N2O), nitrogen trifluoride (NF3),
hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur
hexafluoride (SF6)) and in the aggregate.\405\ By requiring
the disclosure of GHG emissions both disaggregated by the constituent
greenhouse gases and in the aggregate, investors could gain decision-
useful information regarding the relative risks to the registrant posed
by each constituent greenhouse gas in addition to the risks posed by
its total GHG emissions by scope. For example, if a government targets
reduction of a specific greenhouse gas, knowing that a registrant has
significant emissions of such gas would provide insight into potential
impacts on the registrant's business.\406\ Because measuring the
constituent greenhouse gases is a necessary step in calculating a
registrant's total GHG emissions per scope, the proposed disaggregation
by each constituent greenhouse gas should not create significant
additional burdens.
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    \403\ See proposed 17 CFR 229.1504(b)(1). We discuss the setting
of a registrant's organizational and operational boundaries in
Section II.G.2. below.
    \404\ See proposed 17 CFR 229.1504(c)(1). As discussed in
greater detail below, for many companies, these emissions may be
material for assessing the companies' exposure to climate-related
risks, particularly transition risks, and their strategy to reduce
their carbon footprint in the face of regulatory, policy, and market
constraints. See infra Section II.G.1.b.
    \405\ See proposed 17 CFR 229.1504(a)(1).
    \406\ For example, the White House has recently launched an
initiative to reduce methane emissions in the United States. See the
White House Office of Domestic Climate Policy, U.S. Methane
Emissions Reductions Action Plan (Nov. 2021), available at https://www.whitehouse.gov/wp-content/uploads/2021/11/US-Methane-Emissions-Reduction-Action-Plan-1.pdf.
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    Consistent with the GHG Protocol, the proposed rules would require
a registrant to express each scope of its GHG emissions in terms of
carbon dioxide equivalent (``CO2e'').\407\ CO2e
is the common unit of measurement used by the GHG Protocol to indicate
the global warming potential (``GWP'') \408\ of each greenhouse gas,
expressed in terms of the GWP of one unit of carbon dioxide
(CO2).\409\ Requiring a standard unit of measurement for GHG
emissions, rather than different units of measurement for the different
greenhouse gases, should simplify the disclosure for investors and
enhance its comparability across registrants with different types of
GHG emissions.
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    \407\ See id.
    \408\ The proposed rules would define global warming potential
to mean a factor describing the global warming impacts of different
greenhouse gases. It is a measure of how much energy will be
absorbed in the atmosphere over a specified period of time as a
result of the emission of one ton of a greenhouse gas, relative to
the emissions of one ton of carbon dioxide (CO2). See
proposed 17 CFR 229.1500(f).
    \409\ See proposed 17 CFR 229.1500(d).
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    For all scopes of GHG emissions, the proposed rules would require a
registrant to disclose GHG emissions data in gross terms, excluding any
use of purchased or generated offsets.\410\ Because the value of
offsets can vary depending on restrictions that are or may be imposed
by regulation or market conditions, disclosing GHG emissions data in
this manner would allow investors to assess the full magnitude of
climate-related risk posed by a registrant's GHG emissions and the
registrant's plans for managing such risk. This proposed approach also
is consistent with the approach taken by the GHG Protocol.\411\
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    \410\ See proposed 17 CFR 229.1504(a)(2). The proposed rules
would define carbon offsets to represent an emissions reduction or
removal of greenhouse gases in a manner calculated and traced for
the purpose of offsetting an entity's GHG emissions. See proposed 17
CFR 229.1500(a).
    \411\ See GHG Protocol, Corporate Accounting and Reporting
Standard, Chapter 9.
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    Commenters generally supported requiring disclosure of a
registrant's Scope 1 and Scope 2 emissions, with many also supporting
disclosure of Scope 3 emissions.\412\ A common reason asserted by
commenters for requiring GHG emissions disclosure is that quantitative
data, such as GHG emissions data, is useful for assessing a
registrant's exposure to climate-related risks and accordingly its
ability to transition to a lower carbon economy.\413\ Investors that
are currently using GHG emissions data do so because the data provides
insight into a registrant's exposure to climate-related risks, and
transition risks in particular--risks that have implications for a
registrant's financial condition and results of operations.\414\ An
increasing number of investors have identified GHG emissions as
material to their investment decision-making and are either purchasing
this information from third-party providers or engaging with companies
to obtain the information directly. In each situation, there is a lack
of consistency, comparability, and reliability in those data that our
proposal seeks to address.\415\
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    \412\ See, e.g., letters from Actual Systems, Inc.; Adobe Inc.;
AICPA; Curt Albright (June 13, 2021); AllianceBernstein; Alphabet et
al.; Amalgamated Bank; Americans for Financial Reform Education
Fund; Andrew Behar; Apple; Ted Atwood; Baillie Gifford; Bank of
America Corporation; BlackRock; Bloomberg, LP; Blueprint Financial;
BNP Paribas; Rob Bonta, California Attorney General et al.; Boston
Common Asset Management; BSR; CalPERS; CALSTRS; Calvert Research and
Management; Carbon4 Finance (June 14, 2021); Carbon180 (June 13,
2021); Carbon Tracker Initiative; Cardano Risk Management Ltd.;
Carolyn Kohoot; CDP NA; Center for American Progress; Center for
Climate and Energy Solutions; Center for Law and Social Policy and a
New Deal for Youth (June 15, 2021); Ceres et al.; Certified B
