Corporate Governance

Shearman & Sterling LLP 9 | After Years of Debate, Climate Change Impact Reporting Gets Real 20th ANNIVERSARY OF CORPORATE GOVERNANCE REPORTING THE SEC'S EXPANSIVE CLIMATE CHANGE RULE PROPOSAL The SEC's Proposal presents a sweeping new disclosure framework intended to modernize and standardize how companies communicate climate- related information, including risks, opportunities, management and financial impacts, to the market. The proposed rules would require extensive new financial and non-financial disclosures and third-party attestation requirements for domestic and foreign issuers alike. The proposed disclosures are ambitious in scale and scope and prescribe, with specificity, the form such disclosures must take. As mentioned above, however, the Proposal deviates from the principles- based materiality analysis that has underpinned the SEC's approach to climate-related disclosures for more than a decade. New Climate-Related Information Disclosures The Proposal includes several categories of climate-related information that must be disclosed in annual reports and registration statements. Those categories include: • Climate-related risks; • Impacts on strategy, business model, and outlook; • Oversight and governance disclosure; • Risk management disclosure; • Scopes 1 and 2 GHG emissions metrics (and an associated attestation requirement); • Scope 3 GHG emission metrics (if material, or if part of a reduction target or goal); and • Targets or goals and progress against them. Climate-Related Risks The Proposal would require companies to disclose any climate-related risks reasonably likely to have a material impact on the company's business or consolidated financial statements. Companies must specify whether an identified risk is a physical risk (related to the physical impacts of climate change), either acute (event-driven risks related to shorter- term extreme weather events) or chronic (related to longer-term weather patterns and related effects), or a transition risk (related to a potential transition to a lower-carbon economy). A company would also be required to describe how it views these risks manifesting over short, medium and long term time horizons. Impacts on Strategy, Business Model and Outlook Under the Proposal, companies would be required to describe actual and potential impacts of climate- related risks on various elements of its strategy, business model and outlook, such as: • business operations, including the types and locations of its operations; • products or services; • suppliers and other parties in its value chain; • activities to mitigate or adapt to climate-related risks, including adoption of new technologies or processes; • expenditure for research and development; and • any other significant changes or impacts. Companies would also be required to disclose significant details concerning how they consider climate impacts, including: • how climate-related impacts have been considered as part of their business strategy, financial planning and capital allocation; • the role renewable energy credits/certificates (RECs) may play as part of a company's emissions reduction strategy; • any "internal carbon price" used within a company to identify risks and opportunities or for other purposes; and • details of any analytical tools, such as scenario analyses, used by a company to assess climate- related risks or support resiliency.

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