Today marks the 52nd Earth Day celebration, initially commenced in 1970 as citizens around the nation, and the world, gathered to demand stronger protection for the environment: cleaner water, air and land. As in 1970, the clamoring for environmental safeguards remains robust, but the demand has significantly expanded to touch many more aspects of society, including how businesses, and people, spend money. The 2022 Earth Day theme, Invest in Our Planet, is focused on the relationship between sustainable business practices and company performance.
Climate has been a key pillar of the Biden Administration since the presidential campaign, and the Administration has been focused on pushing forward significant ESG initiatives related to climate and environmental justice. At the same time, many stakeholders are focused on the theme that climate risk is financial risk. Consistent with this theme, on March 21, 2022, the US Securities and Exchange Commission (SEC) proposed expansive new rules to enhance and standardize climate-related disclosure requirements for public companies, as discussed in WilmerHale’s client alert.
The SEC’s proposed climate-disclosure rules (“Proposed Rule”) would require companies to include certain climate-related information in registration statements and periodic reports, such as on Form 10-K, including:
- Climate-related risks and their actual or likely material impacts on business strategy and outlook.
- Governance of climate-related risks and relevant risk management processes.
- Greenhouse gas (GHG) emissions, which, for certain companies and with respect to certain emissions, would be subject to assurance. Specifically, companies would be required to disclose direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2). Additionally, disclosure of indirect emissions from upstream and downstream activities in a company’s value chain (Scope 3) would be required in certain circumstances.
- Certain climate-related financial statement metrics and related disclosures in a note to audited financial statements.
- Information about climate-related targets and goals, and transition plan, if any.
The Proposed Rule would require disclosures that are similar to those in existing frameworks, such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. Until now, though, companies have used these frameworks to present voluntary—not legally required—climate disclosures.
But even companies that already report climate information voluntarily may be surprised by the scope and detail of the SEC’s Proposed Rule, including the governance implications. From detailed emissions information to notes on financial statement line items, assembling the information called for in the Proposed Rule may require significant adjustments to internal accounting processes. The timing and format of the disclosures—on Form 10-K, for instance—will raise concerns for many companies. Further, proposed assurance requirements and the liabilities associated with SEC filings promise to bring a new level of rigor to climate disclosures. The ambitious scope of the Proposed Rule demonstrates the Biden Administration’s commitment to advancing its ESG and climate policies.
The SEC is accepting public comments on the Proposed Rule until May 20, 2022. The WilmerHale team is already advising companies on this development as they engage in the SEC rulemaking process, draft public comments, and prepare to comply with the complex climate-related disclosure requirements, should the Proposed Rule become law.
