On March 21, 2022, the Securities and Exchange Commission (SEC) proposed rules to significantly expand and standardize registrants’ climate-related disclosures for investors. By a 3-1 vote, the SEC proposed rules that would mandate disclosures in periodic reports and registration statements to address issues related to greenhouse gas (GHG) emissions and global climate change.  According to the majority of commissioners, the proposed rules are designed to “provide registrants with a more standardized framework to communicate their assessments of climate-related risks as well as the measures they are taking to address those risks.”

The proposed rules would require registered domestic and foreign issuers to disclose:

• The registrant’s oversight and governance of climate-related risks and risk management process
• The registrant’s climate-related risks and their actual or likely material impacts on the registrant’s business, strategy and outlook and on the registrant’s financial statements
• The impact of climate-related events on the registrant’s audited consolidated financial statements at a line-item level, as well as the climate-related estimates and assumptions used in the financial statements
• The registrant’s direct and indirect GHG emissions, with some required to obtain independent certification of the accuracy of such emission disclosures and
• Details regarding any climate-related targets and goals, climate transition plans, scenario analysis, or internal carbon price used by the registrant in connection with its climate-related risk management.

Nothing in the federal securities laws expressly authorizes the SEC to require the disclosures contemplated by the proposal. Instead, these laws generally permit the SEC to require disclosure that is “necessary or appropriate in the public interest or for the protection of investors.” One of the SEC’s chief arguments in support of its authority to impose climate-related disclosures is that many investors have expressed a desire to receive such information.

This climate-specific governance disclosure would include the process by which corporate boards exercise oversight and set targets and goals, and the role of management in assessing and managing climate-related risks. Similar to the SEC’s recently proposed cybersecurity-related guidelines, this proposal would require identification of any director with expertise in climate-related risk. This presumably is intended to encourage companies to appoint board-level climate experts.

Companies will have to account for the costs to implement the new requirements if they are ultimately approved. Internal costs associated with the proposed rule will likely be significant due to the need to build in disclosure controls and create board, management and risk processes and procedures.

The proposed rules would include a phase-in period with compliance dates dependent on the registrant’s filer status. The requirements would standardize the largely voluntary disclosure practices that many public companies have implemented over the last several years to demonstrate their commitment to sustainability.

The proposal is likely to bring opposition from organizations advocating on behalf of businesses who believe the SEC is exceeding its authority and imposing excessive costs on companies. However, companies themselves may find it difficult – at least from a public relations standpoint-to criticize the proposals publicly.

The SEC will accept public comment through at least May 20, 2022. If the proposal is adopted this year, it will apply to most public companies beginning in 2023.

For more information, Stewart M. Banner – Crystal & Giannoni-Crystal, LLC