The Securities and Exchange Commission has issued a proposed rule, which Hester Peirce, one of its commissioners, fears will make the agency the Securities and Environmental Commission. This articlecomprehensive proposalThe SEC has proposed new requirements for publicly traded companies that require disclosures of the effects of climate change on business operations, governance, and other aspects.
The long-awaited rule proposal, for which Peirce was solely responsibleAnd vocal dissenterTo amend SEC Regulations SXK and SX, it would require detailed disclosure requirements for climate-related risk that has had or is likely to have a material affect on a company’s business and finances over short, medium and longer terms. The risks to be disclosed would include the following:
How climate-related risk will impact the registrants strategy and business model as well as their outlook
The company’s processes to identify, assess, and manage climate-related risks
Oversight by the board and management of climate-related matters
The effects of climate-related risks and events on line items of registrants consolidated financial accounts.
The rule’s comment period will remain open until May 20, 2022. Companies are advised to begin the lengthy process of identifying, reviewing, and presenting climate-related risks, impacts and representations as soon as possible to ensure they are ready for the deadlines.
In a major departure of its current materiality based requirements, the SECs proposal would for many registrants require disclosure of up three scopes of GHG emission by 2026.
Scope 1 emissions are direct GHG emission from company sources like vehicles and facilities.
Scope 2 emissions refer to indirect emissions from electricity purchased or other energy sources
Scope 3 emissions refer to emissions from upstream or downstream activities within a company’s value chain. Scope 3 emissions must only be disclosed by qualified registrants if they have been materialized or if the company has set emission targets that include Scope 3 emission. There is no apparent limitation on Scopes 1 or 2.
Scope 1 and 2 emissions will be required of all companies. There is no apparent materiality requirement to limit disclosures of Scopes 1, 2 and 3. Scope 3 emissions are the most difficult to calculate. They require companies to report emissions from sources such as employee commuting and leased assets, as well the use and disposal of products sold customers. This burden could be reduced by exempting smaller reporting businesses from the requirement as defined in SEC regulations.
The proposal would require companies to disclose current GHG levels and to be accountable for their climate-related goals or targets. This is a commitment that many companies are starting to make public to stakeholders with varying degrees. Companies would have to report verifiable information about how they will achieve their climate targets in order to make climate target disclosures easier.
The proposal would also require that the company’s progress towards meeting emissions targets be documented, including certain climate-related financial statements metrics and related disclosures. This information would need to be included in a note attached to audited financial statements.
Peirce’s lengthy critique claims that the requirements would be too expensive and are a misguided effort to direct capital towards favored businesses in order to promote political and social goals. Peirce also points out that they are unnecessary as existing regulations require disclosure of climate risks.
Peirce also stated that the proposal is beyond the authority of the SEC because it would require disclosure of non-material risk and could even mandate disclosures to information protected under the First Amendment. Peirce is not alone in his objection to the proposed disclosure requirements. He sees them as a departure form the SECs commitment of materiality as the guiding principle for disclosures.
According to the SEC, disclosure requirements are largely based on theTask Force on Climate-Related Finance DisclosuresFramework and the (TCFD)Greenhouse Gas ProtocolCompanies that have used these metrics for some time would be able to comply with the rule.
The new requirements will also affect suppliers to regulated companies whose emissions must now be considered in GHG calculations. Suppliers should prepare to share this information with their customers.
Companies that have already made voluntary disclosures of climate-related information need to be aware that their reports could be subject to greater scrutiny once the rules are mandatory. These companies should consult counsel to ensure that there are no greenwashing issues for disclosures made in the past.
Consider the many comments that the SEC received regarding its March 2021 meetingRequest for public input on climate change disclosuresDue to the controversial nature of the new proposal, it is probable that the agency will be subject to a lot of criticisms. Peirces’s fears may be realized if the rule becomes the preferred new environmental agency.