Category Archives: Hot Topic

The SEC’s Proposed Climate-Related Disclosures: Post Eight – Greenhouse Gas Emissions Intensity and Methodology Disclosures

ESG, Hot Topic, Reporting

In the first post in this series, we overviewed the three main areas addressed in the SEC’s Proposed Rule for climate-related disclosures:

  • Governance, strategy, risk and related disclosures outside the financial statements
  • Greenhouse gas emission disclosures and attestation requirements
  • Financial statement disclosures

As you may have heard and can read about in this Press Release, the comment period for this proposal ended June 17, 2022.

Subsequent posts in this series have addressed proposed disclosures for:

This post explores the proposed disclosures surrounding greenhouse gas emission intensity and measurement methodology.  As a reminder, these disclosures would be required for all companies in their annual reports on Forms 10-K and 20-F, with updates on Forms 10-Q and 6-K.  Smaller reporting companies would not be subject to the Scope 3 disclosure requirements.  The disclosures about greenhouse gas emissions fall into the following categories:

  • Greenhouse gas intensity disclosures
  • Methodology
  • Liability for scope 3 emissions disclosures

A Starting Note

Much of approach in the proposed rule is based on the Greenhouse Gas Protocol (GHG Protocol).  The GHG Protocol is designed to provide “comprehensive global standardized frameworks to measure and manage greenhouse gas (GHG) emissions from private and public sector operations, value chains and mitigation actions.”  You can learn about the protocol and get information about available tools to build a reliable GHG inventory at the GHG Protocol website.

Greenhouse Gas Intensity Disclosures

Companies would be required to disclose a “GHG Intensity” measure such as metric tons of CO2e per unit of revenue and metric tons of CO2e per unit of production.  This information would be disclosed for Scopes 1 and 2 emissions, and if Scope 3 emissions are disclosed, separately for Scope 3 emissions.

The measures would be disclosed for each fiscal year included in the consolidated financial statements. Disclosure would also include the basis for the production metric used.

If a company does not have revenue or a unit of production measure, it must develop an alternative measure and explain why it is presenting that measure.  Companies may present additional measures, so long as they explain why a measure provides useful information to investors.

Methodology

Companies must disclose the:

  • Methodology for estimating emissions;
  • Significant inputs; and
  • Significant assumptions.

The description of the registrant’s methodology would include information about:

  • Organizational boundaries;
  • Operational boundaries;
  • Calculation approach;
  • Calculation tools;
  • The determination direct emissions – (Scope 1); and
  • The determination of indirect emissions – (Scope 2).

A significant amount of detail would be required in these disclosures about how companies determine boundaries and about consistency in measuring all scopes of emissions.

Companies would be permitted to use reasonable estimates and would disclose reasons for using such estimates and any underlying assumptions.

Companies would be allowed to use estimated data for the fourth quarter of a fiscal year if actual information is not available.  In this case prompt disclosure of the difference between actual and estimated amounts would be required.

Companies could use a range for estimated Scope 3 disclosures.  The reason for disclosing a range and any related assumptions would be disclosed.

Additional disclosures would include, to the extent material:

  • Use of third-party data and including the source and process to obtain such data;
  • Any changes in methodology;
  • Any gaps in data; and
  • Any overlaps in the categories for Scope 3 emissions.

Liability for Scope 3 Emissions Disclosures

The proposed rule includes a type of “safe-harbor” for disclosures of scope three emissions.  It states that for “any statement regarding Scope 3 emissions that is disclosed pursuant to §§ 229.1500 through 229.1506 and made in a document filed with the Commission”, such statement

“…is deemed not to be a fraudulent statement (as defined in paragraph (f)(3) of this section), unless it is shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith.”

Summary

The complexity and related costs, along with the measurement challenges in estimating GHG emissions are likely to be the subject of comments in the SEC’s rulemaking process.  Our next post will explore the proposed S-K Item 1505 about attestation requirements for greenhouse gas emission disclosures.

As always, your thoughts and comments are welcome!

For reference, here is proposed S-K Item 1504:

 

(Item 1504) GHG emissions metrics.

(a) General. Disclose a registrant’s GHG emissions, as defined in § 229.1500(h), for its most recently completed fiscal year, and for the historical fiscal years included in its consolidated financial statements in the filing, to the extent such historical GHG emissions data is reasonably available.

(1) For each required disclosure of a registrant’s Scopes 1, 2, and 3 emissions, disclose the emissions both disaggregated by each constituent greenhouse gas, as specified in § 229.1500(g), and in the aggregate, expressed in terms of CO2e.

(2) When disclosing a registrant’s Scopes 1, 2, and 3 emissions, exclude the impact of any purchased or generated offsets.

(b) Scopes 1 and 2 emissions.

(1) Disclose the registrant’s total Scope 1 emissions and total Scope 2 emissions separately after calculating them from all sources that are included in the registrant’s organizational and operational boundaries.

(2) When calculating emissions pursuant to paragraph (b)(1) of this section, a registrant may exclude emissions from investments that are not consolidated, are not proportionately consolidated, or that do not qualify for the equity method of accounting in the registrant’s consolidated financial statements.

(c) Scope 3 emissions.

(1) Disclose the registrant’s total Scope 3 emissions if material. A registrant must also disclose its Scope 3 emissions if it has set a GHG emissions reduction target or goal that includes its Scope 3 emissions. Disclosure of a registrant’s Scope 3 emissions must be separate from disclosure of its Scopes 1 and 2 emissions. If required to disclose Scope 3 emissions, identify the categories of upstream or downstream activities that have been included in the calculation of the Scope 3 emissions. If any category of Scope 3 emissions is significant to the registrant, identify all such categories and provide Scope 3 emissions data separately for them, together with the registrant’s total Scope 3 emissions.

(2) If required to disclose Scope 3 emissions, describe the data sources used to calculate the registrant’s Scope 3 emissions, including the use of any of the following:

(i) Emissions reported by parties in the registrant’s value chain, and whether such reports were verified by the registrant or a third party, or unverified;

(ii) Data concerning specific activities, as reported by parties in the registrant’s value chain; and

(iii) Data derived from economic studies, published databases, government statistics, industry associations, or other third-party sources outside of a registrant’s value chain, including industry averages of emissions, activities, or economic data.

(3) A smaller reporting company, as defined by §§ 229.10(f)(1), 230.405, and 240.12b-2 of this chapter, is exempt from, and need not comply with, the disclosure requirements of this paragraph (c).

(d) GHG intensity.

(1) Using the sum of Scope 1 and 2 emissions, disclose GHG intensity in terms of metric tons of CO2e per unit of total revenue (using the registrant’s reporting currency) and per unit of production relevant to the registrant’s industry for each fiscal year included in the consolidated financial statements. Disclose the basis for the unit of production used.

(2) If Scope 3 emissions are otherwise disclosed, separately disclose GHG intensity using Scope 3 emissions only.

(3) If a registrant has no revenue or unit of production for a fiscal year, it must disclose another financial measure of GHG intensity or another measure of GHG intensity per unit of economic output, as applicable, with an explanation of why the particular measure was used.

(4) A registrant may also disclose other measures of GHG intensity, in addition to metric tons of CO2e per unit of total revenue (using the registrant’s reporting currency) and per unit of production, if it includes an explanation of why a particular measure was used and why the registrant believes such measure provides useful information to investors.

(e) Methodology and related instructions.

(1) A registrant must describe the methodology, significant inputs, and significant assumptions used to calculate its GHG emissions. The description of the registrant’s methodology must include the registrant’s organizational boundaries, operational boundaries (including any approach to categorization of emissions and emissions sources), calculation approach (including any emission factors used and the source of the emission factors), and any calculation tools used to calculate the GHG emissions. A registrant’s description of its approach to categorization of emissions and emissions sources should explain how it determined the emissions to include as direct emissions, for the purpose of calculating its Scope 1 emissions, and indirect emissions, for the purpose of calculating its Scope 2 emissions.

