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Keeping you in-the-know on environmental, social and governance developments

After a year of pre-proposal development, drama and general anticipation, the SEC voted yesterday to issue its proposed rules on climate disclosures. [Ed note: the link was updated to reflect the version that was amended subsequent to its adoption, then published in the Federal Register]. Unsurprisingly, the vote was Commissioners Lee and Crenshaw for, Commissioner Peirce against (with a lengthy dissent statement) and Chair Gensler of course voting for.

In addition to the general overview below, we have a series of detailed analyses of the proposal:

Summary/Highlights

The proposal weighs in at 510 pages and is comprehensive. Based on both TCFD and Greenhouse Gas Protocol regimes, it stays focused on the SEC’s existing definition/interpretation of financial materiality and doesn’t attempt to wade into double or dynamic materiality of other ESG disclosure frameworks. The SEC believes that proposing rules based on the TCFD framework and GHG protocol may facilitate achieving a balance between eliciting better disclosure and limiting compliance costs. 

In general, the proposal would require registrants to:

  • Provide the climate-related disclosure in registration statements and Exchange Act annual reports;
  • Provide the Regulation S-K mandated climate-related disclosure in a separate, appropriately captioned section of a company’s registration statement or annual report, or alternatively to incorporate that information in the separate, appropriately captioned section by reference from another section, such as Risk Factors, Description of Business, or Management’s Discussion and Analysis (“MD&A”);
  • Provide the Regulation S-X mandated climate-related financial statement metrics and related disclosure in a note to the registrant’s audited financial statements and in conformance with US accounting standards (GAAP);
  • Obtain independent third party assurance for the GHG emissions disclosure and climate-related financial disclosure;
  • Electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL; and 
  • File rather than furnish the climate-related disclosure.

When it comes to information that the proposed rules would require, registrants would need to disclose: 

  • Scopes 1 and 2 GHG emissions metrics, separately, and expressed:
    • Both by disaggregated constituent greenhouse gases and in the aggregate, and  
    • In absolute and intensity terms;
  • Scope 3 GHG emissions and intensity, if material, or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions;
  • The oversight and governance of climate-related risks by the registrant’s board and management;
  • How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term;
  • How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook;
  • The registrant’s processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes;
  • The impact of climate-related events (severe weather events and other natural conditions as well as physical risks identified by the registrant) and transition activities (including transition risks identified by the registrant) on the line items of a registrant’s consolidated financial statements and related expenditures, and disclosure of financial estimates and assumptions impacted by such climate-related events and transition activities; and 
  • The registrant’s climate-related targets or goals, and transition plan, if any.

In terms of timing/phase-in, the proposal contemplates a phase-in period that would first require compliance from the largest filers in 2024 assuming the final rule is adopted and effective by December 2022.

There is a lot of ground covered in the proposal, and this is only a high-level overview. I’ll be posting more blogs this week examining some of the details and offering commentary – including on the compliance cost estimates.

A Fact Sheet is available to accompany the full text of the proposal. The deadline for submitting comments is the later of either (a) 30 days after date of publication in the Federal Register or (b) May 20, 2022. Comments that have already been filed (as memoranda of meetings) are available here.

What Happens Now

Liz blogged yesterday on TheCorporateCounsel.net about the SEC’s rulemaking process. Like any other regulatory proposal, the climate disclosure proposal is now open for public comment. We expect there to be lots and lots of comments. The really interesting part is what happens after the public comment period closes. The SEC Staff will, of course, have to review and consider all of them and will formulate responses for the Commissioners to consider as part of the adopting release. There may be more face-to-face meetings between interested parties and Staff. The comment period may extend beyond the allotted 30 days. The Commissioners would then decide whether to consider and adopt final rules – and by that time, we may have new individuals on the roster, due to the vacancy created by former Commissioner Roisman’s departure and the planned departure of Commissioner Lee after her term expires in June and a successor is confirmed.

Some of the big regulatory process questions are:

  • How long will the Staff need to develop the final rule and the accompanying adopting release?
  • When will the Commissioners consider the adopting release?
  • If the climate disclosure rules are adopted, will the contemplated phase-in period also be adopted as-is?
  • Will a lawsuit be filed challenging the substantive provisions and/or delaying the effective date?
  • How long will any legal challenges take before they are resolved?
  • If and when the final rule is adopted, will all or part of it be remanded back to the SEC for further rulemaking as part of any legal challenge, and if so, how long will that take?
  • Will parts of the final rules remain in effect during any legal challenge?

Don’t Miss Our April 12th Webcast

Mark your calendars. On Tuesday, April 12th at 1pm Eastern, we’ll be airing a great webcast – “Parsing the SEC’s New Climate Disclosure Proposal.” This program will bring together perspectives from high-level former Corp Fin Staffers – Sidley’s Sonia Barros and MoFo’s Dave Lynn – along with Travelers’ Chief Sustainability Officer & Group General Counsel Yafit Cohn and NuStar Energy’s Executive Director of Sustainability & ESG Mike Dillinger, and yours truly.

We’ll be discussing key points that practitioners and advisors need to understand about the SEC’s proposal and climate disclosures going forward. This webcast is free for members of TheCorporateCounsel.net and PracticalESG.com. If you aren’t already a member, email sales@ccrcorp.com.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for more than 35 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting at the height of regulatory development, working across a range of disciplines. He was one of the firm’s leading environmental compliance and management… View Profile