SEC and International Sustainability Standards Board Head Toward Uniform Disclosure of ESG-Related Information

A chief goal of the November 2021 “COP26” climate change meeting in Glasgow was establishing uniform standards for the reporting of environmental, social and governance (“ESG”) and climate change financial information. The COP26 attendees expected that the standards would follow the recommendations of the Task Force on Climate Related Financial Disclosure (“TCFD”), setting a so-called “global baseline” for disclosure and reporting. When the meeting concluded without such standards, the G20 group of countries turned to the recently established International Sustainability Standards Board (“ISSB”), seeking its proposals. On April 6, 2022, the ISSB issued two such standards: (1) IFRS S1, “General Requirements for Disclosure of Sustainability Related Information”; and (2) IFRS S2, “Climate Related Disclosures” with comments due on July 29th, 2022 (“ISSB Rules”). 

Almost concurrently, the SEC issued its long-anticipated climate change disclosure rule, entitled: “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” 87 Fed Reg 21334 (April 11, 2022) (“Climate Reporting Rule”), which is similar in many respects to the IFRS S2 standard provided to the G20. Both sets of proposals are complex, and have drawn critical comment from the regulated community. Notably, on April 5th, a large consortium of financial institutions submitted a letter to Commissioner Gary Gensler objecting to the May 20, 2022 comment deadline for the Climate Reporting Rule, noting that the Federal Register Guide to rulemaking Process suggests a minimum of 180 days for comment on complex rulemaking, that the Rule is just one of 54 new SEC proposals now up for comment and that, in particular, the SEC has imposed a special burden on the community to “provide relevant data and empirical evidence” on the costs and benefits of the Climate Reporting Rule since no such analysis has been conducted by the SEC. 

We provide a brief summary of the noted rule proposals here:

Climate Reporting Rule

While the SEC has previously made clear that registrants are required to report on material impacts of and risks associated with climate change and greenhouse gas (“GHG”) regulation (see the February 2010 Guidance. 87 Fed Reg 21334), the new rule significantly expands climate related disclosure obligations, most notably by requiring disclosure of GHG emissions. The proposed rule would require a registrant to disclose information about: (1) the registrant’s governance of climate-related risks and relevant risk management processes; (2) how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, over the short-, medium-, or long-term; (3) how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and (4) the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements. 

With regard to GHG emissions, the proposed rule would require a registrant to disclose information about its direct GHG emissions (known as “Scope 1” emissions) and indirect emissions from purchased electricity or other forms of energy (“Scope 2” emissions). In addition, and quite controversially, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (“Scope 3” emissions), if deemed material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions. The proposed rule does not provide guidance on how to evaluate materiality with regard to Scope 3 emissions. The proposed rule would provide a safe harbor for liability from Scope 3 emissions disclosure and an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies. The SEC notes that the proposed disclosures are similar to those that many companies already provide based on broadly accepted disclosure frameworks, such as the TCFD and the Greenhouse Gas Protocol. The proposed rule would also require larger registrants (accelerated filers and large accelerated filers) to engage an outside auditor to review and attest to the accuracy of their Scope 1 and 2 emissions calculations. This requirement would be phased in, with the largest companies being required to provide “limited assurance” for their fiscal year 2024 reports and “reasonable assurance” for their fiscal year 2026 reports. Approximately half of large public companies currently hire an outside party to review their sustainability data. 

The proposed rule also provides for the disclosure of the “impact of climate related opportunities” such as investments in renewables, which may serve to mitigate GHG impacts, 87 Fed Reg 21334 at 21363.

ISSB Rules

As with the SEC proposal, the ISSB Rules would require first an explanation of the sustainability governance and risk management strategy adopted by the reporting entity, as well as the metrics and targets utilized. Risks are divided between “acute” and “chronic” categories, especially with respect to climate risk reporting (“rising sea levels” are given as an example of “chronic” risk). The Rules set a “fair presentation” standard, with reference to “risks and opportunities” across the “full range of activities, resources and relationships related to a company’s business model and the external environment in which it operates.” The reference to “opportunities,” as with the SEC rule, is intended to signal the reporting entity’s possible use of renewables, “offsets” and other remedial actions in its ESG sustainability scheme. 

The ISSB Rules also track the SEC rules for reporting of emissions from Scope 1, 2, and 3 sources. The standards under the ISSB Rules are drawn from the 68 industry-based sets of disclosure requirements developed by the SASB.

The ISSB has not indicated next steps following closure of the comment period on July 29th, but expresses a goal of finalizing its rulemaking by the end of 2022.

We will provide further updates as these significant rulemakings proceed.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. John Rousakis, an O’Melveny partner licensed to practice law in New York, and Eric Rothenberg, an O’Melveny of counsel licensed to practice law in New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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