BY: Jacob Robart, RBFL Student Editor
Motivated by strong investor demand, the Securities and Exchange Commission is expected to announce new rules for climate-related disclosures. In crafting a new climate disclosure framework, the SEC will be guided by the principles of consistency and comparability while seeking to mandate disclosures that will be decision useful to investors. Furthermore, The SEC will consider several important factors when determining what information should be disclosed. The SEC will consider where disclosures should be located and whether they should be furnished or filed. The SEC will also consider introducing a variety of both qualitative and quantitative disclosures. Qualitative disclosures might include how a company’s leadership addresses climate-related risks and opportunities. In terms of quantitative disclosures, the SEC will distinguish between scope 1, 2, and 3 disclosures. Finally, the SEC will consider whether there should be specific disclosures by industry, whether companies should provide forward looking scenario analysis, and whether a new SEC climate disclosure framework should resemble an existing framework such as the TCFD.
Proponents of mandatory climate-related disclosures, such as Elizabeth Warren, have emphasized that climate-related disclosures can be mandated because climate risks are material to investors. Former SEC Commissioner Allison Herren Lee has asserted that the SEC has the authority to mandate climate-related disclosures through the broad statutory powers of the Securities Act of 1933. Regardless of materiality, the SEC believes it can mandate climate-related disclosures because such information is important for protecting investors. Opponents of the SEC’s potential climate-related disclosure mandate argue that climate-related disclosures are outside of the scope of the authority that Congress has delegated to the SEC. Opponents also argue that mandatory climate-related disclosures would violate the first amendment. Other opponents argue that even if the SEC can mandate climate-related disclosures, doing so would be impractical.
Public comments to the SEC have mostly been positive; however, commenters were divided on what exactly should be included in disclosures and whether disclosures should be furnished or filed. Commenters critical to filing believe that filing climate-related disclosures in a similar fashion as traditional financial disclosures would inappropriately expose public companies to liability. Many democratic politicians, along with environmental NGOs, would like to see climate-related disclosures filed in annual or quarterly statements, such as the 10-K. They believe that by filing climate-related disclosures instead of furnishing, companies will be properly motivated to make disclosures completely and accurately.
Depending on how the SEC ultimately tailors its climate-related disclosure rules, I expect SEC registrants will challenge the SEC. Particularly, I would expect SEC registrants to fiercely oppose mandated scope 3 emission disclosures and furnished climate-related disclosure statements.
Gary Gensler, Chairman, Sec. and Exch. Comm’n, Prepared Remarks Before the Principles for Responsible Investment “Climate and Global Financial Markets” Webinar (July 28, 2021)
Alexandra Thornton & Tyler Gellasch, The SEC Has Broad Authority To Require Climate and Other ESG Disclosures, Center for American Progress (June 10, 2021)
Lee Reiners & Mario Olczykowski, Summary of Comment Letters for the SEC’s Climate Risk Disclosure RFI, Glob. Fin. Mkts. Ctr. FinReg Blog (July 9, 2021), https://sites.law.duke.edu/thefinregblog/2021/07/09/summary-of-comment-letters-for-the-secs-climate-risk-disclosure-rfi/ [perma.cc/FX76-T46J]
Allison Herren Lee, Comm’r, Sec. and Exch. Comm’n, Living in a Material World: Myths and Misconceptions about “Materiality” (May 24, 2021)
Andrew N. Vollmer, Does the SEC Have Legal Authority to Adopt Climate-Change Disclosure Rules?, Mercatus Ctr.: Fin. Regul. (Aug. 19, 2021) https://www.mercatus.org/publications/financial-regulation/does-sec-have-legal-authority-adopt-climate-change-disclosure [https://perma.cc/98QU-JEMP]
Adam Bryla et al., Commenters weigh in on SEC climate disclosures request for public input, Davis Polk (July 6, 2021), https://www.davispolk.com/insights/client-update/commenters-weigh-sec-climate-disclosures-request-public-input [https://perma.cc/AK7U-C9CG]
Elad Roisman, Comm’r, Sec. & Exch. Comm’n, Putting the Electric Cart before the Horse: Addressing Inevitable Costs of a New ESG Disclosure Regime (June 3, 2021)
Thomas L. Strickland et al., SEC Redoubles Focus on Climate Change, ESG Disclosures, WilmerHale (Mar. 15, 2021), https://www.wilmerhale.com/en/insights/client-alerts/20210315-sec-redoubles-focus-on-climate-change-esg-disclosures [https://perma.cc/63G2-VA45]