Corporations; Chevron; Christopher Lish; Clean Yield Asset
Management; Climate Advisers; Climate Governance Initiative Climate
Risk Disclosure Law and Policy Lab; Climate Policy Ocean Conservancy
(June 14, 2021); Coalition on Material Emissions Transparency
(COMET) (June 10, 2021); Confluence Philanthropy; Consumer
Federation of America; Crake Asset Management (June 4, 2021); Credit
Suisse (June 11, 2021); Daniel Cain; Katherine DiMatteo; Domini
Impact Investments LLC; Douglas Hileman Consulting, LLC; Dow (June
4, 2021); Dynamhex Inc.; Energy Infrastructure Council (June 14,
2014); Environmental Bankers Association; E2; E3G; ERM CVS; Etsy,
Inc.; FAIRR Initiative; First Affirmative Financial Network;
Regenerative Crisis Response Committee; the Forum for Sustainable
and Responsible Investment; Friends of the Earth, Amazon Watch, and
RainForect Action Network; Generation Investment Management LLP
(June 14, 2021); Georgetown Climate Center (June 14, 2021); George
S. Georgiev; Emmanuelle Haack; Hannon Armstrong; Hermes Equity
Ownership Services Limited; HP, Inc.; IHS Markit; Impact Investors,
Inc.; Impax Asset Management; Institute for Governance and
Sustainable Development; Institute for Market Transformation;
Interfaith Center on Corporate Responsibility; International
Corporate Governance Network; Invesco; Investment Consultants
Sustainability Working Group-U.S.; Investor Advocates for Social
Justice (June 14, 2021); Janice Shade (June 22, 2021); Japanese
Bankers Association; Keramida et al.; Majedie Asset Management;
Manifest Climate; Mercy Investment Services, Inc.; Microsoft
Corporation; Miller/Howard Investments; Mirova US LLC; Morningstar,
Inc.; MSCI Inc.; Natural Resources Defense Council; NEI Investments;
Newground Social Investment (June 14, 2021); New York City
Comptroller; New York State Society of Certified Public Accountants;
Nia Impact Capital (June 14, 2021); Norges Bank Investment; NY State
Comptroller; Oxfam America (June 13, 2021); Paradice Investment
Management; PayPal Holdings, Inc.; Pension Investment Association of
Canada (June 14, 2021); Michael S. Pieciak, Vermont Commissioner of
Financial Regulation (June 14, 2021); PRI (Consultation Response);
Private Equity Stakeholder Project (June 14, 2021); Public Citizen
and 57 other signatories (June 14, 2021); Publish What you Pay (US)
(June 13, 2021); Revolving Door Project; RMI; Salesforce.com, Inc.;
SASB; Schroder Investment Management North America (June 14, 2021);
Seventh Generation Interfaith, Inc.; State Street Global Advisors;
Maria Stoica; Stray Dog Capital; Sunrise Bay Area; Sustainable
Inclusive Solutions (June 13, 2021); Terra Alpha Investor Group; the
organization Green America and 14,600 Individual Americans (June 14,
2021); TotalEnergies; Trillium Asset Management; Union of Concerned
Scientists (June 14, 2021); Unovis Asset Management (June 11, 2021);
Value Balancing Alliance; Vert Asset Management LLC; Wellington
Management Co.; Wespath Benefits and Investments; William and Flora
Hewlett Foundation; W.K. Associates, Inc. (June 14, 2021); World
Benchmarking Alliance; and WBCSD.
    \413\ See, e.g., letters from Calvert Research and Management;
Ceres et al.; NY State Comptroller; and SASB.
    \414\ See, e.g., letters from Bloomberg, LP (stating that GHG
emissions are critical components of any climate-related financial
disclosure scheme, and that understanding the emissions
contributions of a company is an important factor for understanding
how financially vulnerable they may be to shifts in regulation,
technology, and markets during any transition to a lower-carbon
economy); CalPers (indicating the use of GHG emissions data by asset
managers to evaluate potential transition risks); and Credit Suisse
(supporting mandatory disclosure of Scopes 1, 2, and 3 emissions for
key industries as such information is critical for financial market
participants to have a better understanding of their total climate-
related exposure to the highest emitting sectors).
    \415\ See, e.g., letters from CALSTRS (indicating the use by
asset managers of third-party derived climate data, the expense and
lack of consistency regarding such data, and the need for publicly
available climate data so that the commenter may more efficiently
and cost-effectively allocate capital to lower climate risk assets
in line with its investment objectives); Credit Suisse (stating that
the lack of consistent and reliable climate-related data has created
significant challenges in the ability of financial market
participants to adequately assess and compare the performance of
reporting companies, as well as efficiently allocate capital towards
low-carbon solutions); and Norges Bank Investment Management
(indicating their reliance on companies' climate-related data to
assess their exposure to the effects of climate and how they manage
climate-related risks and opportunities, and stating that the scope
and quality of companies' climate-related disclosures varies
significantly and that their climate-related data is often
incomplete and/or not comparable).

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    Some of these commenters supported requiring disclosure of Scope 1
emissions at the individual greenhouse gas level.\416\ Although
commenters noted an increase in the voluntary reporting of climate-
related disclosure, several also stated that significant gaps remain in
the disclosure, particularly regarding Scope 3 emissions, which, for
certain industries, can comprise a majority of GHG emissions.\417\
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    \416\ See, e.g., letters from Amazon Watch and Rainforest Action
Network; Dimensional; Friends of the Earth; and ICCR.
    \417\ See, e.g., letters from Ceres (``In land-intensive
sectors, deforestation, forest degradation, and land-use change are
important financial risks associated with climate change. In these
sectors--for example food and forest management--currently Scope 3
GHG emissions are not regularly disclosed, despite comprising
upwards of 90% of emissions from companies.''); see also letters
from Apple (stating that Scope 3 emissions ``represent the
overwhelming majority of most companies' carbon footprint and are