(2) The organizational boundary and any determination of whether a registrant owns or controls a particular source for GHG emissions must be consistent with the scope of entities, operations, assets, and other holdings within its business organization as those included in, and based upon the same set of accounting principles applicable to, the registrant’s consolidated financial statements.

(3) A registrant must use the same organizational boundaries when calculating its Scope 1 emissions and Scope 2 emissions. If required to disclose Scope 3 emissions, a registrant must also apply the same organizational boundaries used when determining its Scopes 1 and 2 emissions as an initial step in identifying the sources of indirect emissions from activities in its value chain over which it lacks ownership and control and which must be included in the calculation of its Scope 3 emissions. Once a registrant has determined its organizational and operational boundaries, a registrant must be consistent in its use of those boundaries when calculating its GHG emissions.

(4) A registrant may use reasonable estimates when disclosing its GHG emissions as long as it also describes the assumptions underlying, and its reasons for using, the estimates.

(i) When disclosing its GHG emissions for its most recently completed fiscal year, if actual reported data is not reasonably available, a registrant may use a reasonable estimate of its GHG emissions for its fourth fiscal quarter, together with actual, determined GHG emissions data for the first three fiscal quarters, as long as the registrant promptly discloses in a subsequent filing any material difference between the estimate used and the actual, determined GHG emissions data for the fourth fiscal quarter.

(ii) In addition to the use of reasonable estimates, a registrant may present its estimated Scope 3 emissions in terms of a range as long as it discloses its reasons for using the range and the underlying assumptions.

(5) A registrant must disclose, to the extent material and as applicable, any use of third-party data when calculating its GHG emissions, regardless of the particular scope of emissions. When disclosing the use of third-party data, it must identify the source of such data and the process the registrant undertook to obtain and assess such data.

(6) A registrant must disclose any material change to the methodology or assumptions underlying its GHG emissions disclosure from the previous fiscal year.

(7) A registrant must disclose, to the extent material and as applicable, any gaps in the data required to calculate its GHG emissions. A registrant’s GHG emissions disclosure should provide investors with a reasonably complete understanding of the registrant’s GHG emissions in each scope of emissions. If a registrant discloses any data gaps encountered when calculating its GHG emissions, it must also discuss whether it used proxy data or another method to address such gaps, and how its accounting for any data gaps has affected the accuracy or completeness of its GHG emissions disclosure.

(8) When determining whether its Scope 3 emissions are material, and when disclosing those emissions, in addition to emissions from activities in its value chain, a registrant must include GHG emissions from outsourced activities that it previously conducted as part of its own operations, as reflected in the financial statements for the periods covered in the filing.

(9) If required to disclose Scope 3 emissions, when calculating those emissions, if there was any significant overlap in the categories of activities producing the Scope 3 emissions, a registrant must describe the overlap, how it accounted for the overlap, and the effect on its disclosed total Scope 3 emissions.

(f) Liability for Scope 3 emissions disclosures.

(1) A statement within the coverage of paragraph (f)(2) of this section that is made by or on behalf of a registrant is deemed not to be a fraudulent statement (as defined in paragraph (f)(3) of this section), unless it is shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith.

(2) This paragraph (f) applies to any statement regarding Scope 3 emissions that is disclosed pursuant to §§ 229.1500 through 229.1506 and made in a document filed with the Commission.

(3) For the purpose of this paragraph (f), the term fraudulent statement shall mean a statement that is an untrue statement of material fact, a statement false or misleading with respect to any material fact, an omission to state a material fact necessary to make a statement not misleading, or that constitutes the employment of a manipulative, deceptive, or fraudulent device, contrivance, scheme, transaction, act, practice, course of business, or an artifice to defraud as those terms are used in the Securities Act of 1933 or the Securities Exchange Act of 1934 or the rules or regulations promulgated thereunder.

The SEC’s Proposed Climate-Related Disclosures: Post Seven – Scope 3 Greenhouse Gas Emissions Disclosures

ESG, Hot Topic, Reporting

In the first post in this series, we overviewed the three main areas addressed in the SEC’s Proposed Rule for climate-related disclosures:

  • Governance, strategy, risk and related disclosures outside the financial statements
  • Greenhouse gas emission disclosures and attestation requirements
  • Financial statement disclosures

As you may have heard and can read about in this Press Release, the comment period for this proposal ended June 17, 2022.

Subsequent posts in this series have addressed proposed disclosures for:

This post explores proposed disclosures for Scope 3 greenhouse gas emissions.  The next post will focus on greenhouse gas intensity and methodology disclosures.  As a reminder, these disclosures would be required for all companies in their annual reports on Forms 10-K and 20-F, with updates on Forms 10-Q and 6-K.  Smaller reporting companies would not be subject to the Scope 3 disclosure requirements.

A Starting Note

Much of approach in the proposed rule is based on the Greenhouse Gas Protocol (GHG Protocol).  The GHG Protocol is designed to provide “comprehensive global standardized frameworks to measure and manage greenhouse gas (GHG) emissions from private and public sector operations, value chains and mitigation actions.”  You can learn about the protocol and get information about available tools to build a reliable GHG inventory at the GHG Protocol website.

General Disclosure Requirements

As a reminder from our last post, the overall disclosure requirement specifies what must be disclosed and for which periods.   The proposed rule would require that companies disclose their GHG emissions, as defined in proposed S-K Item 1500(h).

Proposed S-K Item 1500(h) provides this definition of GHG emissions:

GHG emissions means direct and indirect emissions of greenhouse gases expressed in metric tons of carbon dioxide equivalent (CO2e), of which: (1) Direct emissions are GHG emissions from sources that are owned or controlled by a registrant. (2) Indirect emissions are GHG emissions that result from the activities of the registrant, but occur at sources not owned or controlled by the registrant.

Direct and indirect GHG emissions would be disclosed using the definitions of Scopes 1, 2, and 3 emissions which are included in S-K 1500 and are based on the definitions in the GHG Protocol.  The disclosures would also be required to be disaggregated by type of greenhouse gas and in the aggregate in terms of CO2e.  (Our previous post discusses the requirement for Scopes 1 and 2 emissions.)

The various types of greenhouse gases are specified in proposed S-K Item 1500(g):

Greenhouse gases (“GHG”) means carbon dioxide (CO2), methane (“CH4”), nitrous oxide (“N2O”), nitrogen trifluoride (“NF3”), hydrofluorocarbons (“HFCs”), perfluorocarbons (“PFCs”), and sulfur hexafluoride (“SF6”)

In addition, disclosures of Scopes 1, 2, and 3 emissions would exclude the impact of any purchased or generated offsets. 

The periods specified in the proposed rule are the most recently completed fiscal year, and “to the extent such historical GHG emissions data is reasonably available,” for earlier years included in its consolidated financial statements.

 

Scope 3 Emissions 

The Proposed Rule would require companies to disclose total Scope 3 emissions if they are material or if the company has set “a GHG emissions reduction target or goal that includes its Scope 3 emissions.”  This amount would be disclosed separately from Scopes 1 and 2 emissions.

Disclosure would include categories of upstream or downstream activities.  Additionally, if any categories of Scope 3 emissions are significant, Scope 3 emissions data would be presented separately for such categories.

Proposed S-K Item 1500 includes this definition of Scope 3 emissions:

 Scope 3 emissions are all indirect GHG emissions not otherwise included in a registrant’s Scope 2 emissions, which occur in the upstream and downstream activities of a registrant’s value chain.

