On March 21, 2022, the SEC, by a 3-1 vote along party lines, approved the issuance of proposed rule changes that, if adopted, would require all registered companies, including foreign issuers, to make specified disclosures related to climate change and greenhouse gas emissions in their registration statements and in annual SEC filings (such as reports on Form 10-K). As discussed below, the proposed disclosure requirements have already provoked significant commentary. The SEC’s 534-page proposed rule release can be found here. The SEC’s fact sheet about the proposed rules can be found here. The SEC’s March 21, 2022 press release about the proposed rules can be found here.
The proposed rule amendments are, according to the SEC’s fact sheet about the rules, “similar” to disclosures that some companies already provide based on prior proposed disclosure frameworks such as those of the Task Force on Climate-Related Climate Disclosures and the Greenhouse Gas Protocols. As the fact sheet summarizes, the proposed rule amendments, which are applicable to both domestic and foreign registrants, address five basic areas of information:
- Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy, and outlook, over the short-, medium- and long-term;
- The registrant’s governance of climate change risks and relevant risk management processes;
- The registrant’s greenhouse gas (“GHG”) emissions, which for accelerated and large accelerated filers would be subject to audit processes;
- Certain climate-change related financial statement metrics and related disclosures in a note to audited financial statements; and
- Information about climate-related targets and goals, and transition plan, if any.
Among other things, the rules also require disclosure of the impact of climate-related events (severe weather events and other natural conditions).
With respect to GHG, the guidelines would require not only the company’s own direct GHG emissions (Scope 1), but indirect emissions from purchased electricity and other forms of energy (Scope 2). The guidelines would also require disclosures relating to emissions in the company’s supply chain and by its consumers (Scope 3) at least for some larger companies. The proposed rules include a proposed exemption from Scope 3 reporting requirements for some smaller reporting companies. (According to the Wall Street Journal, most companies in the S&P 500 would likely have to include Scope 3 disclosures.) The proposed rules also contain a supposed safe harbor for Scope 3 reporting.
The proposed rules “are intended to enhance and standardize climate-related disclosures to address … investor needs.” The proposed rules, it is hoped, will “help issuers to more efficiently and effectively disclose these risks, which would benefit both investors and issuers.”
The proposed rule amendments are now subject to public comment. The comment period will remain open for 30 days after publication in the Federal Register, or 60 days after the date of issuance and publication on sec.gov, whichever period is longer.
The rules, should they be put into effect, would be subject to a detailed staging-in schedule. Assuming very optimistically, a December 2022 effectiveness date, the rules would begin staging in for large accelerated filers at the end of fiscal year 2023 (filed in 2024), and for accelerated filers and non-accelerated filers at the end of fiscal year 2024 (filed in 2025), with later phased-in deadlines for Scope 3 disclosures.
Hester Pierce, the Commission’s lone current Republican Commissioner, published a lengthy statement dissenting from approval of the proposed rules. Among other things, she said that, in her view, the new rules would “undermine the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures. We cannot make such fundamental changes to our disclosure regime without harming investors, the economy, and this agency.” The proposed rules, she said, “tells corporate managers how regulators, doing the bidding of an array of non-investor stakeholders, expect them to run their companies.”
As Liz Dunshee points out in a post on the CorporateCounsel.net blog, the SEC’s new proposed climate change disclosure guidelines are merely the latest in a “deluge” of new proposed controls and reporting practices requirements from the SEC under the Biden Administration. Even before these latest reporting new climate change reporting rules, the current Commission had already proposed revised rules pertaining to 10b5-1 trading plans (discussed here), share buybacks, and cyber disclosure (discussed here). This wave of new rules, Dunshee suggests, indicate that “the floodgates are opening for Chair Gary Gensler’s regulatory agenda.”
Just the same, the fact that new climate change disclosure guidelines are being issued now is hardly a surprise and indeed they arguably have been a long time coming. As readers will recall, the Commission last addressed climate change disclosure in a 2010 interpretive guidance release that described how existing disclosure requirements applied to climate change. Since that time, numerous commentators and interested observers have called for more specific climate change disclosure requirements. For example, Black Rock CEO Larry Fink is among several institutional investor representatives that have called for climate change disclosures requirements. In addition, in 2021, Commissioner and former Acting Chair Allison Herren Lee called for increased focus on climate change disclosure.
