On March 21, 2022, the United States Securities and Exchange Commission (the “SEC”) propose far-reaching changes to Regulation SK and Regulation SX that would require public companies to disclose more climate information. A summary of the new disclosure requirements is available in our Clients & Friends Note dated March 23, 2022. In short, the proposed rules would require a public company to provide important additional disclosures regarding, among other things, its board and management’s oversight of climate-related risks; its processes for identifying, assessing and managing climate-related risks; and its climate-related targets and goals. In addition, a company would be required to disclose how climate-related risks have impacted or are likely to impact its business and consolidated financial statements, as well as its strategy, business model and outlook. A company would also be required to disclose its greenhouse gas emissions and provide an attestation report to provide reasonable assurance, after a transition period, covering certain disclosed emissions.

Although the SEC’s proposal clarifies that issuers of asset-backed securities are not covered by the proposed rules, the SEC has indicated that it continues to examine whether and how to apply this type of regulation to issuers of asset-backed securities. to assets.

If enacted as proposed, the Amendments would impose significant reporting requirements on registrants, which would increase compliance costs and require additional management time and attention. While the proposed rules contain various phase-in periods depending on the status of the filer, there are steps, outlined below, that public companies can take action today to prepare for the new rules.

1) Review existing public disclosures

Although they are not yet required to do so under a specific climate-related rule (existing securities law disclosure requirements dependent on general materiality determinations have still applied), many companies are already making various climate-related disclosures to meet investor and legal requirements. Certain measures that are currently reported on a voluntary basis may need to be revised in the future to meet the technical requirements of the SEC’s proposed rule. For example, although not required under a traditional materiality analysis, companies may already disclose information about their greenhouse gas emissions and other metrics in their voluntary ESG reports or on the corporate sustainability. To prepare for the SEC’s proposed new rule, companies should assess their existing disclosures, as well as the internal processes, procedures, and quantitative methodologies underlying that disclosure (that is to say, a climate audit), to determine how to align them with the requirements proposed by the SEC. Careful consideration should be given to identifying areas that will require the most time to develop new internal processes and procedures to comply with the SEC’s proposed rule.

2) Review and/or implement policies and procedures relating to board oversight of climate-related risks

The proposed rule will require a company to disclose information about board and management oversight and governance of climate-related risks, which include physical risks (that is to sayrisks to business assets resulting from acute climate events or chronic climate change) and transition risks (that is to say, risks and opportunities associated with the transition to a low-carbon economy). Therefore, a company should assess the roles of the board and management, as well as the processes in place, to assess, manage and monitor climate-related risks. Companies could also consider whether changes to the board, committees and their charters, or leadership roles are appropriate to ensure those with appropriate expertise on climate-related issues are in leadership positions.

3) Engage climate change experts – internal and external

Given the scope of the proposed rule, companies should consider whether their staff who will address climate-related risks and opportunities have the necessary knowledge, skills and resources. Companies can consider setting up training or professional development programs for newcomers to these companies to ensure that they take into account all the risks – physical risks and transition risks – such as the requires the proposed rule. A company might also consider engaging outside consultants or counsel to help assess corporate climate risks and advise the company on compliance with new requirements proposed by the SEC.

4) Measure scope 3/supply chain emissions

The proposed rule requires companies to disclose their Scope 3 emissions only if they are material or if a company has set a particular target or goal with respect to Scope 3 emissions. start measuring their Scope 3 emissions now to determine materiality and whether they will eventually need to make any disclosures related to Scope 3 emissions. Unfortunately, there is no consensus on exactly how to measure these emissions (a process known as “carbon accounting”), in part because companies have to rely on their supply chains to provide this information. Nonetheless, companies could still engage in these conversations with their supply chains. For companies in the financial sector, the Partnership for Carbon Accounting Financials’ Global GHG Accounting and Reporting Standard for the Financial Sector provides useful guidance on carbon accounting for different asset classes. Given the uncertainty surrounding the measurement of Scope 3 emissions, the proposed rule contains a safe harbor provision that provides that Scope 3 emissions disclosures will not be considered fraudulent unless it is shown that the statement was made without reasonable basis or was disclosed other than in good faith. .

5) Chat with listeners

To develop a better understanding of the new rule and its implications, companies should engage in dialogue with their independent auditors. Under the proposed rules, large accelerated filers and accelerated filers will be required to provide an attestation report from an independent GHG emissions attestation provider to cover greenhouse gas emissions measurements from fields of application 1 and 2, subject to an implementation period. Although the report does not need to be provided by an external auditor, many companies can probably opt to have an accounting firm issue the attestation. The proposed rules are likely to create strong demand for service providers in this space, so registrants may want to start discussions with potential service providers.

6) Write a comment letter to the SEC

The SEC has invited public comment on the proposed amendments no later than May 20, 2022 or 30 days after the date of publication in the Federal Register, whichever is later. The SEC will review and consider these comments before issuing a final rule. Accordingly, a company should consider filing a comment letter with the SEC to express any particular points of concern or support for the new rule, as well as to suggest any necessary changes that should be made before the rule is finalized. .