“What Gets Measured Gets Managed” – the SEC’s Proposed Climate Change Disclosure Rule

On March 21, 2022, after a 3-1 vote, the Securities and Exchange Commission (the “SEC”) published a proposed rule that would require public companies to provide climate-related disclosures in registration statements and periodic reports. Based on its authority to promulgate disclosure requirements that are “necessary or appropriate in the public interest or for the protection of investors,” the SEC issued the proposed rule to enhance existing climate-related disclosure rules.

Content Summary of the Proposed Rule

The proposed rule adds a new Subpart 1500 to Regulation S-K (a regulation under the Securities Act of 1933 (“1933 Act”) that prescribes non-financial information to be included in registration statements and ongoing public reports) and a new Article 14 of Regulation S-X (a regulation under the 1933 Act that prescribes the form and content of financial statement requirements). Proposed Subpart 1500 of Regulation S-K would generally require a registrant to disclose “certain climate-related information, including information about its climate-related risks that are reasonably likely to have material impacts on its business or consolidated financial statements, and GHG emissions metrics that could help investors assess those risks.” Proposed Article 14 of Regulation S-X would generally require “certain climate-related financial statement metrics and related disclosure to be included in a note to a registrant’s audited financial statements.”

The proposed rule requires companies to conduct three levels or “scopes” of analysis of climate impact. This type of analysis is consistent with the way scientists consider the environmental impact of business activity.

Scopes 1 and 2 would have companies, annually, disclose the direct impact of their operations on climate change in terms of the products they make (Scope 1) and any indirect effects on the environment that come with using electricity, trucks or other vehicles (Scope 2).

Scope 3, which only affects the largest companies, is much more extensive and involves assessing all other indirect GHG emissions occurring in the company’s value chain, both upstream and downstream.

The proposed rule would require the following information:

• The oversight and governance of climate-related risks by the registrant’s board and management;
• How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook;
• The registrant’s processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes;
• The registrant’s climate-related targets or goals, and transition plan, if any;
• The impact of climate-related events (severe weather events and other natural conditions) and transition activities (including risks) on the line items of a registrant’s consolidated financial statements and related expenditures, and disclosure of financial estimates and assumptions affected by such climate-related events and transition activities;
• Scopes 1 and 2 GHG emissions metrics, separately disclosed, that includes disaggregated constituent greenhouse gases and, in the aggregate, and in absolute and intensity terms;
• Scope 3 GHG emissions and intensity, if material, or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions; and
• An attestation report covering Scope 1 and Scope 2 GHG emissions, as well as disclosures about the third party providing attestation services.

The proposed rule also provides guidance to companies regarding where to include the foregoing disclosures (e.g., MD&A section of the registration statement, note to the registrant’s audited financial statements, etc.). Finally, the SEC does mention throughout the proposed rule that as a registrant provides the above-mentioned information, it may also disclose information about any identified climate-related opportunities.

Historical Background

The SEC addressing the disclosure of material environmental issues is not new. In the early 1970’s, when environmental laws like the Clean Air Act, the Clean Water Act, and Superfund were being enacted, the SEC issued an interpretive release stating that registrants should consider disclosing in their SEC filings the financial impact of compliance with environmental laws.

The impetus behind the proposed rule lies in the Financial Stability Oversight Council’s 2021 Report which concludes that “climate-related risks have present financial consequences that investors in public companies consider in making investment and voting decisions.” The framework on which the proposed rule is modeled includes the Task Force on Climate-Related Financial Disclosures (“TCFD”)[1] and Greenhouse Gas Protocol (“GHG Protocol”)[2].

Analysis and Public Response

To the disagreement of Commissioner Pierce, the lone SEC Commission dissenter who issued a 6,000+ word rebuttal entitled, “We are Not the Securities and Environment Commission – At Least Not Yet”, the proposed rule’s underpinning is to create disclosure uniformity while subjecting affected companies to liability under the federal securities laws. Her opposition to the proposed rule primarily turns on the SEC’s rigid dictation of a one-size-fits-all structure that deviates from a traditional principles-based approach where a company determines which climate-related information is material to its business. Not to be overlooked, Commissioner Pierce also voices her concern over First Amendment issues and the cost to companies (and ultimately to public shareholders) to meet the enhanced disclosure requirements.

Conversely, in support of the proposed rule, Sen. Jack Reed told the New York Times, “There’s an old saying in business: What gets measured gets managed,” indicating his belief that by requiring companies to measure and publicize their greenhouse gas emissions, companies will take more aggressive steps to minimize their effect on the climate. (S.E.C. Considers Climate Disclosure Rule – The New York Times (nytimes.com)). However, the full quote (from journalist Simon Caulkin in 1956) is much more instructive in this matter: “What gets measured gets managed — even when it’s pointless to measure and manage it, and even if it harms the purpose of the organisation to do so.”  While it is laudable for the SEC to propose rules that would enhance and standardize climate-related disclosures so that companies can more efficiently and effectively disclose those risks, the rules should differentiate between companies for whom climate-related disclosures are material and those for whom such disclosures are not.

The public may submit comments to the SEC in response to the proposed rule within 60 days of March 21, 2022.

If you have questions as to the substance and/or potential impact of this proposed rule or want our legal assistance in drafting and submitting a public comment on your behalf, please contact Brett J. Warren or Steven M. Taber.

Brett is an Associate with Leech Tishman and a member of the firm’s Corporate Practice Group. He is based in the firm’s Pittsburgh office and can be reached at 412.261.1600 or bwarren@leechtishman.com.

Steve is a Partner with Leech Tishman and a member of Corporate Practice Group and co-lead of the Environmental Group. He is based in the firm’s Pasadena office and can be reached at (626) 395-7300 or staber@leechtishman.com.

[1]In April 2015, the Financial Stability Board established the TCFD, an industry-led task force charged with promoting better-informed investment, credit, and insurance underwriting decisions. In June 2017, the TCFD published its Recommendations on Climate-related Financial Disclosures.

[2]In 1997, the World Resources Institute and the World Business Council for Sustainable Development partnered with businesses and NGOs (non-governmental organizations) to create a standardized GHG accounting methodology that is, according to some experts, the most-widely-used global GHG accounting standard.