The SEC Small Business Capital Formation Advisory Committee held a virtual meeting on Friday May 6, 2022, inviting three guests to speak about the potential effects of the Commission’s March 21 2022 proposed climate-related disclosure rule amendments on small businesses.
While the proposal remains out for public comment: (1) Chair Gary Gensler made opening remarks; (2) Commissioner Hester Peirce made subsequent remarks; (3) Corporation Finance as Deputy Director for Legal and Regulatory Policy, Erik Gerding set forth the proposal’s fine points; (4) Betty Huber, partner and global co-chair of ESG Practice at Latham & Watkins in New York; and Thomas Sonderman and Steve Manko, CEO and CFO of SkyWater Technology, respectively, in Bloomington Minnesota addressed the pros and cons of the proposal; and (5) advisory committee member Carla Garrett, a corporate partner for Potomac Law Group PLLC in Washington, DC turned the guest speakers’ remarks into recommendations to present to the full Commission.
Chair Gensler. Chair Gensler’s now-famous remark since March 2, which lends support for the proposal, is “investors get to choose what risks to take, so long as the company they’re investing in fully discloses those risks.” Gensler supports the proposal “because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions and would provide consistent and clear-reporting obligations for issuers.” But therein lies the rub: the guest speakers are not sure the current proposed rule amendments will accomplish Gensler’s goal without the Committee considering certain factors the speakers touch on in their remarks.
Commissioner Peirce. Commissioner Peirce’s main concern with the proposal is that it will inadvertently affect private companies (which the proposal does not apply to) when public companies that are required to comply must turn to the private entities, e.g. their suppliers, for those entities’ climate disclosures.
Erik Gerding explains the proposal. Gerding was quick to reiterate from Peirce’s remarks that the proposal applies only to public companies subject to Exchange Act reporting requirements and not also to private companies. Generally, the proposed rule amendments would require domestic or foreign company registrants to include certain climate-related information in their registration statements and periodic reports, including Form 10-K. The information for inclusion would be:
- Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy, and outlook;
- The registrant’s governance of climate-related risks and relevant risk management processes;
- The registrant’s greenhouse gas emissions (GHG), which, for accelerated and large accelerated filers and respecting certain emissions, would be subject to assurance;
- Certain climate-related financial statement metrics and related disclosures in a note to its audited financial statements; and
- Information about climate-related targets and goals, and transition plan, if any.
Gerding noted that some companies have independently begun providing disclosures because their investors have asked for them while other companies have not done so, but that companies without target plans are not required to provide them under the proposal.
The last important piece of Gerding’s explanation concerned the proposal permitting climate disclosure exclusions, safe harbors, and carve outs for certain companies (especially from having to provide Scope 3 emissions) as well as allowing a phased-in approach for compliance overall. But the Committee asked the guests to provide their thoughts on the pros and cons of the entire proposal.
Betty Huber’s remarks. Betty Huber proclaimed that the companies she represents are concerned about the audit challenges that climate disclosures pose to their line items on financial statements. Clients specifically tell her that the information being requested can be very subjective because, for example, whether a severe weather event or a wildfire constitutes a climate event for disclosure has not been clearly defined.
Additionally, Huber declared her fear that the approximate $150,000 to millions of dollar cost to provide this data (depending on the company’s size) would be too much for many of them, rendering emerging growth companies particularly unable to raise capital and unable to get a loan when the bank discovers their failure to disclose climate risks to potential investors.
Lastly, Huber remarked upon: (a) a timing issue, namely that many companies will be unable to provide the required data by the time their Form 10-K filing is due; (b) the Private Securities Litigation Reform Act (PSLRA) safe harbor for forward looking statements and other disclosures does not apply to initial public offerings (IPOs), which would prevent private companies mandated to make climate disclosures from going public; and (c) the cost and timing issues would apply not only to a company’s initial reporting but to their ongoing reporting as well, making this too heavy a burden for many companies, especially start-ups, to bear continuously.
Tom Sonderman’s comments. As CEO of a greatly in demand semi-conductor manufacturing company that has been public only a year, Tom Sonderman emphasized that while his company, SkyWater, is very pro-ESG and has gone out of its way to provide these disclosures to customers, the timing of the SEC proposal may be wrong unless it really provides emission exclusions for many small businesses and allows a very long phased in approach for compliance.
Using SkyWater as an example, he said that customer demand for semi-conductors came during the Covid-19 pandemic when the company lost a rather significant portion of its workforce, leaving fewer employees to make semi-conductors or compile financial statements that comply with rulemakings like the SEC’s. Sonderman, therefore, stressed that a “one-size-fits-all policy” will not work for all small companies because many will be unable to absorb the compliance costs.
Steve Manko’s concerns. Steve Manko began his remarks by suggesting that the SEC modify existing rules on risk factors rather than proposing a brand new exacting rule that may be too difficult for many small businesses to abide by. As SkyWaters’ CFO, he also stated that the company’s audit expense has gone up since it went public, and that SkyWater’s Form 10-K containing the Commission’s mandated proposed disclosures would also need to be audited, raising that cost even further. He proclaimed, moreover, that requiring numerous climate disclosures on Form 10-K will severely distract many small companies from their main mission—capital raising—which is also one of the SEC’s missions. Manko also remarked that you can’t just look at a company’s size as an indicator of whether it will be able to comply with the disclosure requirement: the ability to comply could have just as much to do with what industry the company is in.
Huber too suggested in her earlier provided remarks that customized rules for companies in different industries might be the best approach even though such a rulemaking might be too voluminous to set forth. Manko lastly mentioned, like Huber, that forward looking disclosure statements are typically subjective, subject to judgment and not consistent across companies to serve the Commission’s purpose to create a harmonized disclosure framework for all U.S. companies and for U.S. companies compared to European Union and other foreign companies.
Recommendations for Commission consideration. When the guest speakers adjourned the meeting, advisory members Jeffrey M. Solomon - CEO, Cowen, Inc. New York, NY; Sara Hanks - CEO and co-founder, CrowdCheck, Inc. Alexandria, VA; Brian Levey - chief business affairs and legal officer, Upwork Inc., Mountain View, CA; Kesha Cash, founder and general partner, Impact America Fund in Oakland, CA and newly appointed member Donnel Baird, founder of BlocPower, a startup that markets, finances, and installs solar and energy efficiency technology to help houses of worship, and the non-profits, agreed to formalize for the Commission the recommendations from the guest speakers that Committee member Carla Garrett summarized as follows:
- Climate disclosure requirements are important to investors and should be made consistent across U.S. companies;
- Climate disclosure requirements should be consistent with disclosure requirements in other countries;
- Cost-benefit analysis is important to a company and should, therefore, be undertaken;
- Companies should be given time to comply;
- Companies should be subject to safe harbors;
- Consider how disclosure requirements deter companies from going public;
- Consider how disclosure requirements inadvertently affect private companies;
- Consider getting rid of the proposal’s attestation requirement;
- Consider differentiating the disclosure requirements by the industry the company is in;
- Consider having information disclosed later than the Form 10-K filing due date; and
- Incentivize registrants for compliance with climate disclosure requirements by reducing or waiving their other costs such as registration fees.