On July 28, 2021, Gary Gensler, the Chair of the United States Securities and Exchange Commission (the "SEC") announced that he had asked SEC staff to develop a mandatory climate risk disclosure rule proposal for public reporting issuers (the "Proposal"). This announcement was made during the SEC Chair's remarks before the Principles for Responsible Investment signatories, an international network of investors supported by the United Nations. The Proposal is slated to be brought to the SEC for consideration by the end of this year.
The Proposal will focus on public companies, which is a departure from existing approaches like that of the European Union under the Sustainable Finance Disclosure Regulation ("SFDR"), which imposes climate risk disclosure obligations on asset managers and financial advisers. As part of the issuer-focused approach, the SEC Chair has asked staff to consider whether disclosures made under the impending Proposal should be filed in the existing Form 10-K alongside other information currently relied upon by investors.
The Proposal will be the latest development in the global movement to introduce and increase environmental, social, and governance ("ESG") disclosure obligations on regulated firms or issuers. Earlier this year, the EU's SFDR came into force and New Zealand announced legislation that will require certain regulated financial sector firms to disclose the impacts of climate change on their business and their plans to manage climate-related risks. Our analysis of the developments in the EU and New Zealand can be found here and here, respectively, on the McCarthy Tétrault Canadian Securities Regulatory Monitor.
What the SEC's Proposal may require in terms of ESG disclosures
The SEC Chair noted that, to date, public issuers in the United States have failed to quantify climate risks or past climate impacts as recommended by the SEC in 2010. According to Mr. Gensler, companies that have provided some level of ESG disclosure tend to use boilerplate language of limited utility to investors. Accordingly, the SEC Chair stated that the mandatory disclosure requirements in the Proposal would optimally be consistent, comparable, and "decision-useful" for investors by incorporating a variety of qualitative and quantitative information about climate risk that investors could rely on.
Although the SEC Chair's remarks about the substance of the mandatory disclosure requirements were understandably broad in nature, some insight into their potential composition can be gleaned from three requests he has made to SEC staff.
First, the SEC Chair has asked the staff to consider how companies may disclose their "Scope 1" and "Scope 2" emissions, and whether they should have to disclose "Scope 3" emissions, as set out in the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard. "Scope 1" emissions are produced directly by the disclosing company. "Scope 2" emissions are related to the disclosing company's purchase of electricity and other forms of energy for purposes such as heating and cooling. "Scope 3" emissions are produced in the disclosing company's supply chain and by its customers.
Second, the SEC Chair has asked the staff to consider whether specific industries such as banking, transportation, and insurance should be required to disclose certain ESG metrics.
Finally, the SEC Chair has asked the staff to consider how U.S. companies operating in jurisdictions with climate pledges in place, such as the Paris Agreement, can inform investors about how they are meeting those requirements. This final request is particularly noteworthy as the Paris Agreement has been ratified in 191 countries.
What the SEC's Proposal may mean for Canadian firms
The SEC Chair has asked the staff to consider whether the disclosures emerging from the Proposal should be included in the SEC's Form 10-K, which is an annual report filed by U.S. public reporting issuers. If the Form 10-K does become the vehicle for U.S. reporting issuers to comply with the Proposal's forthcoming disclosure requirements, it is possible that comparable disclosure obligations would be imposed by the SEC on Canadian issuers with securities registered in the United States. This requirement could arise by way of Form 40-F, which is an annual filing by Canadian issuers required by the SEC that is substantially similar to Form 10-K in both purpose and content.
The bottom line
While the Proposal is likely a few months away from introduction and will certainly be subject to a period of public comments, the SEC Chair's remarks signal movement in the United States to introduce ESG disclosure requirements. Canadian companies with reporting requirements in the US would be well advised to monitor developments in this area and to identify how market consensus forms around climate risk disclosures by U.S. reporting issuers. It would not be unreasonable to expect foreign issuers to also provide ESG information in their filings since they already provide other risk disclosures in the Form 40-K.
Notably, the SEC Chair stated that external standard-setters such as the Task Force on Climate-related Financial Disclosures ("TCFD") are potential sources of inspiration for the staff as they prepare the Proposal. New Zealand will also rely on the TCFD's recommendations in creating its legislated reporting standards. As such, the SEC Chair's endorsement of the TCFD underscores the value of the TCFD framework as a point of reference for Canadian issuers when thinking about prospective ESG disclosures.
Finally, the SEC Chair observed that the investing public has expressed its support to the Commission on the introduction of mandatory ESG and climate disclosure rules. It is only a matter of time before public sentiments in Canada spur similar proposals for disclosure requirements North of the border.
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