Corporate Governance

Shearman & Sterling LLP After Years of Debate, Climate Change Impact Reporting Gets Real | 10 20th ANNIVERSARY OF CORPORATE GOVERNANCE REPORTING Oversight and Governance Disclosure The Proposal calls for oversight and governance disclosures at both the board and management levels. In terms of how boards of directors oversee climate- related risks, companies would be required to disclose: • any directors or board committees responsible for the oversight of climate-related risks; • whether any director has expertise in climate- related risks; • the processes and frequency by which the board or board committee discusses climate-related risks; • how the board is informed about climate-related risks, and how frequently the board considers such risks; • whether and how the board or board committee considers climate-related risks as part of its business strategy, risk management and financial oversight; and • whether and how the board sets climate-related targets or goals and how it oversees progress against those targets or goals. In terms of how management assesses and manages any climate-related risk, companies would be required to disclose: • whether certain management positions or committees are responsible for assessing and managing climate- related risks and, if so, to identify such positions or committees and disclose the relevant expertise of the position holders or members in such detail as necessary to fully describe the nature of the expertise; • the processes by which the responsible managers or management committees are informed about and monitor climate-related risks; and • whether the responsible positions or committees report to the board or board committees on climate- related risks and how frequently this occurs. Risk Management Disclosure Under the Proposal, companies would be required to describe any processes they have for identifying, assessing and managing climate-related risks, and specifically how the company: • determines the relative significance of climate- related risks compared to other risks; • considers existing or likely regulatory requirements or policies, such as GHG emissions limits, when identifying climate-related risks; • considers shifts in customer or counterparty preferences, technological changes or changes in market prices in assessing potential transition risks; • determines the materiality of climate-related risks, including how it assesses the potential size and scope of any identified climate-related risk; • decides whether to mitigate, accept or adapt to a particular risk; • prioritizes addressing climate-related risks; and • determines how to mitigate a high-priority risk. Scopes 1 and 2 GHG Emissions Metrics Under the Proposal, companies would be required to disclose all direct emissions from company operations (Scope 1 emissions) and emissions generated from energy (electricity, steam, heat or cooling) consumed in the company's operations (Scope 2 emissions). Companies would be required to disclose aggregate Scope 1 and Scope 2 emissions in terms of annual carbon dioxide equivalent (CO2e) amounts, as well as disaggregated emissions by greenhouse gas. Moreover, to assist in comparing emissions across companies of varying sizes, the Proposal also mandates standardized intensity disclosure of metric tons of CO2e per unit of total revenue (or if a company has no revenue, another financial measure, such as total assets) and per unit of production (or, if a company does not have a unit of production, another measure of economic output) selected based on relevance to the company's industry. Eventually, Scope 1 and Scope 2 emissions would need to be covered by third-party attestation reports to provide reasonable assurance over such amounts. The Proposal requires the organizational boundaries for these disclosures to be the same as the financial statements, raising difficult questions on how to approach unconsolidated entities that impact the financials.

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