If anyone believed that the US Securities and Exchange Commission’s (SEC) release of proposed climate change-related disclosure requirements last month might have been an isolated matter, of immediate importance only to the approximately 110 insurers that are SEC registrants, developments during the past month paint a different picture. In early April, state insurance regulators in favor of requiring insurers to provide climate risk disclosure in line with the SEC’s direction achieved only partial success; however, last week, Connecticut joined New York by proposing a comprehensive climate change regulatory framework for insurers. Meanwhile, additional guidance on climate change risk disclosure from the SEC signaled that the agency will continue to focus on the topic.

IN DEPTH

FULL NAIC PASSES ON REVISED CLIMATE DISCLOSURE SURVEY

In an unusual move, following over a year of deliberation and drafting by the National Association of Insurance Commissioners’ (NAIC) Climate and Resiliency Task Force to update and revise the NAIC’s existing climate disclosure form (the NAIC Survey) and following the vote by NAIC’s Executive Committee to approve the new version of the NAIC Survey earlier this month, NAIC leadership determined that its full membership need not discuss the NAIC Survey or vote to adopt it. Subsequent news reports, based on carefully drafted press releases from California, Washington and the NAIC itself, have stated that the NAIC acted to adopt the revised NAIC Survey.

The reality is that during the NAIC’s Plenary session on April 8, 2022, NAIC President Dean Cameron asserted that because filing the NAIC Survey is voluntary—and limited to the 15 US jurisdictions that require certain domestic insurers to submit it—there was no need for the full membership to vote on it (or even discuss it). Whether this maneuver was prompted by a widening split on climate change issues among regulators remains to be seen as the work of the Climate and Resiliency Task Force continues.

CONNECTICUT INSURANCE DEPARTMENT PUBLISHES PROPOSED CLIMATE RISK REGULATORY BULLETIN

During the NAIC’s Spring National Meeting, Connecticut Insurance Commissioner Andrew Mais announced that he expected Connecticut to follow New York’s lead by publishing proposed climate change risk regulatory guidance for insurers. (Connecticut is one of the 15 US jurisdictions that requires certain domestic insurers to file either the NAIC Survey or the Task Force on Climate-Related Financial Disclosures (TCFD) report form.) Late on April 22, 2022, the Department released its proposed bulletin addressed to insurers domiciled in Connecticut, setting forth climate change-related governance, organizational structure and risk analysis/disclosure requirements. Public comments will be accepted for one month. Once the bulletin is finalized, the Department expects that it will direct insurers to:

• “Integrate the consideration of climate risks into its governance structure at the group or insurer entity level.

• Incorporate climate risks into the insurer’s existing financial risk management.

• Appropriately disclose its climate risks and engage with the [TCFD], the NAIC Climate Risk Disclosure Survey, and other initiatives when developing its disclosure approaches.”

Affected insurers will need to implement governance and organizational structure changes by January 1, 2023.

SEC ACTION

On April 12, 2022, speaking at a virtual conference sponsored by the Coalition for Environmentally Responsible Economies (CERES), SEC Chair Gary Gensler and SEC Director of the Division of Corporation Finance Renee Jones spoke at length about the development of the proposed rules. The key takeaways from their remarks are summarized as follows:

• The proposed rules are another in a long tradition of SEC rulemaking that require issuers to provide full and fair financial and business operation disclosures so that investors can make decisions.

• Specifically, the proposed rules follow the development of risk factors in the 1960s, management discussion and analysis requirements from the 1970s, up to the SEC’s publication of its first round of climate-related disclosure guidance in 2010.

• Because issuers have been making climate-related disclosures for some time, now is appropriate to standardize communications from issuers to investors, focusing on material matters—particularly in relation to forecasts and risk factors.

• The SEC is attempting to build on what companies/issuers have already started—particularly issuers who have been using the TCFD framework—to develop clear “rules of the road” so that issuers can provide investors with consistent, comparable and decision-useful information.

• Requiring disclosure in Forms 10-K is appropriate because that’s where investors tend to look to find information relevant to their decision-making, and there are applicable controls (e.g., in SOX §302) that the SEC believes are helpful.

• Disclosures concerning greenhouse gas (GHG) emission reduction targets or transition plans (IF established by an issuer) should be accompanied by explanations as to how the issuer plans to meet those targets or fulfill their transition plan.

• Forward-looking statements with respect to emission reduction targets, transition plans, use of scenario analyses and the like should be protected by the federal Private Securities Litigation Reform Act if they are accompanied by meaningful cautionary language that explains why actual results may differ from those forecasted.

• Disclosure of the financial impacts, expenditures and estimates and assumptions relating to climate events or risks will be required in the disaggregated form if the climate-related portion of any financial statement line item exceeds 1%.

• Because Scope 1 and Scope 2 emissions involve facilities owned or activities controlled by registrants, all should be able to quantify and disclose those.

Scope 3 emission disclosures will be phased in and required only for larger companies if the emissions are material or if the issuer made commitments with respect to such emissions. Chair Gensler and Director Jones’ remarks following up on related SEC staff activity include:

Proxy Statements

At the end of March, the SEC staff wrote to two of the approximately 110 insurers registered with the SEC to advise them that proxy solicitation materials must include shareholder proposals seeking, as the SEC’s March 31, 2022, letter to one major insurer put it, to have “the Company issue a report addressing if and how it intends to measure, disclose, and reduce the GHG emissions associated with its underwriting, insuring, and investment activities, in alignment with the Paris Agreement’s 1.5° C. goal, requiring net zero emissions.” Whether shareholders will approve such proposals remains to be seen, however, these two examples are additional evidence that investors, including some of the largest fund managers, are prepared to try to require companies to disclose more—not less—about existing and future GHG emissions.

Carbon Footprints

The SEC staff is believed to be reviewing so-called “carbon footprint” disclosures by registrants. Areas of interest to SEC staff reportedly include calculation methodologies used by registrants, as well as prior public statements and other communications concerning carbon footprints.

Registrants should also recall the Division of Corporation Finance staff’s September 2021 sample comment letter on climate disclosures, available here. It will be interesting to read what registrants decide to disclose and report vis-à-vis state insurance regulatory climate disclosure “requirements” in light of the NAIC’s April 8, 2022, decision to forego both discussion and voting on the proposed revised NAIC Survey.