Corporate Governance

Shearman & Sterling LLP After Years of Debate, Climate Change Impact Reporting Gets Real | 12 20th ANNIVERSARY OF CORPORATE GOVERNANCE REPORTING COMMENT LETTERS The SEC received over 10,000 comment letters on the Proposal, of which nearly 1,000 were substantive rather than form letters. A few of the common themes in the public comments articulated in certain letters from the investor community, as the end users, and the accounting community, as auditors and assurance providers, are instructive. From the investor side, there was general support for the use of the TCFD framework as the basis for mandatory disclosure obligations. Some investors, however, expressed concern about the prescriptive nature of the Proposal, and the potential for significant increased costs and liability, particularly in light of the evolving state of climate data, methodologies and reporting capabilities. There was particular concern about the required Scope 3 emission requirements, with investors suggesting alternatives like voluntary reporting or comply or explain approaches, or limiting disclosures to larger companies and only where material. There was some support for eliminating assurance requirements altogether. There was support for materiality-based disclosures, and some investors indicated the proposed financial disclosures at 1% of financial statement line items represented an inappropriate compliance burden without any meaningful benefit. Some investors urged for more time to publish climate disclosures (later in the fiscal year and separate from the 10-K). There was some support for extending the disclosure requirements to private companies to avoid discouraging companies from going or remaining public. There was support for a global baseline standard with industry-specific guidance, and some investors urged the SEC to work with preparers and standard setters like the International Sustainability Standards Board (ISSB). From the accounting community, there was also support for a global baseline standard and urging for liaison with standard setters like the FASB, PCAOB and AICPA. Letters supported financial disclosure based on materiality, and expressed concern that the 1% of line items approach was a blunt tool that would require many immaterial disclosures and might allow material items to be undisclosed. Some letters mentioned concerns about the ability to discern when financial impacts were climate-related in whole or in part, and how to separate physical from transition events. There was also comment on organizational boundaries, suggesting that using equity method accounting for reporting GHG emissions might lead to double counting and be difficult for preparers to accomplish. CHALLENGES FOR REGISTRANTS The new prescriptive requirements included in the Proposal could present numerous challenges for public companies and how they prepare their financial statements and annual report disclosures. As an example, here are a few challenges that companies will likely encounter as they look forward to compliance with the final rule. Scenario Analysis As noted above, companies will need to disclose significant details concerning how they analyze climate risks and impacts as part of their business strategy. Concerns have been raised about the requirement to disclose the details of any scenario analysis that a company may use to assess climate-related risks or support resiliency against such risks. The Proposal would require companies to disclose the details of any scenarios it considered and the projected principal financial impacts on its business strategy under each scenario, including both quantitative and qualitative information. This may require companies to reveal highly confidential or competitively sensitive financial planning information. Scope 3 Emissions The SEC, in its Proposal, acknowledged that Scope 3 emissions data would be more difficult to calculate than Scope 1 and Scope 2 emissions. Because Scope 3 emissions span both upstream and downstream activities in the value chain, companies would be reliant on suppliers, customers and other third parties to provide such data, and the accuracy of such data may be difficult for companies to verify. Larger companies, and those with diverse types of customers and suppliers, will be disproportionally burdened. While the Proposal limits who must disclose Scope 3 emissions data, and provides a safe harbor from certain forms of liability under securities laws (assuming the company has a reasonable basis for disclosing the data and acted in good faith), many companies will need to commit significant resources to preparing and confirming this disclosure. Moreover, some larger companies — for which the calculation of Scope 3 emissions might reasonably be expected to be the most challenging — will have as little as 60 days from the end of their fiscal year to finalize their calculations if the compliance deadlines are not extended.

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