Although there is an SEC open meeting scheduled for this week, the commissioners won’t be taking up any proposals from Corp Fin at that meeting (see the agenda). That’s a little puzzling given that the SEC’s agenda for Corp Fin was near to bursting, especially for highly anticipated disclosure proposals on climate and human capital, among other things. Those two topics, for example, had appeared on the two most recent SEC reg-flex agendas with proposal target dates of October 2021, then delayed to December 2021, with expectations later vaguely conveyed for January 2022, unlikely now to be met. [UPDATE: At the Northwestern Pritzker School of Law’s Annual Securities Regulation Institute on Tuesday, Corp Fin Director Renee Jones indicated that said that they expect to have a proposal on climate disclosure before the SEC this quarter.] However, according to Bloomberg, the SEC does have Corp Fin-related plans for this week: to reopen the public comment period on the 2015 pay-versus-performance proposal “after a vote taken behind closed doors.”
According to audit firm Deloitte, “[i]nformative climate reporting requires a complex transformation of reporting processes, of data collection, education of the finance function, and in many cases, of the audit committee itself. Yet, despite the urgency and magnitude of the task, many boards are hesitating in the face of inconsistent standards, fragmented global standard-setting, and myriad expectations from investors.” Just how prepared are companies, their boards and especially their audit committees to deal with climate risk and climate reporting? That’s the big question that Deloitte asked 353 audit committee members globally (56% of whom were chairs) in September 2021. The answer? Not so much. According to Deloitte’s new report, 42% of respondents indicated that their company’s “climate response is not as swift and robust as they would like” and almost half “do not believe that they are well-equipped to fulfil their climate regulatory responsibilities.” Deloitte called the responses “sobering.”
Last week, ISS released for public comment its proposed benchmark policy changes for 2022. If adopted, the proposed policy changes would apply to shareholder meetings held on or after February 1, 2022. The proposed changes for U.S. companies relate to board diversity, board accountability for unequal voting rights, board accountability for climate disclosure by high GHG emitters and say-on-climate proposals.
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.