AAPL Governmental Affairs Fact Sheet: SEC Proposed Rule Mandating Climate Risk and GHG Reporting

On April 11, the U.S. Securities and Exchange Commission (SEC) formally published proposed rulemaking that would mandate corporate reporting of climate risks and greenhouse gas (GHG) emissions. See SEC Press Release here.

The proposal already attracted industry attention when first released as a draft at the end of March. Bloomberg News called this “a major shift in how corporations must show they are dealing with climate change.” Further, “For the first time ever, the agency plans to require businesses to outline the risks a warming planet poses to their operations when they file registration statements, annual reports or other documents. Some large companies will have to provide information on emissions they don’t make themselves but come from other firms in their supply chain.”

As reported by the Oil & Gas Journal, the proposed rule, entitled The Enhancement and Standardization of Climate-Related Disclosures for Investors (87 Fed. Reg. 21334), “would require disclosures of information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition. The SEC suggested its plan would require commonly used metrics that would make it easier for investors to assess the relative risk profiles of different companies. The risks cited by the SEC proposal include not only what the public might imagine — changes in weather, for example — but regulatory, technological, and market risks driven by a transition to a lower-GHG intensive economy. The proposed rule would require a company to disclose information about the company’s governance or high-level oversight and management policies for climate-related risks. Such disclosures would be part of the environmental, social, and governance reporting that many people have begun demanding from businesses.” Read more. “Companies will be required to calculate these potential costs from data they already compile for regular disclosures to investors.” Read more.

Specifically, the rule if finalized would require public companies to include in its registration statements and periodic reporting:

• 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 GHG emissions, which, for accelerated and large accelerated filers and with respect to 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.

“Companies will also be required to disclose their ‘Scope 1’ emissions — the amount of greenhouse gas emissions they directly produce through their own business operations, such as manufacturing or mining — along with their ‘Scope 2’ emissions, which come from the energy they purchase to keep their business running. Companies would also be required to report their ‘Scope 3’ greenhouse gas emissions, which include emissions from the goods and services purchased by the firm, if they have set public emissions reduction targets or if those emissions pose a direct financial risk to the business. Firms required to report Scope 3 emissions, however, will not face penalties if they come forward with mistakes or miscalculations in those figures.” Read more.

Access the SEC Fact Sheet here: https://www.sec.gov/files/33-11042-fact-sheet.pdf.

While the SEC states that the “proposed disclosures are similar to those that many companies already provide based on broadly accepted disclosure frameworks, such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol,” this rulemaking is far broader in scope. As reported by Forbes, “The most glaring concern is that the commission is unable to quantify the benefits for society, while conceding that the costs to companies in terms of compliance and more accurately measuring emissions, as well as to the SEC itself, will be in the millions. Implementing the new disclosures and monitoring compliance will not come cheap, and the SEC will need additional funding from Congress if it is to morph from financial regulator into the economy’s main environmental cop.” Read more.

The SEC claims the “rule aims to address the needs of investors, who have clamored for more consistent reporting from companies about their environmental impact and the risks that climate change could pose to their operations and future profitability.”

The rule is a concern because although it does not specifically target the oil and gas industry and/or the landman profession but all corporations required to report to the SEC, those industries engaged in energy exploration and production would necessarily be forced to report greater detail to shareholders and the public regarding these “climate-related risks” stemming from their operations. This sentiment has been echoes by the American Petroleum Institute (API). “We are concerned that the commission’s sweeping proposal could require non-material disclosures and create confusion for investors and capital markets,” said Frank Macchiarola, API’s senior vice-president of policy, economics, and regulatory affairs.

If the proposed rule is adopted before the end of 2022 it would mandate reporting as early as 2023. Read a detailed implementation timeline and analysis from law firm Vorys here.

Submit Public Comment: The public comment period is open through May 20, 2022. For more information on submitting comments read more here. If you work for a publicly traded corporation AAPL governmental affairs encourages you to share this information with your colleagues so they may also submit public comments to the SEC.