In this two-part series, Jeffrey Karp, Senior Counsel, Sullivan & Worcester LLP, and Edward Mahaffey, Staff Attorney, Sullivan & Worcester LLP will discuss the status of two pending federal regulations that would require the disclosure of information concerning greenhouse gas (GHG) emissions and climate-related risks: one proposed by several agencies that would apply to federal contractors, and the other by the Securities and Exchange Commission (SEC) that would apply to public companies.
Part 1 will focus on the proposed regulations for public companies, while Part 2 will dive into the federal contractor side.
While the comment period on the FAR climate disclosure rule is ongoing, SEC’s proposed climate-related disclosure rule, issued in March 2022, remains in limbo. The proposed rule’s purpose is to protect investors by providing them with consistent and comparable information regarding climate-related risks affecting the public companies in which they may invest. Specifically, public companies must report their Scope 1 and 2, and also in some cases Scope 3, GHG emissions; explain line items in required financial statements that involve climate-related impacts and expenditures; detail the manner in which climate change is affecting or is likely to impact business operations; and provide information regarding any publicly announced climate-related targets or goals, and the manner in which its plans will be implemented. Such disclosures must be made in SEC filings, such as registration statements, annual 10-K forms, and financial reports.
More than 4,000 comments were submitted during the comment period, which ended in June 2022. Many commenters strongly expressed support for the proposed rule. However, there were some previously ardent supporters of an enhanced climate disclosure regime, such as Blackrock, who submitted detailed comments suggesting revisions to provisions in the proposed rule that were identified as overly burdensome to issuers or of questionable materiality to investors.
For example, Blackrock sought to distinguish between requiring the disclosure of Scope 1&2, and Scope 3 emissions:
. . . We support quantitative disclosure aligned with the Greenhouse Gas Protocol (“GHG Protocol”). As investors, we use GHG emissions estimates to size an issuer’s climate-related exposure. Specifically, we look to companies to provide Scope 1 and 2 GHG emissions disclosures, and meaningful short-, medium-, and long-term science-based reduction targets, where available for their sectors.
As investors, we use Scope 3 emissions as a proxy metric (among others) for the degree of exposure companies have to carbon-intensive business models and technologies. However, we do not believe the purpose of Scope 3 disclosure requirements should be to push publicly traded companies into the role of enforcing emission reduction targets outside of their control. Given methodological complexity for Scope 3 emissions and the lack of direct control by companies over the requisite data, our investors believe the usefulness of this disclosure varies significantly right now across industries and Scope 3 emission categories. . .
Accordingly, Blackrock stated that it is “generally supportive of the Commission’s proposal to require disclosure of Scope 1 and Scope 2 emissions,” but disagrees “with the Commission’s approach to requiring disclosure of Scope 3 emissions in SEC filings.”
Similarly, commenters who oppose the proposed rule challenged the materiality of Scope 3 metrics, as well as other disclosures that would be required in SEC filings, such as the inclusion of three types of climate-related information in footnotes to a company’s audited financial statements (financial impact metrics; expenditure metrics; and financial estimates and assumptions).
Also, commenters who raised materiality concerns have noted that the climate-related disclosures that the SEC is seeking to impose, such as greenhouse gas emissions data and the business risks stemming from physical impacts (e.g., severe weather events) and the transition to a decarbonized economy, are distinctly different than the financial information that the Agency traditionally required to protect investors and enable them to make informed decisions.
Although the proposed rule is focused on information disclosure, the breadth of the required disclosures seems likely to place additional pressure on both public companies and companies in their respective supply chains to intensify their GHG emission reduction activities. Thus, some opponents have contended the SEC’s rulemaking proposal exceeds the Commission’s authority under the Securities Act of 1933 and the Securities Exchange Act of 1934, and that promulgation of a rule requiring climate-related disclosures is to influence U.S. climate policy, rather than protecting investors’ financial interests.
