Corporate Governance

Shearman & Sterling LLP 11 | After Years of Debate, Climate Change Impact Reporting Gets Real 20th ANNIVERSARY OF CORPORATE GOVERNANCE REPORTING Scope 3 GHG Emission Metrics Additionally, companies would be required to disclose all other indirect emissions from upstream and downstream activities in the company's value chain (Scope 3 emissions) if the emissions are "material" or if a company has set a specific target or goal that includes Scope 3 emissions. While Scope 3 emissions would not be subject to the attestation requirement and would be covered by a proposed safe harbor from certain securities law liability, the methodologies for producing these numbers are in the early stages of development and will be subject to significant assumptions and uncertainties. Targets or Goals Companies who have set climate-related targets and goals would be required to disclose the following details concerning such targets or goals, as well as relevant data to allow investors to assess if and how the company is making progress toward meeting its target or goal: • the scope of activities and emissions included in the target; • the unit of measurement used for the target, including whether the target is absolute or intensity-based; • the defined time horizon by which the target is intended to be achieved, and whether the time horizon is consistent with one or more goals established by a climate-related treaty, law, regulation, policy or organization; • the defined baseline time period and baseline emissions against which progress will be tracked with a consistent base year set for multiple targets; • any interim targets set by the company; and • how the company intends to meet its climate-related targets or goals. NEW CLIMATE-RELATED FINANCIAL DISCLOSURES The Proposal requires the inclusion of certain climate- related disclosures in a note to a company's annual financial statements (covered by the annual audit). The required disclosures would include climate-related metrics that consist of disaggregated climate-related impacts on other financial line items, as well as climate-related expenditures. Financial Impact Metrics The Proposal would require companies to calculate and disclose impacts from: • climate-related events, being severe weather events and other natural conditions (including flooding, drought, wildfires, extreme temperatures and sea level rise) and identified physical risks; and • transition activities, being identified transition risks and any efforts to reduce GHG emissions or otherwise mitigate its exposure to transition risks. Disclosure of all impacts on a particular consolidated financial statement line item is required unless the "aggregated impact" (sum of the absolute values of positive and negative impacts) is less than 1% of the total line item value for the year. It is not clear how companies are meant to separate climate-related impacts from other impacts or whether certain impacts can be treated as both climate-related and transition- related. In any event, these determinations may require disclosure of immaterial impacts to the financial statements and involve significant assumptions and judgment to develop and produce. Expenditure Metrics The Proposal would require companies to disclose separately aggregate amounts of expenditure expensed and capitalized costs incurred during the fiscal year in respect of positive and negative impacts associated with the climate-related events and transition activities. Such disclosures are subject to the same 1% aggregated impact threshold. Financial Estimates and Assumptions Under the Proposals, a company must disclose whether the estimates and assumptions used in preparation of its financial statements were impacted by risks and uncertainties associated with climate- related events and transition activities and, if so, provide a qualitative description of how such estimates and assumptions were impacted.

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