(1) Upstream activities in which Scope 3 emissions might occur include:

(i) A registrant’s purchased goods and services;

(ii) A registrant’s capital goods;

(iii) A registrant’s fuel and energy related activities not included in Scope 1 or Scope 2 emissions;

(iv) Transportation and distribution of purchased goods, raw materials, and other inputs;

(v) Waste generated in a registrant’s operations;

(vi) Business travel by a registrant’s employees;

(vii) Employee commuting by a registrant’s employees; and

(viii) A registrant’s leased assets related principally to purchased or acquired goods or services.

(2) Downstream activities in which Scope 3 emissions might occur include:

(i) Transportation and distribution of a registrant’s sold products, goods or other outputs;

(ii) Processing by a third party of a registrant’s sold products;

(iii) Use by a third party of a registrant’s sold products;

(iv) End-of-life treatment by a third party of a registrant’s sold products;

(v) A registrant’s leased assets related principally to the sale or disposition of goods or services;

(vi) A registrant’s franchises; and

(vii) Investments by a registrant.

Disclosure would also include the data sources used to calculate the registrant’s Scope 3 emissions, including the use of any of the following:

Emissions reported by entities in the company’s “value chain” and whether such information is verified or unverified;

Information about specific activities reported by entities in the company’s value chain; and

Information “derived from economic studies, published databases, government statistics, industry associations, or other third-party sources.”

Smaller reporting companies would not be required to disclose Scope 3 emissions.

Summary

The complexity and related costs of identifying and estimating Scope 3 emissions have been the subject of comments in the SEC’s rulemaking process.  Our next post will explore the proposed intensity and methodology disclosures for greenhouse gas emission.

As always, your thoughts and comments are welcome!

_________________________________________________________________________

For reference, here is proposed S-K Item 1504:

(Item 1504) GHG emissions metrics.

(a) General. Disclose a registrant’s GHG emissions, as defined in § 229.1500(h), for its most recently completed fiscal year, and for the historical fiscal years included in its consolidated financial statements in the filing, to the extent such historical GHG emissions data is reasonably available.

(1) For each required disclosure of a registrant’s Scopes 1, 2, and 3 emissions, disclose the emissions both disaggregated by each constituent greenhouse gas, as specified in § 229.1500(g), and in the aggregate, expressed in terms of CO2e.

(2) When disclosing a registrant’s Scopes 1, 2, and 3 emissions, exclude the impact of any purchased or generated offsets.

(b) Scopes 1 and 2 emissions.

(1) Disclose the registrant’s total Scope 1 emissions and total Scope 2 emissions separately after calculating them from all sources that are included in the registrant’s organizational and operational boundaries.

(2) When calculating emissions pursuant to paragraph (b)(1) of this section, a registrant may exclude emissions from investments that are not consolidated, are not proportionately consolidated, or that do not qualify for the equity method of accounting in the registrant’s consolidated financial statements.

(c) Scope 3 emissions.

(1) Disclose the registrant’s total Scope 3 emissions if material. A registrant must also disclose its Scope 3 emissions if it has set a GHG emissions reduction target or goal that includes its Scope 3 emissions. Disclosure of a registrant’s Scope 3 emissions must be separate from disclosure of its Scopes 1 and 2 emissions. If required to disclose Scope 3 emissions, identify the categories of upstream or downstream activities that have been included in the calculation of the Scope 3 emissions. If any category of Scope 3 emissions is significant to the registrant, identify all such categories and provide Scope 3 emissions data separately for them, together with the registrant’s total Scope 3 emissions.

(2) If required to disclose Scope 3 emissions, describe the data sources used to calculate the registrant’s Scope 3 emissions, including the use of any of the following:

(i) Emissions reported by parties in the registrant’s value chain, and whether such reports were verified by the registrant or a third party, or unverified;

(ii) Data concerning specific activities, as reported by parties in the registrant’s value chain; and

(iii) Data derived from economic studies, published databases, government statistics, industry associations, or other third-party sources outside of a registrant’s value chain, including industry averages of emissions, activities, or economic data.

(3) A smaller reporting company, as defined by §§ 229.10(f)(1), 230.405, and 240.12b-2 of this chapter, is exempt from, and need not comply with, the disclosure requirements of this paragraph (c).

(d) GHG intensity.

(1) Using the sum of Scope 1 and 2 emissions, disclose GHG intensity in terms of metric tons of CO2e per unit of total revenue (using the registrant’s reporting currency) and per unit of production relevant to the registrant’s industry for each fiscal year included in the consolidated financial statements. Disclose the basis for the unit of production used.

(2) If Scope 3 emissions are otherwise disclosed, separately disclose GHG intensity using Scope 3 emissions only.

(3) If a registrant has no revenue or unit of production for a fiscal year, it must disclose another financial measure of GHG intensity or another measure of GHG intensity per unit of economic output, as applicable, with an explanation of why the particular measure was used.

(4) A registrant may also disclose other measures of GHG intensity, in addition to metric tons of CO2e per unit of total revenue (using the registrant’s reporting currency) and per unit of production, if it includes an explanation of why a particular measure was used and why the registrant believes such measure provides useful information to investors.

(e) Methodology and related instructions.

(1) A registrant must describe the methodology, significant inputs, and significant assumptions used to calculate its GHG emissions. The description of the registrant’s methodology must include the registrant’s organizational boundaries, operational boundaries (including any approach to categorization of emissions and emissions sources), calculation approach (including any emission factors used and the source of the emission factors), and any calculation tools used to calculate the GHG emissions. A registrant’s description of its approach to categorization of emissions and emissions sources should explain how it determined the emissions to include as direct emissions, for the purpose of calculating its Scope 1 emissions, and indirect emissions, for the purpose of calculating its Scope 2 emissions.

(2) The organizational boundary and any determination of whether a registrant owns or controls a particular source for GHG emissions must be consistent with the scope of entities, operations, assets, and other holdings within its business organization as those included in, and based upon the same set of accounting principles applicable to, the registrant’s consolidated financial statements.

(3) A registrant must use the same organizational boundaries when calculating its Scope 1 emissions and Scope 2 emissions. If required to disclose Scope 3 emissions, a registrant must also apply the same organizational boundaries used when determining its Scopes 1 and 2 emissions as an initial step in identifying the sources of indirect emissions from activities in its value chain over which it lacks ownership and control and which must be included in the calculation of its Scope 3 emissions. Once a registrant has determined its organizational and operational boundaries, a registrant must be consistent in its use of those boundaries when calculating its GHG emissions.

(4) A registrant may use reasonable estimates when disclosing its GHG emissions as long as it also describes the assumptions underlying, and its reasons for using, the estimates.

(i) When disclosing its GHG emissions for its most recently completed fiscal year, if actual reported data is not reasonably available, a registrant may use a reasonable estimate of its GHG emissions for its fourth fiscal quarter, together with actual, determined GHG emissions data for the first three fiscal quarters, as long as the registrant promptly discloses in a subsequent filing any material difference between the estimate used and the actual, determined GHG emissions data for the fourth fiscal quarter.

(ii) In addition to the use of reasonable estimates, a registrant may present its estimated Scope 3 emissions in terms of a range as long as it discloses its reasons for using the range and the underlying assumptions.

(5) A registrant must disclose, to the extent material and as applicable, any use of third-party data when calculating its GHG emissions, regardless of the particular scope of emissions. When disclosing the use of third-party data, it must identify the source of such data and the process the registrant undertook to obtain and assess such data.

(6) A registrant must disclose any material change to the methodology or assumptions underlying its GHG emissions disclosure from the previous fiscal year.

