The SEC published in March 2022 a dauntingly complex proposal to require public companies to provide climate-related disclosures. The period for public comment on the proposal is very short, and it seems clear that a majority of the Commission is determined to proceed quickly.
The proposal is extremely ambitious, and it will place heavy new demands on public companies and the public disclosure system. We believe that moderating those demands would improve the proposal’s chances of successfully achieving its purposes.
With this in mind, we asked ourselves this question: if we could only submit five comments on the SEC proposal, what would they be? We were looking for features on which the SEC could make a change that would significantly reduce the burdens of the proposal while maintaining the SEC’s intent to promote more disclosure on climate issues. We had some trouble narrowing the list to five, so we invite readers to consider the following seven issues for comment.
- The Financial Statement Note – The proposal for note disclosure in audited financial statements is seriously flawed – the concepts are unclear, the 1% threshold is inexplicably low, the utility of the information is highly questionable, and the implications for systems and internal controls are an order of magnitude higher than for the rest of the proposal. It is an unnecessary bolt-on to the core of the proposal, which the SEC could easily drop. If the SEC maintains this proposal, it should consider raising the 1% threshold or permitting these disclosures to be unaudited.
- Attestation Requirement – Some companies already obtain some form of independent attestations of climate-related disclosures, and it seems likely that more will do so. However, not all companies are getting attestations at the “reasonable assurance” standard proposed by the SEC. Imposing an attestation requirement on all reporting companies, as the proposal would do, will turbocharge the development of a new industry that presents serious questions about cost, integrity, supervision and value to investors. The proposed phase-in period for this feature of the proposal recognizes the time, cost and burden that will be required for an independent provider to give reasonable assurance on a company’s emissions data. The SEC could drop the attestation requirement without lessening the impact of the rest of the proposal.
- Disclosure of Carbon Offsets or RECs and Internal Carbon Pricing – The proposal calls for mandatory disclosures by companies that use carbon offsets or RECs as part of their climate strategy or that maintain an internal carbon price to assess potential future costs associated with carbon-related assets. Some companies currently make these disclosures on a voluntary basis, but others may be reluctant to do so. Mandatory disclosure of expected use of carbon offsets or RECs could inflate an already growing demand for both, which would affect pricing, and mandatory disclosure of internal carbon pricing could provoke second-guessing of a company’s own internal carbon pricing calculation. By making these disclosures mandatory if a company uses these techniques, the SEC could inadvertently chill innovation by companies that would otherwise have a full arsenal of techniques to address their climate impact. The SEC should consider replacing this requirement with a more broadly-worded requirement to explain the strategy fully, acknowledging that specific details may appropriately be withheld for a variety of reasons.
- Liability Safe Harbor – If it works, the proposal will promote ESG disclosure that reconciles what the reporting-company system can produce with what investors are seeking. The complexities on both side of that equation are significant, and again, the stakes are high. Nothing about this project requires that the SEC invite plaintiff law firms to the table, to bring claims under the antifraud provisions of the securities laws. The proposal does contain a safe harbor for Scope 3 disclosure, which shows the path the SEC could follow to shelter more elements of this new disclosure ecosystem from predation, even temporarily.
- Scope 3 Disclosures – For Scope 3 emissions, disclosure standards, definitions and techniques are still evolving. The prevalence and quality of Scope 3 disclosures are improving as a result of market developments, but that is a complicated process, for which the existence of an SEC requirement might be counterproductive. Without an accepted methodology for calculating Scope 3 emissions, the disclosure that may be triggered by the SEC’s proposed rules would not further the goals of greater transparency as different companies may report based on different inputs and definitions. The SEC should consider severing this requirement from the proposal until there is more accurate methodology for calculating Scope 3 emissions.
- Multi-year Disclosures – The proposal generally requires that a company present quantitative climate-related information for three years – the most recently completed fiscal year and for the historical two years included in the consolidated balance sheet. Many companies will be developing these disclosures for the first time, and even those that have a track record will have to adjust their practices to the new rules. The SEC could amend this proposal to require quantitative climate-related information beginning with the first fiscal year for which it is being reported.
- Compliance Timeline – For large accelerated filers, the compliance date for the proposed disclosures in annual reports, other than the Scope 3 disclosure, would be fiscal year 2023 – which is fast approaching. The amount of work that will be required to collect and report the required data in a manner consistent with the proposed rule requirements is dramatic. Companies will need to implement governance enhancements, develop their climate-related infrastructure and expertise, and work with their auditors to ensure that the accounting standards are being properly applied to climate-related impacts. Auditors may also want to perform dry runs of their accounting procedures in the quarters prior to implementation of the proposed rules – in other words, later this year. Although the timeframe included in the proposal is perhaps intended to be illustrative rather than definitive, the final rule should have a more realistic compliance timeline.
We welcome input on our choices, and we plan to revise this list from time to time as the comment deadline approaches at the end of May. You may review our latest SEC thought leadership and ESG-related blog posts here.
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 We have prepared a series of three alert memos on the SEC climate proposal that you can review on our Cleary M&A and Corporate Governance Watch blog here.