The U.S. Securities and Exchange Commission issued its long-anticipated draft rulings for when publicly-traded companies need to disclose information about the impact that climate change may have on their businesses and their investors.
In a 510-page report, the SEC seeks to hold companies accountable for their role in climate change and its impact, and it gives investors more information to use in deciding where to invest their money and in shareholder voting measures.
The SEC proposal, which provides a 60-day period for outside public comment, also would require any business registered with the federal agency to disclose its risk management plans to deal with the impacts of climate change.
The biggest impact, according to legal experts, will be to corporations in the energy industry and those with a significant amount of greenhouse emissions.
“Although this represents an effort to standardize disparate practices among issuers, the proposals are sure to face criticism and legal challenges,” Winstead shareholder Toby Galloway, a former SEC trial lawyer, told The Texas Lawbook. “Much of the opposition will likely focus on the costs of compliance with the proposals, particularly for smaller entities. Other criticism could be that the SEC is wading into a political debate unrelated to its mission of protecting investors and promoting capital formation.
“Nonetheless, it is clear that many, but certainly not all, investors want these types of disclosures in making their investment decisions,” Galloway said.
The proposed rule also would require audits of its climate-related financial statement measures and information about climate-related targets and goals.
“The proposed rule would require disclosure of the company’s direct GHG emissions, known as Scope 1, as well as indirect GHG emissions from purchased electricity and other forms of energy, known as Scope 2,” Galloway said. “The proposed rule would also require disclosure of indirect emissions from upstream or downstream activities, Scope 3, if material, or if the company has set a GHG emissions target or goal that includes Scope 3 emissions.”
The Texas Lawbook has asked six legal regulatory experts who have monitored the SEC’s climate change proposals to review the SEC’s report and provide their analysis. The Lawbook will publish those comments below as they are submitted.
Maggie Peloso, lead sustainability partner at Vinson & Elkins:
“Perhaps the most significant development in today’s proposal was the Commission’s decision to proposed amendments to both regulation S-K and regulation S-X, proposing to require not only disclosure of greenhouse gas emissions and qualitative discussions of climate governance, but also notes to financial statements related to climate risks. With respect to greenhouse gas emissions, the Commission has proposed the reporting of the direct emissions from a company’s operations (scope 1) and emissions from power consumption (scope 2) in a company’s annual report. In addition, companies will need to disclose emissions from their supply chain and consumption of their products (scope 3) ‘if material.’ For many oil and gas producers, the largest portion of their greenhouse gas emissions will fall into scope 3, so careful assessment of the proposal will be required to fully assess its impact on required GHG emissions disclosures from oil and gas activities.
The other significant aspect of the Commission’s proposal are the ‘disclose if you have these’ proposals. Specifically, the Commission proposes to require companies to disclose any internal carbon prices they may use to guide decision-making. In addition, to the extent that companies have made quantitative greenhouse gas reduction pledges, including announcing Net-Zero targets, the Commission proposes to require that companies disclose their progress towards these targets and any use of offsets or REC to help meet their targets. Given the rising popularity of such pledges in the oil and gas industry, these proposals could expand the level of climate disclosure that will be required in annual reporting.”
Mike Blankenship, managing partner of Winston & Strawn’s Houston office:
“The SEC is proposing rules that ‘would require a registrant to disclose any climate-related risks reasonably likely to have a material impact on the registrant’s business or consolidated financial statements.’ While many already doing this through a sustainability report, we are now seeing the SEC asking companies to be specific on their risk. In addition, the commission is asking public companies to report their greenhouse gas emissions. The biggest issue they will face is pushback on the Scope 3 emissions, which are all other indirect emissions not accounted for in Scope 2 emissions. These emissions are a consequence of the company’s activities but are generated from sources that are neither owned nor controlled by the public company. This will be timely and costly for companies to gather the information.”
Kevin Poli, partner at Porter Hedges:
“The SEC’s current proposal is a reaction to the increased importance in recent years that the investing public has put on climate change and related risks. Although many companies have included general climate disclosure in their public filings, this proposal would be a significant step forward in terms of actual disclosure requirements. In the proposed rule, the SEC specifically referenced letters received throughout 2021 from large institutional investors looking for a more consistent framework for purposes of their investment and voting decisions. The SEC rule is intended to standardize the disclosure across public companies to accomplish these goals. The SEC framework takes elements of various investor initiatives from the past few years, with a particular focus on the recommendations of the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.