(7) A registrant must disclose, to the extent material and as applicable, any gaps in the data required to calculate its GHG emissions. A registrant’s GHG emissions disclosure should provide investors with a reasonably complete understanding of the registrant’s GHG emissions in each scope of emissions. If a registrant discloses any data gaps encountered when calculating its GHG emissions, it must also discuss whether it used proxy data or another method to address such gaps, and how its accounting for any data gaps has affected the accuracy or completeness of its GHG emissions disclosure.

(8) When determining whether its Scope 3 emissions are material, and when disclosing those emissions, in addition to emissions from activities in its value chain, a registrant must include GHG emissions from outsourced activities that it previously conducted as part of its own operations, as reflected in the financial statements for the periods covered in the filing.

(9) If required to disclose Scope 3 emissions, when calculating those emissions, if there was any significant overlap in the categories of activities producing the Scope 3 emissions, a registrant must describe the overlap, how it accounted for the overlap, and the effect on its disclosed total Scope 3 emissions.

(f) Liability for Scope 3 emissions disclosures.

(1) A statement within the coverage of paragraph (f)(2) of this section that is made by or on behalf of a registrant is deemed not to be a fraudulent statement (as defined in paragraph (f)(3) of this section), unless it is shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith.

(2) This paragraph (f) applies to any statement regarding Scope 3 emissions that is disclosed pursuant to §§ 229.1500 through 229.1506 and made in a document filed with the Commission.

(3) For the purpose of this paragraph (f), the term fraudulent statement shall mean a statement that is an untrue statement of material fact, a statement false or misleading with respect to any material fact, an omission to state a material fact necessary to make a statement not misleading, or that constitutes the employment of a manipulative, deceptive, or fraudulent device, contrivance, scheme, transaction, act, practice, course of business, or an artifice to defraud as those terms are used in the Securities Act of 1933 or the Securities Exchange Act of 1934 or the rules or regulations promulgated thereunder.

Brinks Hijacked on “Pre-taliation” Whistleblower Claims

Hot Topic, Reporting

Thanks to Gary Brown of Nelson Mullins for this post!

On June 22, 2022, the SEC announced a settled enforcement case against The Brink’s Company.  The case is based on provisions in Brink’s employee confidentiality agreements that all new employees were required to sign that prohibited disclosing confidential information without prior written approval from the company.  The prohibition was expansive enough to include bringing financial data and other internal records to regulators, which is exactly the sort of information one is likely to include in a whistleblower complaint. The allegations set forth in the SEC’s Order pointed out that despite its knowledge that the SEC was stepping up enforcement in this area, in 2015, the legal team for Brink’s rank and file employees actually made its confidentiality agreements even more restrictive.  These 2015 additions included provisions for liquidated damages ($75,000) and payment of legal fees for any employee.

This case is the latest in a series focused on the whistleblower protection provisions in the Dodd-Frank Act, and specifically Rule 21F-17, which states in part:

(a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.

Brink’s confidentiality agreements did not include an exception for disclosing information to the SEC via its whistleblower program.  As discussed in the SEC’s Order, Brinks will pay a $400,000 civil penalty and must take steps to notify employees that they may provide confidential information to the SEC (and other government agencies) despite the terms of their confidentiality agreements.

Earlier cases that send this same message include:

Pre-taliation clauses are one of the great unforced errors in corporate compliance. You are accountable even if you don’t enforce the agreement – inclusion of the offending language is enough to violate the rule.  So – do a keyword search in your policy manual and form agreements, find any offending examples, and then press the DELETE key. That’s your remediation.

As always, your thoughts and comments are welcome!

The SEC’s Proposed Climate-Related Disclosures: Post Six – Scopes 1 and 2 Greenhouse Gas Emissions Disclosures

ESG, Hot Topic

In the first post in this series, we overviewed the three main areas addressed in the SEC’s Proposed Rule for climate-related disclosures:

  • Governance, strategy, risk and related disclosures outside the financial statements
  • Greenhouse gas emission disclosures and attestation requirements
  • Financial statement disclosures

 As you may have heard and can read about in this Press Release, the comment period for this proposal ended June 17, 2022.

Subsequent posts in this series have addressed proposed disclosures for:

This post explores proposed disclosures for Scopes 1 and 2 greenhouse gas emissions.  The next post will focus on Scope 3 disclosures and the post after that on intensity and methodology disclosures.  As a reminder, these disclosures would be required for all companies in their annual reports on Forms 10-K and 20-F, with updates on Forms 10-Q and 6-K.  Smaller reporting companies would not be subject to the Scope 3 disclosure requirements.  The disclosures about Scopes 1 and 2 greenhouse gas emissions fall into the following categories:

  • General disclosure requirements
  • Scopes 1 and 2 emissions

A Starting Note

Much of approach in the proposed rule is based on the Greenhouse Gas Protocol (GHG Protocol).  The GHG Protocol is designed to provide “comprehensive global standardized frameworks to measure and manage greenhouse gas (GHG) emissions from private and public sector operations, value chains and mitigation actions.”  You can learn about the protocol and get information about available tools to build a reliable GHG inventory at the GHG Protocol website.

General Disclosure Requirements

The overall disclosure requirement specifies what must be disclosed and for which periods.   The proposed rule would require that companies disclose their GHG emissions, as defined in proposed S-K Item 1500(h).

Proposed S-K Item 1500(h) provides this definition of GHG emissions:

GHG emissions means direct and indirect emissions of greenhouse gases expressed in metric tons of carbon dioxide equivalent (CO2e), of which: (1) Direct emissions are GHG emissions from sources that are owned or controlled by a registrant. (2) Indirect emissions are GHG emissions that result from the activities of the registrant, but occur at sources not owned or controlled by the registrant.

Direct and indirect GHG emissions would be disclosed using the definitions of Scopes 1 and 2 emissions which are included in S-K 1500 and are based on the definitions in the GHG Protocol.  The disclosures would also be required to be disaggregated by type of greenhouse gas and in the aggregate in terms of CO2e.

The various types of greenhouse gases are specified in proposed S-K Item 1500(g):

Greenhouse gases (“GHG”) means carbon dioxide (CO2), methane (“CH4”), nitrous oxide (“N2O”), nitrogen trifluoride (“NF3”), hydrofluorocarbons (“HFCs”), perfluorocarbons (“PFCs”), and sulfur hexafluoride (“SF6”)

In addition, disclosures of Scopes 1, and 2 emissions would exclude the impact of any purchased or generated offsets.

The periods specified in the proposed rule are the most recently completed fiscal year, and “to the extent such historical GHG emissions data is reasonably available,” for earlier years included in its consolidated financial statements.

Scopes 1 and 2 Emissions

Companies would be required to separately disclose Scope 1 and Scope 2 emissions.  To calculate these amounts a company must first determine its organizational and operational boundaries.

 The definitions of organizational and operational boundaries are in proposed S-K Item 1500:

Operational boundaries means the boundaries that determine the direct and indirect emissions associated with the business operations owned or controlled by a registrant.

Organizational boundaries means the boundaries that determine the operations owned or controlled by a registrant for the purpose of calculating its GHG emissions

Each company would develop an appropriate methodology and the required information and estimates to determine Scope 1 and Scope 2 emissions.  Information about process and estimates must also be disclosed, as discussed in a later post.

When calculating Scope 1 and Scope 2 emissions a company may exclude emissions from investments that are not consolidated, are not consolidated using proportionate consolidation or that do not scope into equity method accounting.

Summary

The complexity and related costs, along with the measurement challenges in estimating GHG emissions are likely to be the subject of comments in the SEC’s rulemaking process.  Our next post will explore the proposed disclosures for Scope 3 greenhouse gas emissions.

As always, your thoughts and comments are welcome!

For reference, here is proposed S-K Item 1504:

(Item 1504) GHG emissions metrics.

