SEC Proposal for Mandatory Climate Disclosure - Chinese ADRs should also comply

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"Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures," Gary Gensler, Chair of the SEC said. "That principle applies equally to our environmental-related disclosures."

Why mandatory Disclosure Matters

Once approved, companies would be required to provide climate-related information when they register as public companies with the SEC, and also in annual filings. Such mandatory reporting regime would be beneficial to investors to the extent that voluntary disclosures are unverifiable and possibly misleading. The proposed rules are expected to improve market efficiency and price discovery by enabling climate-related information to be more fully incorporated into asset prices. Improved efficiency could inform the flow of capital and allow climate-related risks to be borne by those who are most willing and able to bear them.

Who should disclose

Both domestic or foreign registrant (including a foreign private issuer), an issuer with a class of equity securities registered under the Exchange Act.


Registrants with operations in foreign jurisdictions where disclosure requirements are based on the TCFD’s framework for climate-related financial reporting, would face lower incremental costs. Moreover, costs may also be mitigated by the proposed transition period, which would allow firms to more gradually transition to the new reporting regime.

When to disclose
  • For large accelerated filers, fiscal year 2023 (filed in 2024);

  • For accelerated and non-accelerated filers, fiscal year 2024 (filed in 2025); and

  • For SRCs, fiscal year 2025 (filed in 2026).


  • A phase-in for all registrants, with the compliance date dependent on the registrant’s filer status;

  • An additional phase-in period for Scope 3 emissions disclosure;

  • A safe harbour for Scope 3 emissions disclosure;

  • An exemption from the Scope 3 emissions disclosure requirement for a registrant meeting the definition of a smaller reporting company (“SRC”); and

  • A provision permitting 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.

What to disclose

Content of the Proposed Disclosures:

  • Climate-related disclosure framework modelled in part on the TCFD’s recommendations & GHG Protocol:


  • The oversight and governance of climate-related risks by the registrant’s board and management;

  • How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term;

  • How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook;

  • The registrant’s processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes;

  • The impact of climate-related events (severe weather events and other natural conditions as well as physical risks identified by the registrant) and transition activities (including transition risks identified by the registrant) on the line items of a registrant’s consolidated financial statements and related expenditures,131 and disclosure of financial estimates and assumptions impacted by such climate-related events and transition activities.

  • Scopes 1 and 2 GHG emissions metrics, separately disclosed, expressed:

  • o Both by disaggregated constituent greenhouse gases and in the aggregate, and

  • o In absolute and intensity terms;

  • Scope 3 GHG emissions and intensity, if material (factor or data that would be an important factor to know for an investor, and that are reasonably likely to have a material impact on the company’s business, results of operations, or financial condition.), or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions; and

  • The registrant’s climate-related targets or goals, and transition plan, if any.


When responding to any of the proposed rules’ provisions concerning governance, strategy, and risk management, a registrant may also disclose information concerning any identified climate-related opportunities.



Challenges for ADRs

Under the proposed SEC climate disclosure rules, some Chinese ADRs are captured with Scope 3. Increasing number of companies are pursuing more ESG-related targets and activities. However, organisations should catchup on the fact that their disclosures on certain ESG issues cannot be overlooked just because they may have outdone in other areas.


For example, most of the Chinese ADRs disclosed their flying scores from charity or contributions to certain social aspects, but disclosure little about how they are reacting to other material ESG issues, especially when it comes to supply chains. Most companies are failing to engage with their stakeholders on the other end of the supply chains where most greenhouse gas emissions emitted.


While the SEC climate disclosure proposal pinpointed the needs for identify material scope 3 emissions. With limited data quality, filers might struggle to fill in the data gap when disclosing their material climate footprint. Hence, the need for transition period, especially for smaller companies. This does not grant loose ends of climate disclosures. But the opportunity to seize the valuable transition period to manage exposures for better climate disclosures and better sustainability performance.


Some of the largest ADRs (based on market cap) listed in the US under the watch of the SEC that could be affected by this new proposal:




Next step

The public will have 60 dates (or by May 20, 2022) to weigh in on the proposed rules. The rules will be phased in in stages with an additional phased-in period for Scope 3 disclosures. Companies will have to file information on climate risk in 2024 at the earliest on the 2023 fiscal year performance. Our top recommendations including:

  • Start GHG emission inventories management in align with GHG Protocols

  • Start appointing work force on collecting climate-related information based on business and industry best practices in accordance with TCFD recommendations

  • Contact GC Insights on any questions you may have to the above information



Related Materials and a fact sheet for the "SEC Proposes Rules to Enhance and Standardise Climate-Related Disclosures for Investors" can be found here: https://www.sec.gov/news/press-release/2022-46