Since the Securities and Exchange Commission (SEC) issued initial guidance in 2010, the ongoing debate on climate change has only increased demands by stakeholders for public companies to address the impacts of climate change and climate-related risks on their businesses. More than 10 years later, the SEC increased its efforts to improve the transparency, consistency and reliability of public companies' disclosures with respect to climate change and climate-related risks by, among other actions, establishing a Climate and ESG Task Force more than a year ago aimed at enforcement of climate change and ESG-related disclosures and releasing a sample comment letter identifying common questions and comments on climate-related disclosures last fall. Beyond these actions, on March 21, the SEC took a major regulatory step and issued the long-awaited proposed rule on climate-related disclosures for public companies. Some applaud the proposed rules as an opportunity for consistency, comparability and reliability in climate-related information shared by companies to investors. Others, however, view the proposed rules as a substantial burden and cost on companies and a significant shift in the existing regulatory framework. In particular note, it has been suggested that the SEC's estimates regarding the cost of compliance in the range of $490,000 to $640,000 depending on the size of the company for the first year of compliance and $420,000 to $530,000 in subsequent years, is decidedly inaccurate, suggesting that the costs would be a minimum of two—if not three—times such amounts.

Enhancement and Standardization

The SEC's proposed rule would amend Regulation S-K and Regulation S-X with the objective to "enhance and standardize registrants' climate-related disclosures for investors." The proposed amendments to Regulation S-K would require companies to include additional climate-related disclosures in their periodic reports and registration statements regarding the following, among other things:

• The oversight of climate-related risks by the board and management;
• The impact of climate-related risks on business, strategy, model, outlook and financial statements;
• The process of identifying, assessing and mitigating climate-related risks;
• The development of climate-related goals, targets and objectives;
• The establishment of a transition plan; and
• The measurement of direct (Scope 1), indirect (Scope 2) and indirect from upstream and downstream (Scope 3) greenhouse gas emissions.

The proposed amendments to Regulation S-X would require public companies to include notes to their financial statements describing the disaggregated financial metrics on climate-related risks and the methodology used to derive those metrics. In addition, the proposed amendments to Regulation S-X would require companies to provide an attestation report on the climate-related disclosures in their periodic reports. Public companies that qualify as accelerated filers or large accelerated filers must also provide, at a minimum, an attestation report for Scope 1 and Scope 2 greenhouse emissions. The attestation report must be prepared by an independent greenhouse gas attestation provider, who is an expert in the field and subject to the prevailing standards on greenhouse gas emisssions. In addition to providing the attestation report, the company would have to provide information related to the engagement of the attestation provider.

Phase-In Compliance and Comment Period

Under the proposed rule, there would be a phase-in compliance for all public companies depending on the company's filer status. For the proposed climate-related disclosures, other than Scope 3 emissions disclosures, the compliance dates for inclusion in the annual report are as follows:

• For large accelarated filers, fiscal year 2023 (filed in 2024);
• For accelerated and non-accelerated filers, fiscal year 2024 (filed in 2025); and
• For smaller reporting companies, fiscal year 2025 (filed in 2026).

With respect to the disclosures related to Scope 3 emissions, public companies would have an additional year to comply. For disclosures related to attestation reports covering Scope 1 and Scope 2 emissions, accelerated and large accelerated filers would have a one fiscal year transition period for limited assurance and a two fiscal year transition period for reasonable assurance.

The comment period for the proposed rule ends May 20. The proposed rule has already received over 5,000 comments and garnered significant attention from Congress and other political leaders. For example, several U.S. senators issued letters and statements supporting the rule, with some even advocating for the requirement of additional disclosures on corporate lobbying activities related to climate change. While other U.S. senators, such as Sen. Joe Manchin and Sen. Kevin Cramer, have issued statements and letters to SEC Chair Gary Gensler urging the SEC to withdraw the proposed rule because it places an undue burden on public companies, increases inaccuracies in climate-related reporting and politicizes the SEC's rule-making process. To guarantee the withdrawal of the rule, critics such as Patrick Morrissey, Attorney General of West Virginia, have even threatened that if the SEC continues to pursue disclosure requirements on ESG issues "states and other stakeholders would not hesitate to go to court to oppose a federal regulation compelling speech in violation of the first amendment."