(a) General. Disclose a registrant’s GHG emissions, as defined in § 229.1500(h), for its most recently completed fiscal year, and for the historical fiscal years included in its consolidated financial statements in the filing, to the extent such historical GHG emissions data is reasonably available.

(1) For each required disclosure of a registrant’s Scopes 1, 2, and 3 emissions, disclose the emissions both disaggregated by each constituent greenhouse gas, as specified in § 229.1500(g), and in the aggregate, expressed in terms of CO2e.

(2) When disclosing a registrant’s Scopes 1, 2, and 3 emissions, exclude the impact of any purchased or generated offsets.

(b) Scopes 1 and 2 emissions.

(1) Disclose the registrant’s total Scope 1 emissions and total Scope 2 emissions separately after calculating them from all sources that are included in the registrant’s organizational and operational boundaries.

(2) When calculating emissions pursuant to paragraph (b)(1) of this section, a registrant may exclude emissions from investments that are not consolidated, are not proportionately consolidated, or that do not qualify for the equity method of accounting in the registrant’s consolidated financial statements.

(c) Scope 3 emissions.

(1) Disclose the registrant’s total Scope 3 emissions if material. A registrant must also disclose its Scope 3 emissions if it has set a GHG emissions reduction target or goal that includes its Scope 3 emissions. Disclosure of a registrant’s Scope 3 emissions must be separate from disclosure of its Scopes 1 and 2 emissions. If required to disclose Scope 3 emissions, identify the categories of upstream or downstream activities that have been included in the calculation of the Scope 3 emissions. If any category of Scope 3 emissions is significant to the registrant, identify all such categories and provide Scope 3 emissions data separately for them, together with the registrant’s total Scope 3 emissions.

(2) If required to disclose Scope 3 emissions, describe the data sources used to calculate the registrant’s Scope 3 emissions, including the use of any of the following:

(i) Emissions reported by parties in the registrant’s value chain, and whether such reports were verified by the registrant or a third party, or unverified;

(ii) Data concerning specific activities, as reported by parties in the registrant’s value chain; and

(iii) Data derived from economic studies, published databases, government statistics, industry associations, or other third-party sources outside of a registrant’s value chain, including industry averages of emissions, activities, or economic data.

(3) A smaller reporting company, as defined by §§ 229.10(f)(1), 230.405, and 240.12b-2 of this chapter, is exempt from, and need not comply with, the disclosure requirements of this paragraph (c).

(d) GHG intensity.

(1) Using the sum of Scope 1 and 2 emissions, disclose GHG intensity in terms of metric tons of CO2e per unit of total revenue (using the registrant’s reporting currency) and per unit of production relevant to the registrant’s industry for each fiscal year included in the consolidated financial statements. Disclose the basis for the unit of production used.

(2) If Scope 3 emissions are otherwise disclosed, separately disclose GHG intensity using Scope 3 emissions only.

(3) If a registrant has no revenue or unit of production for a fiscal year, it must disclose another financial measure of GHG intensity or another measure of GHG intensity per unit of economic output, as applicable, with an explanation of why the particular measure was used.

(4) A registrant may also disclose other measures of GHG intensity, in addition to metric tons of CO2e per unit of total revenue (using the registrant’s reporting currency) and per unit of production, if it includes an explanation of why a particular measure was used and why the registrant believes such measure provides useful information to investors.

(e) Methodology and related instructions.

(1) A registrant must describe the methodology, significant inputs, and significant assumptions used to calculate its GHG emissions. The description of the registrant’s methodology must include the registrant’s organizational boundaries, operational boundaries (including any approach to categorization of emissions and emissions sources), calculation approach (including any emission factors used and the source of the emission factors), and any calculation tools used to calculate the GHG emissions. A registrant’s description of its approach to categorization of emissions and emissions sources should explain how it determined the emissions to include as direct emissions, for the purpose of calculating its Scope 1 emissions, and indirect emissions, for the purpose of calculating its Scope 2 emissions.

(2) The organizational boundary and any determination of whether a registrant owns or controls a particular source for GHG emissions must be consistent with the scope of entities, operations, assets, and other holdings within its business organization as those included in, and based upon the same set of accounting principles applicable to, the registrant’s consolidated financial statements.

(3) A registrant must use the same organizational boundaries when calculating its Scope 1 emissions and Scope 2 emissions. If required to disclose Scope 3 emissions, a registrant must also apply the same organizational boundaries used when determining its Scopes 1 and 2 emissions as an initial step in identifying the sources of indirect emissions from activities in its value chain over which it lacks ownership and control and which must be included in the calculation of its Scope 3 emissions. Once a registrant has determined its organizational and operational boundaries, a registrant must be consistent in its use of those boundaries when calculating its GHG emissions.

(4) A registrant may use reasonable estimates when disclosing its GHG emissions as long as it also describes the assumptions underlying, and its reasons for using, the estimates.

(i) When disclosing its GHG emissions for its most recently completed fiscal year, if actual reported data is not reasonably available, a registrant may use a reasonable estimate of its GHG emissions for its fourth fiscal quarter, together with actual, determined GHG emissions data for the first three fiscal quarters, as long as the registrant promptly discloses in a subsequent filing any material difference between the estimate used and the actual, determined GHG emissions data for the fourth fiscal quarter.

(ii) In addition to the use of reasonable estimates, a registrant may present its estimated Scope 3 emissions in terms of a range as long as it discloses its reasons for using the range and the underlying assumptions.

(5) A registrant must disclose, to the extent material and as applicable, any use of third-party data when calculating its GHG emissions, regardless of the particular scope of emissions. When disclosing the use of third-party data, it must identify the source of such data and the process the registrant undertook to obtain and assess such data.

(6) A registrant must disclose any material change to the methodology or assumptions underlying its GHG emissions disclosure from the previous fiscal year.

(7) A registrant must disclose, to the extent material and as applicable, any gaps in the data required to calculate its GHG emissions. A registrant’s GHG emissions disclosure should provide investors with a reasonably complete understanding of the registrant’s GHG emissions in each scope of emissions. If a registrant discloses any data gaps encountered when calculating its GHG emissions, it must also discuss whether it used proxy data or another method to address such gaps, and how its accounting for any data gaps has affected the accuracy or completeness of its GHG emissions disclosure.

(8) When determining whether its Scope 3 emissions are material, and when disclosing those emissions, in addition to emissions from activities in its value chain, a registrant must include GHG emissions from outsourced activities that it previously conducted as part of its own operations, as reflected in the financial statements for the periods covered in the filing.

(9) If required to disclose Scope 3 emissions, when calculating those emissions, if there was any significant overlap in the categories of activities producing the Scope 3 emissions, a registrant must describe the overlap, how it accounted for the overlap, and the effect on its disclosed total Scope 3 emissions.

(f) Liability for Scope 3 emissions disclosures.

(1) A statement within the coverage of paragraph (f)(2) of this section that is made by or on behalf of a registrant is deemed not to be a fraudulent statement (as defined in paragraph (f)(3) of this section), unless it is shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith.

(2) This paragraph (f) applies to any statement regarding Scope 3 emissions that is disclosed pursuant to §§ 229.1500 through 229.1506 and made in a document filed with the Commission.

(3) For the purpose of this paragraph (f), the term fraudulent statement shall mean a statement that is an untrue statement of material fact, a statement false or misleading with respect to any material fact, an omission to state a material fact necessary to make a statement not misleading, or that constitutes the employment of a manipulative, deceptive, or fraudulent device, contrivance, scheme, transaction, act, practice, course of business, or an artifice to defraud as those terms are used in the Securities Act of 1933 or the Securities Exchange Act of 1934 or the rules or regulations promulgated thereunder.