Which is not to say that the new Commission’s approval of the new guidelines was not without controversy – and not just, as might be expected, between the Democratic and Republican commissioners, but even between the Democratic-majority commissioners. As Cydney Posner details on the Cooley law firm’s PubCo blog (here), the possible scope and reach of the climate change disclosure guidelines were much debated between the Democratic commissioners, particularly with respect to Scope 3 disclosure guidelines, with some commissioners apparently taking the view that Scope 3 disclosures are indispensable while others questioned whether there were reliable metrics for Scope 3 disclosures. Reportedly concerns were also raised about the difficulties and expense of obtaining necessary GHG emissions data from supply chain participants (many of whom are private companies or based outside the U.S.)
The debates that preceded the approval of the proposed rules arguably are just a preview of what may be to come. Among other things, the Republicans have indicated that they are primed to oppose the proposed rules and are rallying industry and business groups to take on the proposed rule changes.
In what arguably is an opening salvo, Jay Clayton, the SEC Chair in the Trump Administration, in an op-ed piece in yesterday’s Wall Street Journal written in conjunction with Republican congressman Patrick McHenry and entitled “The SEC’s Climate Change Overreach” (here), said that “Setting climate policy is the job of lawmakers, not the SEC, whose role is to facilitate the investment decision-making process. Companies choose how best to comply and thrive under those polices, and investors decide which business strategies to back. That approach addresses many societal issues—think vaccines—and enhances global welfare. Taking a new, activist approach to climate policy—an area far outside the SEC’s authority, jurisdiction and expertise—will deservedly draw legal challenges. What’s worse, it puts our time-tested approach to capital allocation, as well as the agency’s independence and credibility, at risk.” The WSJ itself, in a March 22, 2022 editorial, also took exception to the proposed new rules, and in particular to the proposed Scope 3 disclosure requirements.
In addition, the U.S. Chamber of Commerce issued a March 21, 2022 statement concerning the proposed new rules that “The Chamber is concerned that the prescriptive approach taken by the SEC will limit companies’ ability to provide information that shareholders and stakeholders find meaningful while at the same time requiring that companies provide information in securities filings that are not material to investors. The Supreme Court has been clear that any required disclosures under securities laws must meet the test of materiality, and we will advocate against provisions of this proposal that deviate from that standard or are unnecessarily broad.”
The proposed rules will not only have to survive political challenges, but possible legal challenges as well. Along those lines, readers may recall that challengers to the conflicts minerals disclosure rules were partially struck down on the grounds that the rules represented compelled disclosure, in violation of the First Amendment.
All of that said, given the current composition of the Commission, it seems likelier than not that some form of the current proposed rules will eventually be put into effect. This obviously will not only create potential disclosure challenges for all reporting companies (including reporting expenses implied) but could also translate to enforcement and even litigation exposures as well. The proposed guidelines, if they were to go into effect, could provide fruitful hunting grounds for plaintiffs’ lawyers seeking to hold companies and their executives liable for prior reporting deficiencies in the wake of subsequent weather events or other climate-related impacts.
Climate Change Derivative Suit Against Shell’s Board: Anyone thinking about possible climate change-related board liability exposures will want to take a look at the new action launched in the U.K. by climate activist firm ClientEarth against the Board of Directors of the oil energy giant, Shell. As discussed in ClientEarth’s March 15, 2022 press release (here), the activist firm says that its action, which it says is the first of its kind, seeks to hold Shell’s Board of Directors “liable for failing to properly prepare for the energy transition” to be required to meet the challenges of climate change.
The activist firm’s action, which alleges that Shells’ board breached its duties under sections 172 and 174 of the UK Companies Act, argues that the board “failure to properly manage climate risk to Shell means that it is breaching its legal duties.” The action seeks to “compel Shell’s Board to act in the best long-term interests of the company by strengthening Shell’s climate plans,” based on the argument that the company’s “current strategy and insufficient targets put the enduring commercial success of the company and employees’ jobs at risk,” and is harmful to the planet.
The action has only just been filed and it remains to be seen how it will succeed. The action undoubtedly will face certain legal challenges. However, it is in any event an example of the way in which activists seek to use litigation against board members as a means to try to advance their climate change agenda. The fact is that for a host of reasons companies increasingly cannot ignore climate change-related issues.