Today, in a 3-1 vote among deciding committee members, the Securities and Exchange Commission (SEC) voted to advance a set of proposed rules for climate-relate disclosure statements for all SEC-registered companies. The SEC decision on greenhouse gases will dramatically change how companies conduct business practices and disclose information to shareholders and the public. The changes also underscore the incredible importance of taking a measured approach to all types of advertising, marketing, ESG statements, or other information disclosures that touch on Environmental (“E”) factors, including greenhouse gas emissions (GHG).

Background On SEC and ESG

In March 2021, the SEC formed the Climate and Environmental, Social and Governance Task Force (ESG Task Force) within its Division of Enforcement. Hand in hand with the legal world’s attention on greenwashing in 2021, the SEC’s ESG Task Force was created for the sole purpose of investigating ESG-related violations. At the same time, the SEC also announced that it intended to create rules for company disclosures related to ESG factors, including climate disclosures. The goal of the SEC ESG decision is to create standardized, comprehensive disclosure requirements, making it easier for investors to compare between companies.

The SEC’s actions were well-timed, as 2021 saw an enormous increase in investor demand for ESG-related and ESG-driven portfolios. There is considerable market demand for ESG portfolios, and whether this demand is driven by institute influencers or simple environmental and social consciousness among consumers is of little importance to the SEC – it simply wants to ensure that ESG activity is being done properly, transparently and accurately.

SEC Decision On Greenhouse Gases

Today’s SEC proposed rule requires SEC-registered companies to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions.

More specifically, the proposed rules would require the following information disclosures:

1. Oversight and governance practices by the company’s board and management related to climate risks;

2. Which climate-related risks identified by the company have had or will have a “material impact” on the business, whether short-, medium-, or long-term;

3. How climate-related risks have or will affect the company’s strategy, business model, or outlook forecast;

4. Identification of the company’s processes for identifying, assessing and managing climate-related risks and whether the processes are integrated into the company’s overall risk management system or processes;

5. The impact of climate-related events and climate-transition activities on the company’s financial statements and related expenditures, as well as an estimate of the financial impact of these events or activities;

6. Scope 1 and Scope 2 GHG emissions metrics expressed in the aggregate and also disaggregated;

7. Scope 3 GHG emissions metrics, or whether the company has set a GHG emissions reduction target or goal that incudes its Scope 3 emissions. The proposed rule also creates a safe harbor for liability from Scope 3 emissions disclosures and an exemption from the Scope 3 emissions disclosure for smaller companies; and

8. The company’s climate-related targets or goals and transition plan, if any.

The proposed rule would include a phase-in period for all companies, with the compliance date dependent on the company’s filer status, and an additional phase-in period for Scope 3 emissions disclosure.

The SEC decision on greenhouse gases indicates that the proposed rule’s comment period will remain open for 30 days after publication in the Federal Register, or 60 days after the date of issuance and publication on sec.gov, whichever period is longer. The full statements on the proposed rule by Chair Gary Gensler or Commissioner Hester Pierce are available on the SEC website.

Impact On Business

Many companies already provide GHG disclosures in annual sustainability reports and in disclosures to investors; however, there is wide discrepancies among these companies in terms of what information is shared, how detailed the shared information is, and the format in which the information is shared. The SEC’s proposed rule seeks to bring all companies into uniformity in terms of GHG reporting and disclosure. Investors have played a large part in driving the change by the SEC in the proposed rule, as investors are seeking exponentially more climate and environmental related information from companies every year. Investment professionals seek this information in order to better assess and understand risks that the company has financially related to climate.

The proposed disclosure requirements will add an increased level of scrutiny on companies that are not as far along in climate-control measures and data gathering as other companies. This will in turn increase scrutiny and accountability of board members for failure to deliver measured results as compared to competitors. It could also turn the SEC into the driving agency for climate disclosure enforcement actions.

While it is possible that any final SEC rule on GHG disclosures will be challenged in court, companies must nonetheless prepare now for changes that are, at least as of now, likely in the next several months. Failure to do so would not only have impact on SEC enforcement targeting, but also may lead to governance disruption by disgruntled shareholders over board or management inaction.