The SEC’s Proposed Climate-Related Disclosures: Post Five – Targets, Goals and Interactive Data

Hot Topic, Reporting

In the first post in this series, we overviewed the three main areas addressed in the SEC’s Proposed Rule for climate-related disclosures:

  • Governance, strategy, risk and related disclosures outside the financial statements
  • Greenhouse gas emission disclosures and attestation requirements
  • Financial statement disclosures

As you may have heard and can read about in this Press Release, on May 9, 2022, the SEC extended the comment period for this proposal to June 17, 2022.

Subsequent posts in this series have addressed proposed disclosures for:

This post explores the proposed disclosures surrounding climate-related targets and the requirement to provide all the proposed non-financial statement disclosures in an interactive data format.  As a reminder, these disclosures would be required for all companies in their annual reports on Forms 10-K and 20-F, with updates on Forms 10-Q and 6-K.

The disclosures about targets fall into the following categories:

  • Climate-related targets
  • Progress towards climate-related targets
  • Use of carbon offsets or renewable energy credits (RECs)

Climate-Related Targets

 The proposed rule would require disclosure if a company has set any targets or goals for the reduction of GHG emissions, or any other climate-related targets or goals.  Examples in the proposed rule include:

  • Energy usage
  • Water usage
  • Conservation or ecosystem restoration
  • Revenues from low-carbon products

 Additionally, targets or goals could be related to:

  • Actual or anticipated regulatory requirements
  • Market constraints
  • Other goals established by a climate-related treaty, law, regulation, policy, or organization.

Because targets or goals could be related to strategy or risk management activities, companies could provide these disclosures along with those topics.

Proposed disclosures for climate-related targets or goals are:

  • Activities and emissions included in the target;
  • Relevant units of measurement;
  • Whether the target is absolute or intensity based;
  • Time horizons by which the target is intended to be achieved;
  • Whether time horizons are consistent with goals established by a climate-related treaty, law, regulation, policy, or organization;
  • The defined baseline time period and baseline emissions against which progress will be tracked (The base year must be consistent if a company has multiple targets);
  • Interim targets; and
  • How the company intends to meet its climate-related targets or goals.

Progress Towards Climate-Related Targets

Companies would be required to disclose information about whether they are making progress toward meeting a target or goal.  In addition, disclosure would include how progress has been achieved. This disclosure would be updated each year with disclosure of actions take each year.

Use of Carbon Offsets or RECs

If a company uses carbon offsets or RECs to achieve climate-related targets or goals, disclosure would include:

  • Amounts of carbon reduction represented by theoffsets
  • Amounts of generated renewable energy represented by the RECs
  • Sources of theoffsets or RECs
  • Descriptions and locations of the underlying projects, any registries or otherauthentication of the offsets or RECs
  • Cost of the offsets or RECs

Interactive Data

Proposed S-K Item 1507 would require that all non-financial statement climate-related disclosures be presented in an interactive data file.

Summary

 The proposed detailed descriptions of targets and goals and progress towards meeting them present complex decisions about how and in fact whether to adopt targets and goals.  This and other issues are likely to be the subject of comments in the SEC’s rulemaking process.  Our next post will explore the disclosures in proposed S-K Item 1504 about greenhouse gas emission disclosures.

As always, your thoughts and comments are welcome!

For reference, here are proposed S-K Items 1506 and 1507:

Item 1506 – Targets and goals

(a)(1) A registrant must provide disclosure pursuant to this section if it has set any targets or goals related to the reduction of GHG emissions, or any other climate-related target or goal (e.g., regarding energy usage, water usage, conservation or ecosystem restoration, or revenues from low-carbon products) such as actual or anticipated regulatory requirements, market constraints, or other goals established by a climate-related treaty, law, regulation, policy, or organization.

 (2) A registrant may provide the disclosure required by this section as part of its disclosure in response to § 229.1502 or § 229.1503.

(b) If the registrant has set climate-related targets or goals, disclose the targets or goals, including, as applicable, a description of:

(1) The scope of activities and emissions included in the target;

(2) The unit of measurement, including whether the target is absolute or intensity based;

(3) The defined time horizon by which the target is intended to be achieved, and whether the time horizon is consistent with one or more goals established by a climate-related treaty, law, regulation, policy, or organization;

(4) The defined baseline time period and baseline emissions against which progress will be tracked with a consistent base year set for multiple targets;

(5) Any interim targets set by the registrant; and

(6) How the registrant intends to meet its climate-related targets or goals. For example, for a target or goal regarding net GHG emissions reduction, the discussion could include a strategy to increase energy efficiency, transition to lower carbon products, purchase carbon offsets or RECs, or engage in carbon removal and carbon storage.

(c) Disclose relevant data to indicate whether the registrant is making progress toward meeting the target or goal and how such progress has been achieved. A registrant must update this disclosure each fiscal year by describing the actions taken during the year to achieve its targets or goals.

(d) If carbon offsets or RECs have been used as part of a registrant’s plan to achieve climate-related targets or goals, disclose the amount of carbon reduction represented by the offsets or the amount of generated renewable energy represented by the RECS, the source of the offsets or RECs, a description and location of the underlying projects, any registries or other authentication of the offsets or RECs, and the cost of the offsets or RECs.

Item 1507 – Interactive data requirement.

Provide the disclosure required by this Subpart 1500 in an Interactive Data File as required by § 232.405 of this chapter (Rule 405 of Regulation S-T) in accordance with the EDGAR Filer Manual.

The SEC’s Proposed Climate-Related Disclosures: Post Four – Risk Management

Hot Topic, Reporting

In the first post in this series, we overviewed the three main areas addressed in the SEC’s Proposed Rule for climate-related disclosures:

  • Governance, strategy, risk and related disclosures outside the financial statements
  • Greenhouse gas emission disclosures and attestation requirements
  • Financial statement disclosures

As you may have heard and can read about in this Press Release, on May 9, 2022, the SEC extended the comment period for this proposal to June 17, 2022.

The second post in this series explored proposed governance disclosures.  The third post focused on disclosures about risks, strategy, business model and outlook.  This fourth post addresses proposed disclosures for risk management processes.  This information would be required for all companies in their annual reports on Forms 10-K and 20-F, with updates on Forms 10-Q and 6-K. These disclosures fall into the following categories:

  • Climate-related risk management processes
  • Integration of climate-related risk into overall risk management processes
  • Transition plan risk management disclosures

Climate-Related Risk Management Processes

The proposed rule would require disclosure about any processes for “identifying, assessing, and managing climate-related risks.”  Disclosure about climate-related opportunities could also be included here.  Required details in the proposed rule include information about how a company:

  • Determines the relative significance of climate-related risks compared to other risks;
  • Considers existing or likely regulatory requirements or policies, such as GHG emissions limits, when identifying climate-related risks;
  • Considers shifts in customer or counterparty preferences, technological changes, or changes in market prices in assessing potential transition risks; and
  • Determines the materiality of climate-related risks, including how it assesses the potential scope and impact of an identified climate-related risk.

Disclosures related to individual risks would include information about how a company decides whether to mitigate, accept, or adapt to a particular risk.  In addition, disclosures would be made about how a company prioritizes whether to address climate-related risks and determines how to mitigate any high priority risks.

Integration of Climate-Related Risk into Overall Risk Management Processes

Companies would be required to disclose whether climate-related risk management processes are integrated into their overall risk management process.  If climate-related risks are included in a company’s overall risk management process, disclosure would include details of this integration.  Additionally, if a separate board or management committee performs risk assessment and management of climate-related risks, disclosure would include how that committee interacts with the company’s board or management committee overseeing risk management in general.

