Jurgita Ashley and David Wilson are partners with Thompson Hine LLP. Ms. Ashley co-chairs both the firm’s Public Companies group and its ESG Collaborative and Mr. Wilson in the Partner-in-Charge of the Washington, DC office.*
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On March 21, 2022, the SEC issued its long-awaited climate disclosure proposal on which it is accepting public comments (due, at the earliest, May 20). Below are five things every company needs to know.
- Scope 3 GHG Emissions – Scope 3 greenhouse gas (GHG) emissions are in for most companies (in addition to Scope 1 and 2)! The SEC’s proposal would require disclosure of Scope 3 GHG emissions if material to the company or if part of the company’s publicly disclosed climate-related targets. As such, all companies other than smaller reporting companies (which are exempt) will presumably need to obtain enough data to at least assess Scope 3 materiality. What an undertaking!
- Net Zero Targets – A lot more information would be required about Net Zero and other targets and progress towards meeting them. Think again if setting targets without a fairly developed plan of how the company will achieve them.
- Data Verification – Validation of data will be key. Many companies will be required to provide third-party assurance reports for Scope 1 and 2 emissions data but even where such third-party report is not required, internal controls will need to be built out so that any climate-based disclosures—and there will be many!—that are included in SEC reports undergo strict validation processes.
- ESG Governance – Don’t overlook ESG-related director qualifications and board and management processes around ESG governance, which are discussed with increasing frequency in the SEC’s proposals, including its recent climate and cyber risk disclosure proposals. It takes time to put those structures in place.
- Timing – The timing contemplated by the proposal is difficult—it will be challenging to collect this type of information and undergo validation processes in time for the information to be included in annual reports on Form 10-K that are usually filed in February or March. Many ESG reports are currently published months later. Additionally, some of the proposed disclosures would be included in the notes to the financial statements, which means they would be subject to audit—yet another element that will impact the annual report preparation timelines.
The SEC’s proposed climate disclosure rule-making is broad, complex and detailed. While phase-in periods are helpful, they are not very long considering what needs to get done and the proposed breath and granularity of disclosure. Companies may want to start thinking about building out internal and external teams so that they are able to provide this level of disclosure. And if anyone has not started on the ESG program, the time is now (or yesterday).
The proposed requirements are described in more detail in Thompson Hine’s ESG Collaborative’s alert available here: “SEC Releases Long-Awaited Proposed Climate Disclosure Rules,” Thompson Hine ESG Collaborative Update, March 22, 2022.
*The views expressed in this article are attributable to the authors and do not necessarily reflect the views of Thompson Hine LLP or its clients. This publication is provided for educational and informational purposes only and is not intended and should not be construed as legal advice.