Corporate Governance

Shearman & Sterling LLP After Years of Debate, Climate Change Impact Reporting Gets Real | 8 20th ANNIVERSARY OF CORPORATE GOVERNANCE REPORTING Despite the seeming recognition on all sides that investors want and need reasonably standard and comparable disclosures about climate change, the approach taken in the Proposal is a relatively dramatic departure from the approach the SEC staff has taken in disclosure rules and guidance over the past decade, where it has largely embraced "principles-based" disclosures based on materiality assessments rather than prescriptive "rules-based" disclosures and has encouraged "private ordering" between companies and their shareholders in substantive governance areas such as proxy access. While private ordering may not be the solution to disclosure on climate change disclosures given the need for comparability across companies and industries, the departure from principles-based disclosures is striking. As discussed below, many of the requirements in the Proposal are rules-based and apply regardless of industry or materiality. In the proposing release the SEC expresses the concern that existing disclosures relating to the risks associated with climate change are not adequate for the protection of investors. The release references the lack of consistency among disclosures made voluntarily, the absence of key information such as the methodologies, data sources and assumptions used to assess climate- related risks, and the absence of liability to ensure complete and accurate disclosure. The stated intent of the Proposal is to remedy these problems by eliciting consistent comparable and reliable information that is decision useful. In light of these objections, the SEC chose, perhaps understandably, to adopt a largely rules-based approach to its new disclosure requirements. One of the key questions, however, is whether such a prescriptive and fixed approach to disclosure is well suited to the impacts of climate change, where the science, conceptual frameworks, nomenclature and systems are still evolving. Furthermore, climate-related disclosures, especially as they relate to disclosures of GHG emissions and financial statement impact, would appear to benefit from an active standard setter that can provide interpretive guidance on an ongoing basis rather than a one-off rulemaking process. In that context, the seeming absence of collaboration with the FASB in developing these rules is notable. The implications of the Proposal for public companies are significant. While some of the non-financial disclosures around governance and risks may be relatively easy to generate, the GHG emissions and financial statement disclosures will require extensive development of systems, processes, leadership, training programs and resource allocation that is undoubtedly the work of months, if not years. It is difficult to think of any securities law requirement imposing this level of disruption, cost and effort on public companies since SOX 404. While the Proposal is not final, public companies should be preparing for the inevitable rules in final form in order to make the compliance burden manageable and to enhance their existing voluntary efforts in the interest of investor transparency and staying on message with respect to climate-related risks. This article discusses the requirements of the Proposal, some key themes in comment letters on the Proposal, potential challenges for companies in complying with the proposed rules, timing and potential legal challenges to the Proposal, the current reporting frameworks influencing the Proposal, and what companies should be doing now to prepare for the eventual adoption of final rules.

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