Practical Guidance for Public Companies

Regardless of these debates on climate change and the final adoption of the proposed rule as is or in modified form by the SEC, public companies that have previously made climate-related disclosures should continue to review and re-assess the adequacy of such disclosures. Other public companies who are new to climate-related disclosures should consider the applicability of the proposed rule. All companies should investigate, evaluate, and consider the impacts of climate change and climate-related risks on their businesses and the expectations of their shareholders and other stakeholders with respect to disclosures regarding these issues.

In light of the proposed rule, public companies should consider the following practical guidance as they address climate change and climate-related risks and opportunities in any of their public disclosures, including their periodic reports and registration statements.

• Establish a multi-disciplinary working group focused on climate-related disclosures.

Public companies, that have not done so already, should consider establishing a multi-disciplinary working group to assess the company's governance practices and disclosures, or lack thereof, in light of the proposed rule. The multi-disciplinary working group should take the following actions:

• Identify the climate-related disclosures required under each provision of the proposed rule;
• Assess the company's existing climate-related disclosures, if any;
• Evaluate gaps between the company's existing disclosures and the disclosures required under the proposed rule; and
• Identify the key personnel (including external and internal employees, consultants and advisers), practices and procedures necessary to eliminate the gaps between the company's disclosures and the disclosures required under the proposed rule.

• Consider whether to adopt the TCFD framework and GHG protocol.

Public companies should consider whether to adopt the prevailing frameworks and protocols for establishing climate-related disclosures. The SEC's proposed rule is based, in part, on the framework established by the task force on climate-related financial disclosures (TCFD) in June 2017. Companies should review and consider the structure provided by TCFD for assessing, managing and disclosing climate-related financial risks. According to the TCFD, the four core elements of recommended climate-related financial disclosures are as follows:

Governance: The company should describe the role of the board and management in assessing, managing and overseeing climate-related risks and opportunities;

Strategy: The company should describe the company's short- and long-term climate-related risks and opportunities, the impact of the climate-related risks and opportunities on business, strategy and finances and the ability of the company to display resiliency in response to various climate-related scenarios;

Risk Management: The company should describe the processes for identifying, assessing and managing climate-related risks and the integration of those processes into risk management strategies; and

Metrics and Targets: The company should describe the metrics used to assess climate- related risks and opportunities including Scope 1, Scope 2, and Scope 3 greenhouse gas emissions and the targets and performance on the targets used to manage and assess climate-related risks.

The SEC's proposed rule is also based, in part, on the greenhouse gas emissions reporting framework of the Greenhouse Gas Protocol (GHG Protocol). The GHG Protocol was established in 1997 by the World Resources Institute and World Business Council to standardize the accounting methodology for greenhouse gas reporting. The GHG Protocol covers seven greenhouse gases: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulfur, hexafluoride and nitrogen difluoride, and the GHG Protocol delineates the greenhouse gases according to scopes. Companies should consider whether to adopt the GHG Protocol's uniform methods for accounting for and reporting greenhouse gas emissions.

By assessing the methods and frameworks of the TCFD and GHG Protocol, public companies can ensure their climate-related disclosures are consistent with developing ESG practices and could minimize the costs associated with compliance with the proposed rule.

Conclusion

The SEC's proposed rule on climate-related disclosures demonstrates the changing role of public companies in addressing climate change and sustainability. To ensure compliance with the evolving climate-related disclosure requirements and meet the expectations of key stakeholders, public companies should prioritize assessing their corporate governance and accounting practices and procedures regarding climate-related matters. In addition, public companies should continue to monitor the discussions around climate-related disclosures and the development of the proposed rule.

Mehrnaz Jalali is a member in the capital markets and securities and corporate governance groups at the firm. She advises companies on corporate governance, securities offerings, SEC disclosure and reporting, annual meeting and proxy matters, investor and shareholder relations, ESG matters, compliance with stock exchange listing standards and general corporate matters. She can be reached at [email protected] or 212-453-3949.

Rikisha Collins is an associate in the firm's corporate department. She assists clients with general corporate, securities, capital markets and governance matters. She can be reached at [email protected] or 215-366-4464.