On March 15, 2021, Acting Chair of the SEC Allison Herren Lee issued a statement requesting input from investors, public companies and other market participants on climate change disclosures. The statement follows Acting Chair Lee's previous statement that the SEC plans to evaluate and update the 2010 Commission Guidance Regarding Disclosure Related to Climate Change. The 2010 Guidance discussed disclosure of climate change-related information within the framework of existing non-financial disclosure rules, including the business description, legal proceedings, risk factors and MD&A. The SEC Staff will evaluate the current rules "with an eye toward facilitating the disclosure of consistent, comparable, and reliable information on climate change." Interested members of the public have 90 days from March 15, 2021 to submit comments for the SEC's review.

In the statement, Acting Chair Lee poses fifteen questions to which commenters may respond to facilitate the SEC Staff's evaluation. She also encourages commenters to submit empirical data and other information to support their comments. Public input may include comments on existing disclosure requirements, potential new disclosure requirements, and potential new disclosure frameworks. The questions can be summarized as follows:

1. How can the SEC best regulate climate change disclosures?

Given the SEC's goal of providing more consistent, comparable, and reliable information for investors while also providing clarity to registrants as to what is expected of them, how can the SEC best regulate, monitor, review and guide climate change disclosures? Where and how should such disclosures be provided (annual reports, other periodic filings)?

2. How should climate change data be quantified and reported?

To provide consistent, comparable, and reliable information, the Commission must determine what data relating to climate risks can be quantified and measured. Moreover, the Commission must determine what quantifiable information is material to an investment or voting decision. What quantifiable and measurable data should registrants report, and should the requirements be tiered based on the size of the company? Acting Chair Lee lists scopes 1, 2, and 3 greenhouse gas emissions as examples of quantifiable metrics to consider for disclosure. If disclosure of all three scopes of greenhouse gas emissions is required, the disclosure requirement would be similar to the proposed Climate Corporate Accountability Act in California, which would be one of the first mandatory reporting schemes to require disclosure of waste, supply chain, and other indirect greenhouse gas emissions.

3. Who should set the standards?

The Commission is considering allowing market participants to develop the disclosure standards. What are the pros and cons of permitting industry-led standards? If the Commission allows industry-led standards, should the Commission establish minimum disclosure requirements and, if so, what should those look like?

4. Should the standards be industry-specific?
5. Should the rules draw on existing frameworks?

Acting Chair Lee lists the frameworks developed by the Task Force on Climate-Related Financial Disclosures (TCFD), the Sustainability Accounting Standards Board (SASB), and the Climate Disclosure Standards Board (CDSB) as examples to consider but asks commenters to submit other frameworks that would be useful as well.

6. How should disclosure requirements be updated over time?

The Commission itself may be responsible for updating the requirements but is also considering adopting criteria for identifying another organization or other organizations to assume this function. The Commission also seeks input on whether it should designate a climate disclosure standard setter (similar to the Financial Accounting Standards Board) and asks whether there is an existing standard setter that should be considered.

7. Should the Commission incorporate climate-related disclosure requirements into existing rules or promulgate a new regulation?

For example, should climate-related disclosures be incorporated into existing rules, such as Regulation S-K or Regulation S-X? Should the rules require companies to file or furnish disclosures with the SEC?

8. How should companies disclose their internal governance and oversight of climate-related issues?

For example, should registrants disclose information regarding the connection between executive compensation and climate change risks and impacts? Linking executive compensation to climate risk performance could hold executives accountable for climate risk management.1

9. What are the advantages and disadvantages of developing a single set of global standards, and what should be the interaction between any global standard and SEC requirements?
10. How should disclosure standards be enforced and assessed?

Various constituents have raised concerns as to whether companies have adequately complied with the 2010 Guidance. For example, in her testimony before the House of Representatives Subcommittee on Investor Protection, Entrepreneurship and Capital Markets at its hearing on Climate Change and Social Responsibility, Veena Ramani, Senior Program Director of Capital Market Systems at Ceres, stated that the Commission did not effectively enforce the 2010 Guidance. Ms. Ramani testified that in reviewing hundreds of 10-K filings, she concluded that most registrants did not comply with the Guidance. The Commission also seeks comment on what audit or assurance framework it should require or permit.2

11. Should the Commission consider other measures to ensure the reliability of disclosures?

Acting Chair Lee provides the following examples of ways to ensure reliability: (i) update management's annual report on internal control over financial reporting and related requirements to ensure sufficient analysis of controls around climate reporting; and (ii) require the CEO, CFO, or other corporate officers to certify climate-related disclosures.

12. Should the Commission implement a "comply or explain" framework rather than mandate specific disclosure?

Under this framework, registrants could either comply with disclosure rules or explain why they have not complied.

13. How should the Commission craft rules to elicit a meaningful discussion of the registrant's views on its climate-related risks and opportunities?

To ensure meaningful disclosure, should companies be required to accompany disclosed metrics with a sustainability disclosure and analysis section? Acting Chair Lee points out that such a section would be similar to the current MD&A.

14. How should the rules address private companies' climate disclosures?
15. How should the SEC craft climate-related disclosure requirements that would complement a broader ESG disclosure standard?

The SEC is evaluating disclosure under the broader ESG heading in addition to climate-related disclosures. How should climate-related disclosures fit into the broader ESG disclosure framework?

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Interested parties should consider submitting comments related to the questions above. Note that submissions received will generally be posted on www.sec.gov without redaction of personal identifying information. Commenters can submit comments via the webform or email.

*A special thank you to Maggie Goff for her contribution to this article.

[1] See https://corpgov.law.harvard.edu/2019/11/25/running-the-risks-how-corporate-boards-can-oversee-environmental-social-and-governance-issues/.

[2] The American Institute of CPAs and Center for Audit Quality issued a report in February 2021 providing a roadmap for independent accounting firms performing an attestation report on ESG disclosures.