The Securities and Exchange Commission recently proposed amendments to their existing disclosure policy that would require publicly traded corporations to disclose more information regarding climate change related risks, and how those risks may impact the company’s business and outlook (read, “bottom line and stock value”).  While the SEC regulates publicly traded corporations, privately held companies need to also track these proposed rule amendments:

  • The SEC has been requiring reporting on climate change / greenhouse gas emission information since 2010, so this overall concept is not new. However, the proposed disclosures would expand these obligation by requiring the publicly traded corporation to disclose (among other things):
    • The company’s process for identifying, managing, measuring and managing climate change risks;
    • If the company uses (“best,” “worst” and “most-likely” case) scenarios to assess risk, what assumptions and analytical choices the company uses to reach these outcomes;
    • The Company’s “direct” and “indirect” emissions (the latter, from purchased electricity or other forms of energy); and, of particular significance; and – possibly of greatest significance,
    • The Company’s indirect emissions from upstream and downstream activities.

This last bullet is far-reaching and likely to be controversial due to its impact on upstream privately held companies that sell products or services to publicly traded companies.  Should this proposal be promulgated:

  • Publicly traded companies will be obliged to make heightened demands upon their upstream vendors and suppliers to measure and disclose information re carbon dioxide (or other greenhouse gas) emissions associated with the sourcing, manufacture and transport of products to the SEC-regulated customer;
  • Commercial counter-parties should anticipate new terms in contracts that would require such disclosures from private companies – including possibly indemnification for misstatements about carbon emissions;
  • Small and medium-sized enterprise are likely not going to have in-house capabilities to perform such assessments, so an increased potential for out-sourcing this would be necessary if vendors want to remain on their customers’ “preferred provider” lists.

All of the above is linked to “materiality” thresholds.  “Material risks” and “material costs” can be interpreted differently by different parties, so anticipate a need for more guidance on this gating issue.

In a perfect world, it would be optimal to know precisely where greenhouse gas emissions come from and what quantity of emissions are at issue – so that they can be reduced; few would argue with that goal.  The SEC has appropriately named its proposal the “The Enhancement and Standardization of Climate-Related Disclosures for Investors” as evidence of its goal to provide more transparency to the public and to more accurately value publicly traded businesses that are investment options.  All good so far.

In reality, the implementation of the SEC’s proposal will require great consideration and agreement upon how this work can be accurately and efficiently implemented considering that the SEC anticipates: 1) finalization of the Rule in 2022; 2) the initial reporting period to begin in 2023; and 3) the initial public reports to be filed in 2024; the proposed rule would phase-in Scope 3 reporting requirements with the earliest reporting date in 2025 (for FY 2024)).  We predict the regulated sector will struggle with normalizing “materiality” concepts, accurately measuring emissions and working through the blocking and tackling of drafting these responsibilities up in existing or future contracts.

Stay tuned for more public review and comment on this issue.  The comment period will run for 30 days after publication in the Federal Register, or 60 days after the date of issuance and publication on, whichever period is longer.  This may be a situation where companies not directly regulated by an agency rule may still want to weigh in on the ripple effects from this proposal.