By John Filar Atwood
Panelists at Practising Law Institute’s securities regulation conference did not mince words about the SEC’s climate disclosure proposals, calling the current iteration of them “outrageously hard,” “messy,” and “not moored to reality at this point.” The experts did not call into question the SEC’s attempt to draft regulations in this area, but strongly believe that the proposals should be modified before being implemented.
The panelists’ remarks are not unlike what the SEC is seeing in the more than 4,000 unique comment letters on the proposals, which express significant support but also include a substantial number of recommended changes. WilmerHale’s Meredith Cross referenced some letters where the commenters essentially said, “start over, it’s too hard.”
Cross believes that the proposals as they stand will be very expensive to implement. She is worried that even with the pushback from many stakeholders, the requirements could just get bigger and harder.
Kier Gumbs of Broadridge Financial said that he hopes the International Sustainability Standards Board will finish its effort to develop climate standards, and that the SEC will incorporate them into its rules. He acknowledged that the SEC probably will not take that path, but he believes stakeholders should strongly encourage the global harmonization of standards.
Cross said that everyone needs to accept that the SEC is not just going to adopt someone else’s climate disclosure requirements. “They didn’t do it with IFRS, and it will not happen here,” she said. The Commission does not want to give over its rulemaking to some other organization, she noted, nor is it allowed to. However, the SEC can bring in concepts from around the world, she added, so suggested that a possible way forward is through requiring an ESG report that could be provided outside of other required filings, and then used as a passport around the world.
Ernst & Young’s Mark Kronforst agreed that global standard-setting efforts are so different that it is hard to see how they all will ultimately connect. He noted that the European Union seems to favor a double materiality standard, and the SEC has called for a scenario analysis in climate disclosures. For U.S. companies, he said, it is difficult right now to predict what the requirements will be.
Gumbs noted that there is some commonality globally such as the greenhouse gas emissions standard and a widespread reliance on the Task Force on Climate-Related Financial Disclosures (TCFD) framework. Even before any climate disclosure rules are adopted, companies should be applying the TCFD framework to their ESG efforts, he advised.
Lona Nallengara, a partner at Shearman & Sterling, touched on the climate disclosure proposals in a separate panel suggesting that they are not workable in their current form. However, practically speaking a lot of what is in the proposals such as Scope 1 and Scope 2 information is going to have to be disclosed anyhow, he stated. A large company that is consumer facing will need to have a robust ESG platform, he continued. The company’s stakeholders—either customers, employees, or shareholders—are eventually going to ask for it, he said.
Diving into some of the specifics surrounding the proposals, Charles Schwab’s Karen Garnett noted that there have been about 15,000 total comments on them so far. She said that there has been considerable concern around the timing of the rules because if they are adopted this year some companies will have to put processes in place by January 2023 to begin gathering the information that will be required to be reported in 2024. In her view, however, it is very unlikely that the rules will be adopted this year.
Kronforst said that there has been a lot of pushback on the Regulation S-X piece of the proposals. In that section, the SEC proposed, among other things, to require certain climate-related financial statement metrics and related disclosure to be included in a note to a registrant’s audited financial statements. A metric would need to be disclosed if the absolute value of all climate-related impacts or expenditures with respect to a corresponding financial statement line item represents at least 1 percent of the line item.
Kronforst hopes that the 1 percent threshold will be raised or converted to a materiality standard. As it is written, the requirement “would be an extremely heavy lift,” he said. Based on the comment letters, he said it feels like the percentage might change. Companies are holding back on preparing for this right now to see if it gets adjusted in the final rule, he added.
Panelists agreed that it is unclear what even will qualify as a climate expense under the proposed rules. Kronforst said it will be a challenge if a company does something for multiple reasons, such as both to save money and because it is good for the environment. Should a company split up those expenses in its financial statements, he asked. He expressed his hope that there will be clarifications on this and other matters in the adopting release.