The SEC discusses an effective date of December 2022 as an example in its landmark proposal on corporate disclosure of climate change risks in Release No. 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors, published in March 2022.
But it is likely to be difficult for the commission to be able to finalize the rules by the end of the year given the sheer volume of comment letters it is getting.
In the rulemaking process, Christina Thomas, a partner with Mayer Brown LLP, said the SEC must especially be mindful of “aspects of the proposal that may be difficult or unworkable” and “respond to that and perhaps modify what’s proposed in order to not only make the rules workable for companies but also ensure that investors are getting valuable information because you always have to do a cost-benefit analysis.”
“And if the cost greatly outweighs any benefit, it doesn’t make sense to proceed,” she said in an interview on May 17. “So, I think this is a good opportunity for the SEC to hear from the investor community, from the public company community, and from all other market participants to really understand what would make sense at the adoption phase compared to what was proposed.”
Rulemaking can take a very long time—sometimes years—especially for something this complex, controversial with so many comment letters still coming in.
As of May 20 morning, the agency has gotten more than 970 unique comment letters and over 8,100 form comment letters already. There is still plenty of time for comment with a recent extension to June 17.
“The SEC staff has to go through all of those comments. And those comments have to be addressed in the adopting release,” said Thomas, who previously worked at the commission. “So that is a lengthy process. You only have so many people who are able to read all of the comment letters and summarize them and draft the release. So you know, it’s certainly possible that this can get done within the year, but I think that based on the number of comments ….received, I think it’s going to take a lot of effort to do so.”
So far, all form comment letters urge the SEC to finalize the rules in the proposal issued in March. However, the unique comment letters, which get more weight as they often have data and analysis coming from trade groups, have a variety of views—from questions about whether the SEC has the authority to even write the rule to Democratic Senators, saying that the commission can indeed do the rulemaking.
Moreover, one of the commission’s advisory panels has started to discuss the merits of the proposal, which the agency needs to consider if the advisers have recommendations. Other advisory committees are likely to discuss the climate proposal as well when they have meetings in the future.
On May 6, the Small Business Capital Formation Advisory Committee voted tentatively to recommend that the commission consider certain issues before moving ahead with its proposal.
Carla Garrett, chair of the panel who is a corporate partner of Potomac Law Group PLLC, said that the advisory committee believes that climate-related disclosures are important, and it also believes that companies should provide a consistent set of disclosures. The small business advisory panel also said that it wants more consistency between agencies domestically and internationally.
The proposal seeks more consistent, decision-useful, comparative, and relevant information so investors can better assess a company’s efforts to reduce its carbon footprint or the environment’s impact on its businesses.
However, Garrett said that some of the panel members said the commission should do a more detailed cost-benefit analysis and study the impact that the rule will have on smaller companies, using the emerging growth companies (EGCs) and smaller reporting companies (SRCs) as a way to scale the requirements.
The committee said it also wants the disclosures subject to a safe harbor and have an incentive structure instead of a penalty structure. The SEC should also consider how these disclosures might make companies reluctant to go public because of compliance burdens.
“I love the incentive structure thing. I really do. My mind is already thinking about, you know, if you want people to comply at smaller companies, you know, reduce their registration fees, that’s well within the SEC’s purviews to do that,” said panel member Jeffrey Solomon, CEO of Cowen, Inc. “They’re so expensive to file sometimes registration fees, but if this is really an important thing for the SEC and you want small company compliance, it’s like waive some of the other fees.”
Another concern, Garrett said, “is on the private companies, and whether this could inadvertently affect private companies and whether… companies such as Walmart might not use a small company because they don’t have the disclosures in place.”
The panel also wants to get rid of the attestation requirement because it is expected to be costly and slow down the reporting process.
Release No. 33-11042 would require assurance of greenhouse gas (GHG) emissions data.
Scope 1 and Scope 2 are about a company’s direct emissions and indirect emissions from purchased energy. Scope 3 is about emissions of other companies in the issuer’s value chain.
Scope 1 and Scope 2 must be separately disclosed, expressed both by disaggregated constituent GHGs and in the aggregate, in absolute terms not including offsets, and in terms of intensity—per unit of economic value or production. For Scope 3, the company must report if it has set a GHG emissions target or goal that includes Scope 3 emissions. This must be in absolute terms, not including offsets, and in terms of intensity.
Accelerated filers and large accelerated filers must include an attestation report covering the disclosure of Scopes 1 and 2, according to Release No. 33-11042. An accelerated filer has a public float of $75 million but less than $700 million. Companies that have more than $700 million in public float are classified as large accelerated filers.
The SEC proposed that for fiscal years 2 and 3 after Scopes 1 and 2 emissions compliance date, the minimum level of assurance companies must get is “limited” assurance. For fiscal years 4 and beyond, the level of assurance is upgraded to “reasonable.”
The SEC is not proposing assurance over Scope 3 data at this time because getting the data presents unique challenges.
This article originally appeared in the May 23, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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