SEC Climate Disclosure Requirements Become More Likely

Akin Gump Strauss Hauer & Feld LLP

The U.S. House of Representatives has approved a bill backed by President Biden supporting the Corporate Governance Improvement and Investor Protection Act (the “Act”), H.R. 1187. The Act supports the Securities and Exchange Commission’s (SEC) efforts to require every public company to disclose climate-specific metrics in public financial statements. Currently, companies must only disclose climate risks in securities filings if they deem such risks “material” according to the SEC’s 2010 guidance.1 In an effort to increase transparency and standardize comprehensive environmental, social and governance (ESG) disclosures, the Act provides the SEC with, among other things, discretion to amend securities laws in order to incorporate ESG disclosure standards.

The bill requires specific climate disclosures,2 including:

  1. The identification of, the evaluation of potential financial impacts of, and any risk management strategies relating to physical and transition risks posed by climate change.
  2. A description of any established corporate governance processes and structures to identify, assess and manage climate-related risks.
  3. A description of specific actions to mitigate such risks.
  4. A description of the resilience of any strategy the public company has for addressing climate risks.
  5. A description of how climate risk is incorporated into the overall risk management strategy of the public company.

The Act also requires public companies to make additional diversity-related and employee management disclosures.

The House passed the bill by just a single vote with a handful of Democrats joining all the Republicans opposing the bill. The prospects for ESG disclosure legislation in the Senate will depend on the ability of Democrats to use the budget reconciliation process to move broad climate legislation. The budget reconciliation process would allow for passage of a bill with only Democratic support, but it is unclear if all 50 Senate Democrats would support using the budget reconciliation or whether reconciliation’s limited rules would allow for inclusion of an ESG disclosure provision.

Even without enactment of an ESG disclosure law, the SEC likely has all the authority needed to require certain ESG disclosure. SEC Chair Gary Gensler previously announced that the SEC plans to propose rules requiring public companies to provide certain human capital disclosures, which was supported by the SEC’s regulatory agenda addressing climate change initiatives released this month (discussed in more detail here3). This comes in the wake of the European Union requiring companies to disclose actual progress on their green commitments.

1 Link to SEC Guidance.

2 Link to Bill.

3 Link to AG Blog Post.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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