Transition Plan Risk Management Disclosures

For companies that have adopted a transition plan as part of their climate-related risk management strategy, disclosures would include a description of the plan, including details such as any metrics and targets related to physical and transition risks.  Companies would be required to update this disclosure each fiscal year by “describing the actions taken during the year to achieve the plan’s targets or goals.”

Summary

The detailed descriptions of how climate risk is managed and how the related process is or is not integrated into a company’s overall risk management process requires a level of detail not seen in many SEC disclosure requirements.  This and other issues are likely to be the subject of comments in the SEC’s rulemaking process.  Our next post will explore the disclosures in proposed S-K Item 1506 about climate-related targets and goals.

As always, your thoughts and comments are welcome!

For reference, here is proposed S-K Item 1503:

Risk management.

(a) Describe any processes the registrant has for identifying, assessing, and managing climate-related risks. If applicable, a registrant may also describe any processes for identifying, assessing, and managing climate-related opportunities when responding to any of the provisions in this section.

(1) When describing any processes for identifying and assessing climate-related risks, disclose, as applicable, how the registrant:

(i) Determines the relative significance of climate-related risks compared to other risks;

(ii) Considers existing or likely regulatory requirements or policies, such as GHG emissions limits, when identifying climate-related risks;

(iii) Considers shifts in customer or counterparty preferences, technological changes, or changes in market prices in assessing potential transition risks; and

(iv) Determines the materiality of climate-related risks, including how it assesses the potential scope and impact of an identified climate-related risk, such as the risks identified in response to § 229.1502.

(2) When describing any processes for managing climate-related risks, disclose, as applicable, how the registrant:

(i) Decides whether to mitigate, accept, or adapt to a particular risk;

(ii) Prioritizes whether to address climate-related risks; and

(iii) Determines how to mitigate any high priority risks.

(b) Disclose whether and how any processes described in response to paragraph (a) of this section are integrated into the registrant’s overall risk management system or processes. If a separate board or management committee is responsible for assessing and managing climate-elated risks, a registrant should disclose how that committee interacts with the registrant’s board or management committee governing risks.

(c)(1) If the registrant has adopted a transition plan as part of its climate-related risk management strategy, describe the plan, including the relevant metrics and targets used to identify and manage any physical and transition risks. To allow for an understanding of the registrant’s progress to meet the plan’s targets or goals over time, a registrant must update its disclosure about the transition plan each fiscal year by describing the actions taken during the year to achieve the plan’s targets or goals.

(2) If the registrant has adopted a transition plan, discuss, as applicable:

(i) How the registrant plans to mitigate or adapt to any identified physical risks, including but not limited to those concerning energy, land, or water use and management;

(ii) How the registrant plans to mitigate or adapt to any identified transition risks, including the following:

(A) Laws, regulations, or policies that:

(1) Restrict GHG emissions or products with high GHG footprints, including emissions caps; or

(2) Require the protection of high conservation value land or natural assets;

(B) Imposition of a carbon price; and

(C) Changing demands or preferences of consumers, investors, employees, and business counterparties.

(3) If applicable, a registrant that has adopted a transition plan as part of its climate-related risk management strategy may also describe how it plans to achieve any identified climate-related opportunities, such as:

(i) The production of products that may facilitate the transition to a lower carbon economy, such as low emission modes of transportation and supporting infrastructure;

(ii) The generation or use of renewable power;

(iii) The production or use of low waste, recycled, or other consumer products that require less carbon intensive production methods;

(iv) The setting of conservation goals and targets that would help reduce GHG emissions; and

(v) The provision of services related to any transition to a lower carbon economy.

The SEC’s Proposed Climate-Related Disclosures: Post Three – Strategy, Business Model, and Outlook

ESG, Hot Topic, Reporting

In the first post in this series, we overviewed the three main areas addressed in the SEC’s Proposed Rule for climate-related disclosures:

  • Governance, strategy, risk and related disclosures outside the financial statements
  • Greenhouse gas emission disclosures and attestation requirements
  • Financial statement disclosures

As you may have heard and can read about in this Press Release, on May 9, 2022, the SEC extended the comment period for this proposal to June 17, 2022.

The second post in this series explored proposed governance disclosures.  This third post focuses on more disclosures outside the financial statements, proposed S-K Item 1502’s disclosures about risks, strategy, business model and outlook. This information would be required for all companies in their annual reports on Forms 10-K and 20-F, with updates on Forms 10-Q and 6-K. These disclosures fall into the following categories:

  • Climate-related risks reasonably likely to have a material impact on the company;
  • Actual and potential impacts of identified climate-related risks on strategy, business model, and outlook;
  • How any actual and potential impacts of identified climate-related risks are considered as part of business strategy, financial planning, and capital allocation;
  • Whether and how any climate-related risks disclosed have affected or are reasonably likely to affect the consolidated financial statements;
  • Whether a company maintains an internal carbon price, and if so, how it uses such a price; and
  • The resilience of the company’s business strategy to potential future changes in climate-related risks.

Description of Climate-Related Risks

This part of proposed S-K Item 1502 requires companies to describe any climate-related risks that are “reasonably likely” to have a material impact on a company, including a material impact on its consolidated financial statements.

As a reminder, here is the definition of “climate-related risk” in proposed S-K Item 1500:

Climate-related risks means the actual or potential negative impacts of climate-related conditions and events on a registrant’s consolidated financial statements, business operations, or value chains, as a whole. Climate-related risks include the following:

(1) Physical risks include both acute risks and chronic risks to the registrant’s business operations or the operations of those with whom it does business.

(2) Acute risks are event-driven and may relate to shorter term extreme weather events, such as hurricanes, floods, and tornadoes, among other events.

(3) Chronic risks relate to longer term weather patterns and related effects, such as sustained higher temperatures, sea level rise, drought, and increased wildfires, as well as related effects such as decreased arability of farmland, decreased habitability of land, and decreased availability of fresh water.

(4) Transition risks are the actual or potential negative impacts on a registrant’s consolidated financial statements, business operations, or value chains attributable to regulatory, technological, and market changes to address the mitigation of, or adaptation to, climate-related risks, such as increased costs attributable to changes in law or policy, reduced market demand for carbon-intensive products leading to decreased prices or profits for such products, the devaluation or abandonment of assets, risk of legal liability and litigation defense costs, competitive pressures associated with the adoption of new technologies, reputational impacts (including those stemming from a registrant’s customers or business counterparties) that might trigger changes to market behavior, consumer preferences or behavior, and registrant behavior.

The definition of “reasonably likely” would be essentially the same as the definition used in MD&A, as described in Financial Release 36 (Release 33-6835), which you can review here.  (Check out Section III.B.)  As a reminder, this can be a low level of probability, perhaps even less than 50%.

These risks should be described over the short-, medium-, and long-term.  The proposed rule does not define these terms but does require that a company disclose how it defines all three time horizons.  In addition, the proposed rule specifically requires disclosure about how a company “takes into account or reassesses the expected useful life of the registrant’s assets and the time horizons for the registrant’s climate-related planning processes and goals.”

The risks required to be disclosed may include physical risks and/or transition risks.  Disclosures about physical risks would include the nature of the risk and whether it is an “acute or chronic risk.”  Other details such as the location and nature of the properties, processes, or operations subject to the physical risk would be disclosed.  The proposed rule would require several very specific disclosures about flooding and water stress risks.

Description of transition risks would include the nature of the risk, including whether it relates to regulatory (including GHG emission regulations), technological, market, liability, reputational, or other factors, and how those factors impact the company.

