Corporate Governance

Shearman & Sterling LLP After Years of Debate, Climate Change Impact Reporting Gets Real | 14 20th ANNIVERSARY OF CORPORATE GOVERNANCE REPORTING WHAT SHOULD COMPANIES DO NOW? Assess preparedness for gathering the information that will be necessary to support GHG emissions disclosures and financial metrics, assess organizational structure and whether there needs to be a chief climate/sustainability officer. Public companies should begin preparations now for the new disclosures because the work necessary to comply with the expected configuration of the final rules may be significant. Even for companies that have provided extensive climate-related disclosures in the past, the new rules will present new requirements that may not be consistent with their existing disclosures and, importantly, will no longer simply be presented in a separate sustainability report or on the company's website. Here are a few tips of what companies can be doing now to prepare for the adoption of final rules: • Assess How Current Information Gathering Processes Measure Up to the New Rules. Companies should begin to assess the gaps that exist in their current disclosures relative to the proposed rules and start the process to build the necessary framework and internal controls necessary for disclosures. The proposed rules require extensive new disclosures that many companies have not considered or prepared in the past. For example, the Scope 1 and Scope 2 emission requirements and the related intensity metrics and attestation procedures will pose a challenge for many companies. • Evaluate Processes, at the Board and Management Levels, Related to Climate Risks. The proposed rules require detailed disclosures on how a board oversees climate-related risks, with specific requirements to identify the board committee with responsibility, directors with climate expertise and detailed information about how the board is informed and considers climate-related information. Similarly, with respect to management, the proposed rules would require detailed disclosure of the individuals responsible and the processes employed by management in connection with the assessment of climate-related risks. Boards and management should begin to evaluate their processes against the proposed disclosure requirements and determine what changes need to be made given the likelihood of an increased spotlight on these issues. This may include adding a new chief sustainability officer. (For a broader discussion of this topic, see our article titled The Rise of the ESG Officer.) • Review Climate-Related Goals. Although the proposed rules do not require companies to set climate-related targets, the proposed rules require specific disclosures related to these goals when a company has set them. These disclosures will now be included in annual reports and registration statements, so companies should review or develop the necessary processes to test the reliability of these targets. Carbon-neutral and net-zero pledges should be tested with rigor, similar to projections and outlook statements. Companies that have not set climate- related targets should consider whether expectations from investors and other stakeholders will quickly demand that targets be set. • Discuss Financial Reporting Impacts with Auditors. The proposed financial metric disclosures will require companies to categorize and test impacts that climate- related events and transition activities are having on each financial statement line item, and to make new disclosures of expenditure metrics specific to climate-related events and activities. Companies should begin to consider how well their existing financial reporting systems, controls and procedures will be able to reliably capture the data and make the classifications necessary to comply with the requirements of the final rules. As these financial disclosures and procedures may be subject to audit by the company's external auditors, companies should consider initiating these discussions with external auditors well before compliance is required.

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