Just how reliable are those carbon footprints that many large companies have been publishing in their sustainability reports? Even putting aside concerns about greenwashing, what about those nebulous Scope 3 GHG emissions? As we all know, the SEC is now is the midst of developing a proposal for mandatory climate-related disclosure. (See, e.g., this PubCo post and this PubCo post.) The WSJ reports that “[o]ne problem facing regulators and companies: Some of the most important and widely used data is hard to both measure and verify.” According to an academic cited in the article, the “measurement, target-setting, and management of Scope 3 is a mess….There is a wide range of uncertainty in Scope 3 emissions measurement…to the point that numbers can be absurdly off.”
So, what are the GHG emissions for a mega roll of Charmin Ultra Soft toilet paper? If you guessed 771 grams, you’d be right…or, at least, according to this article in the WSJ, you’d be consistent with the calculations of its carbon footprint made by the Natural Resources Defense Council. By comparison, a liter of Coke emits 346 grams from farm to supermarket, as calculated by the company. That’s the kind of calculation that many public companies may all need to be doing in a few years, depending on the requirements of the SEC’s expected rulemaking on climate. Of course, many companies are already doing those calculations and including them in their sustainability reports. But they generally have discretion in deciding what to include. A mandate from the SEC could be something else entirely. The WSJ calls it “the biggest potential expansion in corporate disclosure since the creation of the Depression-era rules over financial disclosures that underpin modern corporate statements. Already it has kicked off a confusing melee as companies, regulators and environmentalists argue over the proper way to account for carbon.”
Late Friday, the SEC announced that its Spring 2021 Regulatory Flexibility Agenda—both short-term and long-term—has now been posted. And it’s a doozy. According to SEC Chair Gary Gensler, to meet the SEC’s “mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, the SEC has a lot of regulatory work ahead of us.” That’s certainly an understatement. While former SEC Chair Jay Clayton considered the short-term agenda to signify rulemakings that the SEC actually planned to pursue in the following 12 months, Gensler may be operating under a different clock. What stands out here are plans for disclosure on climate and human capital (including diversity), cybersecurity risk disclosure, Rule 10b5-1, universal proxy and SPACs. In addition, with a new sheriff in town, some of the SEC’s more recent controversial rulemakings of the last year or so may be revisited, such as Rule 14a-8. The agenda also identifies a few topics that are still just at the pre-rule stage—i.e., just a twinkle in someone’s eye—such as gamification (behavioral prompts, predictive analytics and differential marketing) and exempt offerings (updating the financial thresholds in the accredited investor definition and amendments to the integration framework). Notably, political spending disclosure is not expressly identified on the agenda, nor is there a reference to a comprehensive ESG disclosure framework (see this PubCo post). Below is a selection from the agenda.
Yesterday, in remarks before the WSJ’s CFO Network Summit, SEC Chair Gary Gensler scooped the Summit with news of plans to address issues he and others have identified in Rule 10b5-1 plans. Problems with 10b5-1 plans have long been recognized—including by former SEC Chair Jay Clayton—so it will be interesting to see if any proposal that emerges will find support among the Commissioners on both sides of the SEC’s aisle. In an interview, Gensler also responded to questions about climate disclosure rules, removal of the PCAOB Chair, Enforcement, SPACs and other matters.
The White House has issued an Executive Order expressing its policy “to advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk… including both physical and transition risks.” The EO states that the “intensifying impacts of climate change present physical risk to assets, publicly traded securities, private investments, and companies—such as increased extreme weather risk leading to supply chain disruptions. In addition, the global shift away from carbon-intensive energy sources and industrial processes presents transition risk to many companies, communities, and workers. At the same time, this global shift presents generational opportunities to enhance U.S. competitiveness and economic growth, while also creating well-paying job opportunities for workers.”
Yesterday, Allison Lee, Acting Chair of the SEC, directed the staff of Corp Fin to “enhance its focus on climate-related disclosure in public company filings.” This action should come as no surprise. As I wrote just yesterday, Lee has used almost every opportunity to emphasize the importance of the SEC’s taking action to mandate climate risk disclosure. (See, for example, this NYT op-ed, her remarks at PLI entitled Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation and this statement, “Modernizing” Regulation S-K: Ignoring the Elephant in the Room.”) “Now more than ever,” Lee said in her statement, “investors are considering climate-related issues when making their investment decisions. It is our responsibility to ensure that they have access to material information when planning for their financial future.” But what will this enhanced focus on climate entail?
Is mandatory climate risk disclosure a done deal yet? Acting SEC Chair Allison Lee has taken almost every opportunity to emphasize the importance of the SEC’s taking action to mandate climate risk disclosure. (See, for example, this NYT op-ed, her remarks at PLI entitled Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation and this statement, “Modernizing” Regulation S-K: Ignoring the Elephant in the Room.”) And now, according to Reuters, Acting Corp Fin Director John Coates remarked during a conference on climate finance that the SEC “‘should help lead’ the creation of a disclosure system for environmental, social and governance (ESG) issues for corporations.” But how to craft the new rules? With the new Administration in Washington, many of the think tanks and advocacy groups are making their voices heard on just that—crafting mandatory climate disclosure regulations. The reports of two are discussed below; there are definitely some common threads, such as the need for the SEC to onboard climate expertise and organize a platform or two for stakeholder input. Their recommendations may also provide some ideas for voluntary compliance and some insight into the direction the SEC may be going.
In his 2021 letter to CEOs, BlackRock CEO Laurence Fink asked companies to disclose a “plan for how their business model will be compatible with a net zero economy”—that is, “one that emits no more carbon dioxide than it removes from the atmosphere by 2050, the scientifically-established threshold necessary to keep global warming well below 2ºC.” (See this PubCo post.) Now BlackRock Investment Stewardship has posted a powerpoint presentation that sets out BIS’s expectations in greater detail. The presentation concludes with a caution that, “where corporate disclosures are insufficient to make a thorough assessment, or a company has not provided a credible plan to transition its business model to a low-carbon economy, including short- medium- and long-term targets, we may vote against the directors we consider responsible for climate risk oversight.”
SEC Commissioner Allison Lee has been speaking up quite a bit recently about diversity and inclusion and about climate change—and not just at SEC open meetings. In her recent dissents in voting on proposals regarding amendments to Reg S-K disclosure requirements related to the descriptions of business, legal proceedings and risk factors (see this PubCo post) and amendments to the SEC’s shareholder proposal rules (see this PubCo post), Lee did not hesitate to express her misgivings about the failure of the first proposal to mandate disclosure regarding diversity and climate change and the anticipated adverse impact of the second proposal on shareholder proposals related to ESG. In recent remarks to the Council of Institutional Investors Fall 2020 Conference, Diversity Matters, Disclosure Works, and the SEC Can Do More, and in this NYT op-ed, Lee reinforces her view that the SEC needs to do more in terms of a specific mandate for diversity and climate disclosure.