Others questioned the need for a separate climate-related disclosure rule since there already are detailed SEC rules requiring disclosure of liabilities and risks that would encompass the disclosure of material climate change information. With regard to the disclosure of climate-related risks, the SEC issued a guidance document in 2010 that provides examples of material information, but there are no specific rules requiring such disclosures. Although the SEC required that registrants more broadly disclose environmental liabilities when amending its S-K Regulations in 2020, the Commission declined to specifically mandate the disclosure of climate-related risks because a majority of the Commissioners at the time found such directives inconsistent with the Agency’s “principles-based” approach to revising the regulations. Thus, affected companies must decide on a case-by-case basis whether any of the climate change business risks and impacts they face are sufficiently material to require disclosure under the environmental-related regulations.
The Commission in the Biden Administration has taken a proactive position in enforcing these S-K regulations. In March 2021, the SEC formed an Enforcement Division Task Force to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules. Moreover, in September 2021 the Division of Corporate Finance staff posted a sample letter highlighting the types of comments or questions it planned to send to issuers inquiring about the climate-related risk disclosures made in recent filings. Subsequently, the staff sent several rounds of letters to a number of companies seeking to button down responses to their tailored questions and comments.
Since the Agency’s expected Fall 2022 time frame for issuing a final rule has passed, speculation has arisen regarding whether the Commission is considering dropping some of the more contentious requirements or aggressive compliance timetables in the proposed rule. While changes before issuance of a final rule certainly are plausible, it is not surprising that additional time is needed to complete the rulemaking package given that the Agency staff must review and consider over 4,000 comments and prepare a responsiveness summary for the Commission’s consideration.
Nonetheless, it does not appear that support has lessened for the proposed rule among the majority of Commissioners. Since the rule was proposed in March 2022, Commissioner Lee, a rule champion, has left the SEC, but her replacement, Jaime Lizarraga, also appears to strongly support its issuance:
Investors rely extensively on financial statement disclosures to make informed investment decisions. These quantitative metrics are essential for investors to understand the operations and performance of a company, and the same can be said for climate-related metrics.
The “major question doctrine” already has been raised in comments challenging the SEC’s authority to require that public companies make the sweeping range of disclosures included in the proposed climate risk disclosure rule. Also, it can be expected that the doctrine and arguments that the agency has exceeded its authority granted by Congress will appear prominently in the D.C. Circuit briefs challenging the final rule’s validity. However, the Commission has the advantage of long being recognized as having broad authority to determine the disclosure of information that is necessary to protect investors and enable them to make informed decisions.
Please note: Additional citations can be found on Sullivan & Worcester LLP's website.
(Credit: Jeffrey Karp)Jeffrey M. Karp, Senior Counsel, Sullivan & Worcester LLP
Jeff heads Sullivan’s Environment & Natural Resources Practice Group. He assists clients in resolving complex regulatory matters and high-stakes business disputes, and engaging in transactions that involve the intersection of law, science, and technology.
Jeff represents clients on a range of environmental issues under federal and state laws, including advising on regulatory compliance, contaminated property and remediation matters, due diligence in property and corporate transactions, government investigations, and enforcement actions. He also has an impressive track record of resolving disputes short of litigation, both with respect to claims arising under a wide range of federal and state laws, and those involving private party transactions.
(Credit: Edward Mahaffey)Edward R. Mahaffey, Staff Attorney, Sullivan & Worcester LLP
Edward focuses on regulatory matters including environmental, energy, and securities law. He has co-authored numerous articles on developments in environmental and securities law for such publications as Financier Worldwide, Thomson Reuters Practical Law, and Law360, and has contributed extensively to Sullivan’s Environment & Energy Insights blog.
About Sullivan
Sullivan & Worcester (Sullivan) is a leading AmLaw 200 law firm with over 200 attorneys in Boston, London, New York, Tel Aviv and Washington, DC. Sullivan’s clients, including Fortune 500 companies and emerging businesses, rely on Sullivan’s strategic vision, comfort with complexity and intense focus on results. As a global law firm, Sullivan’s reach extends beyond the United States. Sullivan has represented clients around the world and has a deep bench for working on a variety of matters and issues affecting clients globally.
