Publicly traded companies are now scrambling to understand the proposed disclosure requirements and related legal obligations and how to mitigate potential, forthcoming litigation, appease investors, balance economic imperatives and provide reliable and honest carbon metrics. While the proposed rules are no surprise, companies must assess carefully the potential impact on their business and formulate with trusted counsel its position in response to the Commission’s proposal. This position can form the basis for public comments to the SEC on the rule, which assures a “seat at the table” in litigation over the final rule.
Fast-Approaching Comment Deadline
The SEC is seeking comments by the 30th day after the release’s publication in the Federal Register or by May 20, 2022, whichever is later. Based on the degree to which stakeholders have been anxiously awaiting the publication of the proposed amendments, and lengthy statements made by the various Commissioners regarding such amendments, it is clear that the SEC expects significant commentary and engagement from actors from all sectors of the economy. In addition to a general request for comment on any aspect of the proposed amendments, the SEC solicited comments on over 200 specific topics in the release.
The SEC will take comments into consideration before issuing a final rule to be voted on by the Commissioners. Interested companies should evaluate areas of support or concern and consider filing comments before the conclusion of the comment period and/or directing advocacy and policy-maker outreach regarding necessary changes to be made before the rule is finalized.
Stakeholders should consider weighing in before the rule is finalized to preserve their right to challenge an unacceptable final rule. Regardless of the ultimate substance of the final rule, we anticipate that it will be litigated extensively in federal court—either challenging SEC for exceeding its authority by requiring such granularity in environmental and climate change disclosures or failing to go far enough on requiring such disclosures (or both). Commissioner Hester Peirce mentioned such challenges in her remarks voting against the proposed rules, and the SEC’s release includes commentary from the SEC attempting to defend such claims.
Effective Preparation for Forthcoming Changes
In addition to commenting, U.S.-listed companies should take steps now in preparation for the adoption of any final rules, including:
- Reviewing Board and Management’s Role in Climate Oversight: Consider the board’s role in overseeing the governance and risk management of, and management’s role in assessing and managing, the company’s climate-related risks and opportunities. Consider board membership and expertise related to climate-related risks. Evaluate whether any related changes should be made to board committees or management positions, as well as committee charters.
- Evaluating Existing Disclosures: Many companies already release information about their GHG emissions and include climate-related risks and opportunities in their SEC reports and voluntary ESG or sustainability reports. Evaluate existing company disclosure and identify areas requiring lead time accounting or reporting infrastructure to comply with the proposed rules. Consider ways to leverage the methodology and processes already used to make existing climate-related disclosures portable to SEC reports.
- Revisiting Climate Goals and Net Zero Plans: Consider whether the company has developed plans and milestones for achieving previously announced climate goals and net zero plans. Where applicable, look to prominent existing target-setting and disclosure frameworks, such as CDP (formerly, the Carbon Disclosure Project) for guidance on how to make accurate and sensible climate-related disclosures, including quantifying emissions throughout the value chain, where material.
- Assessing Reporting Needs: Consider whether the company has sufficient in-house staff with relevant experience in evaluating climate-related risks and implementing related plans of action. Educate decision-makers and in-house counsel new to evaluating climate risk on how it may be material to a business, and ensure that the company considers the full range of climate-related risks, including both physical risks (e.g., loss or damage to property, sourcing and supply chain issues) and transition risks (e.g., business and regulatory changes that establish new market or legal challenges).
- Engaging Experts: Consider whether to engage additional third-party climate consultants and counsel to evaluate the company’s climate risk profile and advise on scenario analysis methodologies, annual climate-related disclosure and the eventual anticipated need to obtain an attestation report covering emissions disclosures.
- Beginning Dialogue with Auditors: Discuss the proposed amendments with your independent auditor.
This week’s release marks a significant step in the Biden administration’s transformation of the U.S. government’s response to climate change, as the administration proposes to leverage the SEC’s rulemaking authority as part of its whole of government approach to significantly enhance transparency around climate risks and claims.
For a detailed analysis on the proposed climate disclosures and the open comment period, please read Akin Gump’s “Sea Change: The SEC Makes Waves with New Proposed Climate Disclosure Rules.” If you wish to provide comments to the SEC or need help preparing for the forthcoming changes, please reach out to your relationship partner at Akin Gump or one of the authors on this post.
