Climate Change Disclosure Proposal Provides Opportunity And Risk For Boards

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As debate kicks off about which types of climate change disclosures are needed to meet the the SEC’s new requirements, a look at what boards can expect to see.

Now that the SEC has officially proposed rules regarding climate-related disclosures for publicly traded companies, one thing is certain – there will be some form of climate-related risk disclosures required very soon. Many companies in the Energy, Infrastructure and Utilities sectors are already reporting information on climate-related risks to their shareholders. Some of those companies were led by forward-thinking CEOs and corporate boards who decided to attack the climate change problem by taking steps to decrease greenhouse gas emissions, while others were pushed into reporting on climate-related matters through shareholder proposals and proxy fights. However they got there, at least they’ve started the reporting and risk assessment process. Other companies have been slower to act.

With the more than 500-page proposal now out for public comment, all corporate boards have an opportunity to embrace the challenge of actively working with the SEC to make sure that whatever disclosure rules are adopted do not disrupt what companies need to do to run their operations efficiently while providing information on climate change risks that investors have requested for years.

There should be no complaining about the fact that a proposal to report on carbon emissions and inform shareholders about the risk climate-related issues pose to the companies they invest in. There should only be a robust debate about what type of disclosures are needed to meet those aims while keeping companies profitable. As that debate rages throughout 2022, here are some thoughts on what is likely to take place:

• The comment period draws battle lines. The comment period will yield plenty of sentiment in support of and in opposition to major portions of the proposed disclosure rules. This is where most companies will have an opportunity to influence the crafting of these rules by demonstrating, with actual examples, how certain aspects of the proposed rules would hurt their company. They should probably make suggestions for changes and adjustments that are in line with the spirit of what the proposed rules are trying to accomplish, but they can bash the rules as unnecessary if they have viable points to make. Companies should make their best argument and then follow up with a call to the SEC if necessary. If enough companies show that the rules are hampering them in some significant way the proposal will likely be adjusted. The proposal is not meant to be punishment.

• Legal challenges will surface. Several detractors have already vowed to challenge the proposed rules in court. The SEC has said it has anticipated legal challenges. Expect lawsuits claiming the agency doesn’t have the authority to require climate disclosures as well as suits challenging the extent of liability companies could face if their data on climate change risk isn’t accurate. There may also be a lawsuits challenging or clarifying what companies should consider is “material” for inclusion in the disclosures.

• The focus on climate risk may spur innovation. In a weird twist, requiring boards to disclose more information about carbon emissions and climate change risk could inspire boards and management to rethink business strategies to deal with climate change. Similar to how the Covid 19 pandemic inspired companies to find new ways to overcome its challenges, the disclosure rules could inspire the creation of new technologies, new industries that support carbon neutrality efforts and new ways of thinking about profiting (saving money) from energy transition strategies. Without the SEC’s push, these moves might not be made at all.

• Board members will draw “Against” votes in elections. With the climate disclosure proposal under consideration, pressure on boards to adopt measures to disclose more climate related date will intensify. Expect institutional investors BlackRock, Vanguard and State Street Global Advisors to cast “against” votes for the re-election of directors who continue to oppose climate related disclosures.

• Director candidates with climate change experience will be coveted. Boards may reassess how much climate change experience they have and recruit new members that can help them with the new disclosure requirements and overall climate risk management strategies. Current board members may also begin to enhance their knowledge of climate change risk management to strengthen their position on the board.

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