2022 promises to be a fast-moving and important year on ESG regulatory activity with the SEC's proposal on disclosures of climate-related risks likely to be released in coming months. In order to be well-positioned to shape SEC direction on this important issue, public companies (and companies on the path to becoming public) should be carefully considering likely features of the proposal and how these new requirements will be addressed. SEC Chair Gary Gensler has repeatedly previewed that new disclosure requirements will bring “consistency” to climate risk disclosures, but there are pros and cons to a ‘one-size-fits-all' approach and the devil is in the details as to whether consistency is an achievable goal given the complexities of carbon accounting and the types of risks posed to the widely differing companies subject to SEC disclosure requirements. For example, the SEC may require that all public companies disclose Scope 1 and 2 emissions as those are more reasonably estimable than Scope 3 emissions and less uncertain. But this could result in a distorted picture of a company's overall emissions to the extent its Scope 1 and 2 emissions are minimal, but its Scope 3 emissions are substantial. On the flip side, measuring Scope 3 emissions can be a daunting and expensive task due to the reliance on third party disclosures. The SEC is likely grappling with how to address these issues in an analytically rigorous way to ensure the rulemaking achieves its aims of providing greater transparency and consistency to the public and investors.
At this point, it is unclear whether the SEC will require all filings to conform to a single existing standard, such as the Task Force on Climate-Related Financial Disclosures' framework or whether it will allow variation depending on industry or other distinguishing features. There are benefits, for example, to allowing particular industries to address physical and transitional risks associated with climate change through a more granular framework consistent with voluntary standards already used by that industry (such as the Global GHG Accounting and Reporting Standard for the Financial Industry developed by the Partnership for Carbon Accounting Financials). But even if the SEC adopts or requires a single framework for reporting, there will likely be wide variability in how parties implement the framework to satisfy the disclosure requirements.
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