As currently proposed, the SEC would adopt a new subsection of Regulation S-K related specifically to climate disclosure, as well as a new article to Regulation S-X covering climate-related financial metrics. Companies would be asked to disclose climate risks likely to have a material impact on their business, provide specific information about their emissions from greenhouse gases, describe their internal governance policies regarding climate matters, disclose any internal targets regarding climate matters and how the company is progressing in achieve those targets, and include financial statement metrics and disclosure on a line item basis in their financial statements. Companies will also be required to obtain a third party attestation report covering their emissions disclosures. Although this is only a proposal, a version of these rules will be adopted in the coming months and many companies may have to meet these disclosure obligations as soon as 2023. If they are not already familiar, companies would be well advised to review the disclosure initiatives of Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol so that they can understand what types of information they will need to collect.”
Elisha Kobre, a partner in Bradley’s Dallas office and a former AUSA in the Southern District of New York:
“The roughly 500-page proposed new SEC rule titled ‘The Enhancement and Standardization of Climate-Related Disclosures for Investors,’ if adopted, would be a considerable expansion of the SEC’s disclosure regime and would impose significant costs on filers not fully acknowledged in the Proposed Rule. The proposed rule requires climate-related disclosures that appear to go beyond what a reasonable investor would consider “material.” Material climate-related information already needs to be disclosed under a host of other SEC regulations. The Proposed Rule goes far beyond that. As pointed out by one of the SEC Commissioners, many companies have expressly told the SEC-in response to prior requests by the SEC’s Division of Corporate Finance for greater disclosure in this area-that information that would be required under the Proposed Rule was immaterial and therefore need not be included. In that same Commissioner’s words: ‘The Commission proposes today to require companies to pull into Commission filings much of this non-investor-oriented information that is either immaterial or keyed to a distended notion of materiality that seems to turn on an embellished guess at how the company affects the environment.’
As importantly, depending on the nature of their business, some companies have more to disclose in terms of climate-related issues, and some have less. The Proposed Rule seeks to impose a level of uniformity of disclosure that doesn’t seem to take this diversity into account. As to costs, the Proposed Rule is based, in large part, on the ‘Task Force on Climate-Related Financial Disclosures’ (TCFD) Framework developed by the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system. But many of the filers that will be required to comply with the Proposed Rule have never encountered the TCFD or, if they have, pick and choose elements of the TCFD framework to follow.
Moreover, under the proposed rule, a large number of filers will be required to disclose, as so-called ‘Scope 3 emissions’ data, indirect Greenhouse Gas emissions ‘which occur in the upstream and downstream activities of a registrant’s value chain.’ These include a breathtakingly wide-range of difficult to ascertain-or perhaps even unknowable-emissions, including those attributable to goods and services that the registrant acquires, employee business travel and commuting, the use of the registrant’s products, and investments made by the registrant. Complying with the complex and-to many companies-unfamiliar framework of the TCFD, in the face of the significant uncertainty of estimating upstream and downstream emissions data, is likely to impose significant costs on filers.”
Heather Palmer, environmental and social governance partner at Sidley in Houston:
“The impact of the SEC’s proposed rule amendments concerning climate-related disclosures for public companies would be significant, if finalized. Companies that have to date limited climate-related disclosures in their SEC filings would now have to study (in depth) and clearly explain the material risks posed to their business models by climate change—and their disclosures will need to pass muster for SEC filing purposes. Such disclosure requirements also would require companies to have a credible plan for business resilience in the face of climate change in the short, medium, and long terms. New attestation requirements applicable to disclosures of Scope 1 and Scope 2 emissions would create new challenges for companies across the market that have not made these disclosures in the past.
The final form of these rules may change from what the SEC has issued today, based on comments that will be submitted during the two-month comment period as well as the inevitable litigation challenging the final rules. However, it appears that the new rules could usher in a fundamental shift in how companies assess their climate-related risks and climate impacts and how they communicate with shareholders about these and other environmental-related issues. As counsel to many public companies that would be affected by these rules, we’ve been sharpening our pencils for a while on these issues at Sidley and are hitting the ground running.”