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The SEC Seeks to Expand Scope of Required Climate Risk Disclosures

March 22, 2022

Publicly traded companies would have to provide detailed information about potential financial risks related to climate change and greenhouse gas (GHG) emissions (with varying levels of detail and assurance depending upon a company’s status and size), under a proposal the Securities and Exchange Commission (SEC) issued for public comment on March 21, 2022. For example, if finalized in its current form, the proposal would require disclosure of information about how climate change could impact a business’s strategy and outlook, processes for managing climate-related risks, the impact of climate-related events on the company. Notably, the proposal requires disclosure of direct GHG emissions (i.e., “Scope 1”), indirect GHG emissions from the purchase of electricity or other energy sources ( i.e., “Scope 2”), and, in some situations, indirect GHG emissions from both upstream and downstream sources (i.e., “Scope 3”). As summarized in a related fact sheet, the SEC proposal would also require that, if a company has identified a GHG emission-reduction goal, it disclose information about how it intends to reach that goal and report on its progress toward the same—a common target of “greenwashing” claims that have increased of late.

As outlined during the webcast, the SEC proposes requiring public companies to disclose climate-related financial risks and GHG emissions to varying degrees of specificity, with varying levels of attestation, depending upon a company’s status and size. Informed by such existing frameworks and tools as the Task Force on Climate-related Financial Disclosures (TCFD) and the GHG Protocol, the proposal is intended to standardize reporting regarding the risks posed by climate change, as well as enhance the comparability and reliability of information that some companies may already be making public. Significantly, the proposal highlights the recent increase in “net-zero” targets, and requires that if companies are making such claims, they also explain to investors how they are attempting to achieve those targets, on what time horizon, and whether they are using carbon offsets to do so, among other information. These requirements would be phased in over time and would exempt small entities from certain provisions. The proposal also includes a safe-harbor provision for Scope 3 emission disclosures (i.e., protection from liability), in recognition of the difficulty of verifying such information.

This proposal carries with it a certain amount of controversy. There are those—including some in the SEC—who had been skeptical about the need for such disclosures, or even the authority and the ability of the SEC to craft a rule governing climate-related disclosures. And yet others maintained that a more specific, mandatory disclosure framework is necessary to ensure a consistent approach by issuers and provide decision-useful information to investors. 

These competing views were on display during the meeting preceding the vote. Chair Gensler, Commissioner Lee, and Commissioner Crenshaw all expressed support for the proposal. Chair Gensler highlighted that investors with a total of $130 trillion in assets under management are requesting disclosures about climate risk, and identified numerous countries that are already requiring similar disclosures. On the other hand, Commissioner Pierce’s lengthy statement in opposition to the proposal previews likely challenges to the rule. For example, she expresses concern that the SEC lacks the statutory authority to promulgate a rule that demands information exceeding what the company itself may deem to be material. Additionally, she warned that she thought the proposal could even risk running afoul of the First Amendment’s limits on compelled speech.

This proposal builds upon an interpretation the SEC issued in 2010 clarifying when and how companies should characterize climate change-related risks as “material” as part of their required securities filings. Over the past year, SEC leadership has signaled that, in its view, the current approach to climate disclosure is inadequate, leaving too much discretion to businesses and that a mandatory disclosure framework is needed to ensure investors understand the range of risks climate change poses to businesses. For example, just over a year ago the SEC announced the creation of a Climate and ESG Task Force in its enforcement division that would enhance efforts to identify potential misconduct such as material gaps and misstatements in disclosures of financial risks related to climate change. Shortly thereafter, on March 15, 2021, then-Acting Chair Allison Herren Lee announced a request for public input on whether current disclosure requirements adequately inform the public of climate-related risks. The SEC received thousands of comments in response, and much ink was spilled opining on how the SEC should, or should not, proceed to require such disclosures. Later in 2021, the SEC issued letters to certain companies asking for information about how they are complying with the 2010 interpretation regarding material risk.

As an independent agency, the SEC is not subject to the Biden Administration’s executive orders requiring agency heads to consider climate change and environmental justice as central to their regulatory, programmatic, and enforcement activities. Nonetheless, the SEC’s proposal complements efforts taken by the Biden Administration to satisfy demand for companies, public and private, large and small, to increase the amount of information they disclose regarding ESG (environment, social, and governance) factors. For example, the Biden Administration early on indicated that it would be putting the weight of the federal government behind a push to disclose climate-related risks, in particular. On May 20, 2021, President Biden issued an executive order directing the Treasury Department (both as a standalone department and as head of the Financial Stability Oversight Council), the Office of Management and Budget, and other agencies to evaluate and incorporate consideration of climate-related financial risk into the government’s purchasing, lending, and financial sector oversight activities. And agencies from the Department of Defense to the General Services Administration followed suit, seeking input on potential amendments to the Federal Acquisition Regulation that could require not only disclosures of GHG emissions and climate-related financial risk, but also that suppliers set science-based emission reduction targets. The Biden Labor Department also reversed course on Trump Administration rules concerning how ESG factors and climate risks should be considered as part of investment decisions for ERISA-covered retirement plans.

Comments on the rule are due 30 days after publication of the proposal in the Federal Register, or May 20 (60 days after issuance), whichever is later. Whether or not the SEC finalizes this rule, the demand for climate-related financial risk disclosure is unlikely to abate. And, to be sure, any final rule promulgated by the SEC is likely to be mired in litigation in the near-term. But simply by putting down a marker and articulating what it believes to be a workable standard, the SEC has already changed the landscape for public companies, and quite possibly beyond, as markets and market participants grapple with what it means to quantify and disclose climate-related financial risk. Our global ESG advisory team is well-positioned and ready to assist companies in evaluating the implications of this proposal and next steps.

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Thomas A. Hanusik
Partner – Washington, D.C.
Phone: +1.202.624.2530
Email: thanusik@crowell.com
Elizabeth B. Dawson
Counsel – Washington, D.C.
Phone: +1.202.624.2508
Email: edawson@crowell.com
Byron R. Brown
Senior Counsel – Washington, D.C.
Phone: +1.202.624.2546
Email: bbrown@crowell.com
Jeff Severson
Counsel – Denver
Phone: +1.212.895.4313
Email: jseverson@crowell.com