Corporate Governance

Shearman & Sterling LLP 7 | After Years of Debate, Climate Change Impact Reporting Gets Real After Years of Debate, Climate Change Impact Reporting Gets Real Richard Alsop, Taylor Landry, Emily Leitch, Ryan Robski and Karen Mann 20th ANNIVERSARY OF CORPORATE GOVERNANCE REPORTING 20 Years In 2022, mandatory climate change disclosures in the United States went from theoretical to probable. The publication by the Securities and Exchange Commission (SEC) of a rule proposal (Proposal) that would require U.S. public companies to make extensive new disclosures relating to climate change is a singular moment in corporate governance. 1 In March of 2021, the SEC requested public comment on climate change disclosure, which garnered significant general support from institutional investors for mandatory standards. That request followed years of urging by institutional investors for action by governments to elicit more information on climate risks from public companies and a multitude of shareholder proposals requesting reports on climate issues. In addition, the SEC took note of the increasing prevalence of voluntary climate disclosures by issuers and numerous public commitments by issuers to achieve tangible emissions reductions targets or to reach net-zero emissions by a specificed target date. On that basis, the SEC's rulemaking efforts could be said to have been launched against a backdrop of significant support. The SEC also noted that many commenters referenced the proliferation of voluntary frameworks and inconsistent application of their standards as one of the reasons for the absence of comparability. The SEC proposal incorporated concepts from two of the most widely accepted frameworks, the Task Force on Climate- Related Financial Disclosure (TCFD) and the GHG Protocol. The disclosures requirements in the resulting Proposal are in part based on traditional notions of materiality, in that they relate to how climate change presents current risks to the company's business and strategy or may be impacting its results. But some of the disclosure requirements, if adopted, will also transcend those traditional materiality notions, by requiring disclosures about each company's contribution to the problem, in the form of greenhouse gas emissions, the potential impacts of such contribution, including speculation about what governments and regulators might do, and the efforts the company is making to remediate the problem, in the form of specific targets and metrics. The relevance to investors seems to be that in a world faced with a humanitarian crisis that cannot be solved without making significant changes, some business models will simply not be sustainable. Investors, therefore, must have access to information necessary to ascertain which companies are charting a course for long-term success. Judging by the comment letters submitted to the SEC, the rules are and will remain the subject of significant controversy, and it is by no means clear what shape the final rules will take. However, there seems to be a broad recognition among commenters that the continued economic health of the United States and the prosperity of its people depends in large measure on the way our companies navigate the challenges of climate change, and that investors need to be able to assess their progress as the as the actual impacts of climate change become more apparent. 1 See U.S. Securities and Exchange Commission, "The Enhancement and Standardization of Climate-Related Disclosures for Investors," 17 CFR 210, 229, 232, 239, and 249, https://www.sec.gov/rules/ proposed/2022/33-11042.pdf (March 21, 2022).

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