On March 21, 2022, the U.S. Securities and Exchange Commission (SEC) released proposed rule changes that would, if adopted, require companies that have issued securities registered with the SEC (“registrants,” including most public companies) “to disclose certain climate-related information, including information about . . . climate-related risks that are reasonably likely to have material impacts on [a] business or consolidated financial statements, and GHG [greenhouse gas] emissions metrics that could help investors assess those risks.” The proposal would also introduce requirements to include certain climate-related financial statement metrics and related disclosures in a registrant’s audited financial statements.
Specifically, the proposed rules would require disclosure of the following information:
The proposal has been touted by many, including the SEC, as a natural extension of two prior commission policies: (1) its 1982 rules requiring disclosure of business costs related to environmental impacts and (2) its 2010 Guidance, which recognized that existing reporting obligations could encompass climate-related risks. Driving this next evolution of environmental reporting mandates is the proliferation of competing voluntary disclosure frameworks, selectively implemented on a global scale, and a perceived convergence by companies and regulators around the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) in particular. Through incorporation of TCFD principles and aspects of the Greenhouse Gas Protocol (GHG Protocol), the SEC intends, as noted by Chair Gary Gensler in a March 21, 2022, press release, to “provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and . . . provide consistent and clear reporting obligations for issuers.”
But while many of the thousands of public comments submitted in response to the March 15, 2021, preliminary call for Public Input on Climate Change Disclosures reportedly supported implementing uniform climate-related disclosure rules, the proposal is not without its detractors, many of whom have raised legal objections. Chief among them is Commissioner Hester Peirce, who laid out a multipronged attack on the proposal in a statement entitled “We are Not the Securities and Environment Commission—At Least Not Yet.” Among other things, Commissioner Peirce asserts that the proposed rule “do[es] the bidding of an array of non-investor stakeholders” (“whose primary concern is something other than company financial performance”), by requiring managers to accept that climate-related risks are material to their business and make plans to mitigate them, rather than using their own judgment to identify threats to a company. By proposing “to require companies to disclose information that may not be material to them,” Commissioner Peirce warns that the SEC risks violating the First Amendment, exceeding its jurisdiction, and distorting markets, in addition to imposing significant financial burdens to demonstrate compliance with a new, highly technical set of scientific, not financial, disclosure requirements.
At the heart of the debate over the SEC’s proposal is whether a detailed compendium of climate risks is universally material to all businesses and whether requiring reporting on these risks falls within the purpose of the SEC’s enabling statute: to maintain fair and efficient financial markets. Either due to input from commenters or subsequent legal challenges—or both—the final rules will likely differ from those initially proposed and take additional time to implement. Nevertheless, companies should still use the proposal as a guide to assess how they would begin to collect and report the information that might someday be mandated, as investor-driven demands of companies and other government entities show no sign of slowing down.
Indeed, by late 2021, 733 global investors representing more than $52 trillion dollars of assets under management had joined the 2021 Global Investor Statement to Governments on the Climate Crisis that, among other things, backs mandatory climate risk disclosure requirements aligned with the TCFD recommendations. State governments, unconstrained by limited missions specified by Congress, are likewise considering a role in mandating climate risk disclosures. For example, in California, Senate Bill 260 would require new regulations directing businesses with annual revenues in excess of $1 billion to disclose independently verified Scope 1, 2, and 3 emissions data from the prior calendar year.
In short, whether through the SEC disclosure rules or other vehicles, TCFD principles and the GHG Protocol are likely to become established requirements.
When these proposed rules take effect, the demand for new and evolving services is likely to outstrip the supply of qualified compliance counselors. Further, businesses that have done nothing to prepare will find themselves needing to comply with a daunting amount of unfamiliar reporting standards. Companies should accordingly consider taking steps now to understand the TCFD framework and GHG Protocol, and to identify internal and external resources with the necessary climate-related expertise to tackle new and enhanced reporting obligations when the time comes. For a crash course in understanding the benefits and pitfalls of the SEC’s rules as proposed, and potentially viable alternatives, companies might also review the comment letters of similarly situated businesses, which the SEC accepted through mid-June 2022.
