March 22, 2022 - Yesterday the SEC released its long awaited proposal on climate-related corporate disclosures. (For more information, please refer to the SEC’s press release and fact sheet.) If finalized, the rulemaking would amend the SEC’s rules under the Securities Act of 1933 and Securities Act of 1934 to require that registrants provide specific climate related information in their registration statements and annual reports.  The Commission voted 3-1 with Commissioner Hester Peirce as the sole vote against the proposal where she vehemently opposed the objective and contents of the proposal.  At over 500 pages, the LSTA – like other financial market participants and stakeholders – is still in the process of digesting the proposal to understand its implications.   After a preliminary review, however, several items immediately stand out:

• The proposal applies to domestic and foreign companies required to be registered with the SEC.
  • Chapman & Cutler points out that the proposal would also be likely to indirectly affect non-registrants who are in the supply chain of a large, disclosing company.
• The disclosure framework is largely based on the Task Force on Climate-Related Financial Disclosures (“TCFD”) Framework and the Greenhouse Gas Protocol.
• The proposal requires disclosure of:
  • climate-related risks;
  • climate-related effects on strategy, business model, and outlook;
  • board and management oversight of climate-related issues; processes for identifying, assessing, and managing climate risks;
  • plans for transition;
  • financial statement metrics related to climate;
  • greenhouse gas (“GHG”) emissions; and
  • climate targets and goals. 
• With respect to greenhouse gas emissions:
  • the proposal would require the disclosure of a company’s Scope 1 and Scope 2 emissions (emissions from business operations and purchase energy), but seemingly recognizes the challenges associated with disclosure of Scope 3 emissions (emissions the company indirectly impacts in its value chain).
  • Scope 3 emissions would only be required if they are material to a company’s performance or if the company has set targets for reducing emissions. Small companies are exempt from Scope 3 disclosures.
  • The proposal offers a safe harbor for Scope 3 disclosures
  • Large companies would need to include an independent attestation of its Scope 1 and 2 disclosures
  • The requirements would be phased in for companies depending on their size and filing status, with the earliest compliance date being one fiscal year from the rules’ effective date for the Scope 1 and Scope 2 requirements.

Reporting on the release, Law360 noted that “SEC staff described the proposal as asking for disclosure of the ‘actual or likely material impacts’ climate risks will have on their business, strategy and expenditures, as well as metrics detailing for investors ‘how the registrant arrived at the metrics.’ Risks related to severe weather events would also need to be factored in, as would so-called transition risks, which refer to the risks involved with changing strategies, policies or investments to reduce reliance on carbon and impact on the climate.”

While it is too early to understand the genuine reaction of the financial industry and business community, it is clear that the SEC staff considered their many comments sent to the SEC last year ahead of the rule. Items such as safe harbors, exemptions, and a long runway to meet new requirements was a common theme in those comments and Politico explained that the SEC took on the industry feedback up front and delivered a leaner version of the proposal than progressives had hoped and some industry analysts expected. Again, whether the proposal sufficiently addresses the concerns raised commenters is something that we will learn in comings days.

The LSTA will continue to review the rule and update members with analysis and commentary in the coming weeks. The LSTA will consult with members and expects to weigh in on the proposal by the comment deadline of May 9th or 30 days after publication in the Federal Register, whichever is later.