An Update on the SEC Climate Disclosure Proposal

In March 2022, the U.S. Securities and Exchange Commission (SEC) issued a new regulatory proposal that would mandate climate disclosure within financial reports. The proposal focuses specifically on how climate risks are identified, assessed, managed, and disclosed; the financial impact of severe weather and other natural events as well as transition activities; and greenhouse gas emissions (GHG). The rule was originally expected to be passed over the summer. However, the SEC ultimately extended the public comment period on the proposal until June 17, 2022, and then again issued a release on Oct. 7, 2022 (Release No. 33-11117, the “Release”) indicating that it was reopening comment periods for 11 proposed rules and a request for comment. The second extended comment period ran until Nov. 1, 2022. A technical issue with the SEC’s online submissions system impacted online comment submissions made between June 2021 and August 2022. Potential delays caused by the extended comment period might push back the ESG Proposal’s compliance dates, though companies preparing for new disclosures contemplated in the ESG Proposal should not assume the extension would have that effect (the rules were originally anticipated to phase in for large accelerated filers for fiscal year (FY) 2023 reporting and all other registrants for FY 2025 reporting (2024 for accelerated filers and 2025 for smaller reporting companies).

Will the SEC proposal be blocked in court?

Proposed US rules to allow consideration of ESG factors for managing pension funds and to require disclosure of climate-related financial risks will be a target of the new conservative majority. We can expect hearings featuring SEC Chairman Gary Gensler and executives of large asset management firms with ESG investment practices. Congress is unlikely to be able to block these rules, but it remains to be seen how far pushback will go in court.

SEC comments are largely mixed

Further uncertainty regarding the timing and scope of the climate-related disclosure requirements is expected to arise due to legal challenges to the SEC’s authority to implement them. Many commenters noted that the SEC must take into account the Supreme Court’s June 2022 ruling in West Virginia v. Environmental Protection Agency, in which the Court limited the EPA’s ability to regulate greenhouse gas emissions from power plants based on the “major questions doctrine.”

In June, the comment period closed on the SEC’s proposed rulemaking on “The Enhancement and Standardization of Climate-Related Financial Disclosures” (the Proposal). The SEC received more than 5,000 comments on the initial Proposal. Since comment periods have reopened, more comments have flooded in that take into account current events and regulatory concerns.

Letters from the extensive comment period for the SEC rules are largely mixed. Investors and NGOs are strongly in favor, trade associations and politicians are strongly against, and companies – who would be subject to the requirements – are split. Coca-Cola – which had signed the business roundtable letter against requiring scope 3 emissions reporting, came out in favor of the rule.

Arguments against the proposal say it is an abuse of the SEC’s mission and that SEC will likely be found in court to have exceeded its legal authority in trying to conduct greenhouse gas emissions regulation through an agency unrelated to that purpose (ie. climate disclosure is not financially material to business and this rule is more about the regulation of emissions rather than reporting).

Learn more about the makeup of comments from this article by the Harvard Business Review

Other News:

The U.S. Securities and Exchange Commission (SEC) charged Goldman Sachs’ asset management (GSAM) division for failing to implement and follow policies and procedures for some of its ESG funds. GSAM agreed to pay a $4 million penalty to settle the charges, without admitting or denying the SEC findings. The charges were for not having written policies in place for ESG research, and then failing to follow the policies once they were established.

How Can Your Company Prepare?

Crossing the threshold from voluntary ESG/sustainability/ and climate risk disclosure to mandatory disclosure would invoke monumental shifts in capital markets and the business-as-usual operational strategies across all industries and company sizes as the ripple effects trickle down into smaller public and private entities.

To help your company prepare, we’ve created a Guide to the 2022 SEC Climate Disclosure Rules. This extensive guide outlines and clarifies what the robust regulatory document mandates, what to expect in terms of impacts of the regulatory changes, insights into why this shift in financial and sustainability reporting is occurring, and how to prepare as a corporate entity for the future of sustainability reporting.