The (SEC) has issued a Sunshine Act Notice announcing its upcoming meeting to consider the adoption of its long-awaited climate disclosure rule, “The Enhancement and Standardization of Climate-Related Disclosures for Investors”. This meeting is scheduled for March 6 at 9:45 am ET.

The rule was proposed two years ago and received more comment letters than any other rule in the history of the agency – over 14,000 were submitted. The agency has yet to publish the full text of the final version. The SEC ultimately voted 3-2 along party lines to release the proposed mandates for companies to disclose how climate change affects their businesses.

As reported in the news, the SEC has most likely decided to drop the requirement to report Scope 3 emissions. (Those are the emissions that result from the activities of third parties in the company’s “value chain,” making collection of the data much more difficult and much less reliable.)

Even with that major amendment, the rule is likely to go to litigation, many people believe.

According to Bloomberg, “West Virginia could be first in line to take on the SEC. [T]he state’s attorney general … threatened to sue the SEC over the rules before they were even proposed. Mandatory disclosures on climate change and other environmental, social and governance issues would violate companies’ First Amendment rights”. The US Chamber of Commerce, National Association of Manufacturers, and American Farm Bureau Federation have also threatened to sue.

Rule refresher

Proposed two years ago in March 2022, the proposed rules include disclosures relating to the following:

• Financial impacts of actual and potential physical and transition risks reasonably likely to have a material impact on the business or its financial statements in the short, medium, or long term. This information is to be expressed numerically in the financial statement notes and in narrative form in a special section of its regular SEC filings entitled “Climate-related disclosure.”
• Expenditures the company makes to address those risks.
• Greenhouse gas emissions the company is responsible for, including emissions from its own fuel use (Scope 1), from the power plants that generate the electricity it uses (Scope 2), from the companies that make up its supply chain (upstream Scope 3), and from the use of its own products, such as the gasoline sold by an oil company (downstream Scope 3).
• Integration of climate risk assessment and management into core business functions, including whether and, if so, how the company accomplishes this and covering governance; strategy, business model, and outlook; risk management; and targets.

Some of the areas of concern in the proposed rules – as reflected in comment letters – include

• the phase-in periods for compliance;
• the granularity of required GHG emissions disclosures;
• the Scope 3 emissions disclosure requirements, including triggers;
• the timing for filing GHG emissions disclosures;
• and the required disclosures around board oversight and qualifications.

And the proposed rule included changes to Reg S-X that would require a company to disclose in a note to its audited financial statements specified disaggregated climate-related financial statement metrics that are mainly derived from existing financial statement line items – with the proposal requiring just a 1% disclosure threshold.  

The SEC will investigate when firms: (1) make misleading statements about their ESG programs, and (2) downplay or omit disclosures about negative ESG-related information, Grewal said. 

According to an article in the WSJ, SEC officials were “taken aback by the strength of opposition to their financial-reporting proposals, people close to the agency said. Many companies said the changes would bring high costs, complexity and potential unintended consequences”.

Other disclosure obligations

Stepping back and looking at the bigger picture, two years on, climate disclosure is in a truly different realm than when the SEC proposed its rules.

First of all, extensive climate disclosure requirements recently were adopted by California that, in some respects, go beyond the SEC’s proposal. And, although it’s just “guidance” and not a regulation, the New York Department of Financial Services finalized its climate-related guidance in December, outlining how the banks and mortgage institutions it regulates should manage climate-related financial and operational risks.

The European Union has adopted the Corporate Sustainability Reporting Directive, a policy requiring large companies and public-interest entities operating in the EU to disclose information on their ESG performance annually. And the UK has adopted climate financial disclosure requirements.

And the International Sustainability Standards Board’s climate disclosure standard has been finalized and is under consideration by several jurisdictions.

But without any clearly articulable rules, companies have done their own thing and arrived at their own determinations about what disclosures are needed, what they should say, and how consistently they should be offered.

And it has led to some companies failing to disclose material climate-related risks, even after those risks have materialized into massive losses.

ESG and investors’ trust

n a recent speech, SEC Director of Enforcement Gurbir Grewal discussed the importance that ESG plays in investors’ trust in the securities industry. 

According to Grewal, investors by significant margins want companies to incorporate ESG considerations into corporate strategy even if it reduces short term profitability.

He said the SEC is committed to investigating situations where firms: (1) make misleading statements about their ESG programs, and (2) downplay or omit disclosures about negative ESG-related information. 

NYAG sues JBS over climate claims

Speaking of misleading statements, New York’s Attorney General (NYAG) has accused JBS, the world’s largest beef producer, of misleading the public about its impact on the environment in order to boost sales.

NYAG Letitia James said JBS USA Food Co, the Brazilian company’s American-based unit, has “no viable plan” to reach net zero greenhouse gas emissions by 2040, making its stated commitment to achieving that goal false and misleading. She also said reaching the goal was “not feasible,” given JBS’ plan to increase production and therefore its carbon footprint, on top of greenhouse gas emissions that had exceeded those of the entire country of Ireland by 2021.

JBS has admitted its “Net Zero by 2040” commitment did not incorporate the vast majority of greenhouse gas emissions from its supply chain, including from deforestation in the Amazon, the NYAG said.

The lawsuit was filed in a state court in Manhattan and seeks a $5,000 civil fine per violation of state business laws, plus recovery of ill-gotten gains.