Description of Actual and Potential Impacts of Climate-Related Risks on Strategy, Business Model, and Outlook

This part of the proposal would require disclosure about how the risks identified above impact on a company’s:

  • Business operations, including the types and locations of its operations;
  • Products or services;
  • Suppliers and other parties in its value chain;
  • Activities to mitigate or adapt to climate-related risks, including adoption of new technologies or processes;
  • Expenditure for research and development; and
  • Any other significant changes or impacts.

Each area would also be analyzed by short-, medium-, and long-term time horizons

Discussion of Impacts of Climate-Related Risks on Business Strategy, Financial Planning and Capital Allocation 

In this section of the proposed disclosure a company would discuss how the risks identified above affect its:

  • Business strategy
  • Financial planning
  • Capital allocation

The discussion would include current and forward-looking disclosures to help a reader understand “whether the implications of the identified climate-related risks have been integrated into the registrant’s business model or strategy, including how any resources are being used to mitigate climate-related risks.”

This discussion would have to include any financial metrics that a company discloses pursuant to the proposed new rules in Regulation S-X (more details about these in later posts), as well the role of carbon offsets or renewable energy credits (RECs) in these areas.

Discussion of Impact of Climate-Related Risks on Consolidated Financial Statements

Disclosure here would include information about any climate-related risks described above that have or are “reasonably likely” to affect the company’s financial statements, including any of the climate related metrics disclosed pursuant to the proposed Regulation S-X rules.

Disclosures About Internal Carbon Prices

Companies that maintain an internal carbon price would be required to disclose how they use such a price along with other disclosures, including:

  • The price in units of the registrant’s reporting currency per metric ton of CO2e;
  • The total price, including how the total price is estimated to change over time, if applicable;
  • The boundaries for measurement of overall CO2e on which the total price is based if different from the GHG emission organizational boundary required for the related Regulation S-X disclosures; and
  • The rationale for selecting the internal carbon price.

If a company maintains more than one internal carbon price, these disclosures would be required for each price.

Resilience Disclosures

This section of the proposed rule would require companies to discuss the “resilience” of their business strategy “in light of potential future changes in climate-related risks.”  Discussion would include any analytical tools, such as scenario analysis, used by the company, including, if applicable, several details about how scenario analysis is used.

Summary

The comprehensive list of areas to be addressed and granular detail of specific disclosures within each area of proposed S-K Item 1502 present several disclosure challenges.  Many are likely to be the subject of comments in the SEC’s rulemaking process.  Our next post will explore the follow-on disclosures in proposed S-K Item 1503 about risk management processes.

As always, your thoughts and comments are welcome!

For reference, here is proposed S-K Item 1502:

Item 1502 – Strategy, business model, and outlook.

(a) Describe any climate-related risks reasonably likely to have a material impact on the registrant, including on its business or consolidated financial statements, which may manifest over the short, medium, and long term. If applicable, a registrant may also disclose the actual and potential impacts of any climate-related opportunities when responding to any of the provisions in this section.

 (1) Discuss such climate-related risks, specifying whether they are physical or transition risks and the nature of the risks presented.

(i) For physical risks, describe the nature of the risk, including if it may be categorized as an acute or chronic risk, and the location and nature of the properties, processes, or operations subject to the physical risk.

(A) If a risk concerns the flooding of buildings, plants, or properties located in flood hazard areas, disclose the percentage of those assets (square meters or acres) that are located in flood hazard areas in addition to their location.

(B) If a risk concerns the location of assets in regions of high or extremely high water stress, disclose the amount of assets (e.g., book value and as a percentage of total assets) located in those regions in addition to their location. Also disclose the percentage of the registrant’s total water usage from water withdrawn in those regions.

(ii) For transition risks, describe the nature of the risk, including whether it relates to regulatory, technological, market (including changing consumer, business counterparty, and investor preferences), liability, reputational, or other transition-related factors, and how those factors impact the registrant. A registrant that has significant operations in a jurisdiction that has made a GHG emissions reduction commitment may be exposed to transition risks related to the implementation of the commitment.

(2) Describe how the registrant defines short-, medium-, and long-term time horizons, including how it takes into account or reassesses the expected useful life of the registrant’s assets and the time horizons for the registrant’s climate-related planning processes and goals.

(b) Describe the actual and potential impacts of any climate-related risks identified in response to paragraph (a) of this section on the registrant’s strategy, business model, and outlook.

 (1) Include impacts on the registrant’s:

(i) Business operations, including the types and locations of its operations;

(ii) Products or services;

(iii) Suppliers and other parties in its value chain;

(iv) Activities to mitigate or adapt to climate-related risks, including adoption of new technologies or processes;

(v) Expenditure for research and development; and

(vi) Any other significant changes or impacts.

(2) Include the time horizon for each described impact (i.e., in the short, medium, or long term, as defined in response to paragraph (a) of this section).

(c) Discuss whether and how any impacts described in response to paragraph (b) of this section are considered as part of the registrant’s business strategy, financial planning, and capital allocation. Provide both current and forward-looking disclosures that facilitate an understanding of whether the implications of the identified climate-related risks have been integrated into the registrant’s business model or strategy, including how any resources are being used to mitigate climate-related risks. Include in this discussion how any of the metrics referenced in § 210.14- 02 of this chapter and § 229.1504 or any of the targets referenced in § 229.1506 relate to the registrant’s business model or business strategy. If applicable, include in this discussion the role that carbon offsets or RECs play in the registrant’s climate-related business strategy.

(d) Provide a narrative discussion of whether and how any climate-related risks described in response to paragraph (a) of this section have affected or are reasonably likely to affect the registrant’s consolidated financial statements. The discussion should include any of the climate related metrics referenced in § 210.14-02 of this chapter that demonstrate that the identified climate-related risks have had a material impact on reported financial condition or operations.

(e)(1) If a registrant maintains an internal carbon price, disclose:

(i) The price in units of the registrant’s reporting currency per metric ton of CO2e;

(ii) The total price, including how the total price is estimated to change over time, if applicable;

(iii) The boundaries for measurement of overall CO2e on which the total price is based if different from the GHG emission organizational boundary required pursuant to § 229.1504(e)(2); and

(iv) The rationale for selecting the internal carbon price applied.

(2) Describe how the registrant uses any internal carbon price described in response to paragraph (e)(1) of this section to evaluate and manage climate-related risks.

(3) If a registrant uses more than one internal carbon price, it must provide the disclosures required by this section for each internal carbon price and disclose its reasons for using different prices.

(f) Describe the resilience of the registrant’s business strategy in light of potential future changes in climate-related risks. Describe any analytical tools, such as scenario analysis, that the registrant uses to assess the impact of climate-related risks on its business and consolidated financial statements, and to support the resilience of its strategy and business model. If the registrant uses scenario analysis to assess the resilience of its business strategy to climate-related risks, disclose the scenarios considered (e.g., an increase of no greater than 3 ºC, 2 ºC, or 1.5 ºC above pre-industrial levels), including parameters, assumptions, and analytical choices, and the projected principal financial impacts on the registrant’s business strategy under each scenario. The disclosure should include both qualitative and quantitative information.

The SEC’s Proposed Climate-Related Disclosures: Post Two – Governance Disclosures

Hot Topic, Reporting

In the first post in this series, we overviewed the three main areas addressed in the SEC’s Proposed Rule for climate-related disclosures:

  • Governance, strategy, risk and related disclosures outside the financial statements
  • Greenhouse gas emission disclosures and attestation requirements
  • Financial statement disclosures

This second post explores the proposed governance disclosures.  As we discussed in the first post, these disclosures would be required for all companies in their annual reports on Forms 10-K and 20-F, with updates on Forms 10-Q and 6-K. As these disclosures would be outside the financial statements they are included in new S-K Item 1501 and fall into two broad categories:

  • Board oversight
  • Management’s role

 

Board Oversight

The proposed disclosures begin with a broad requirement to “describe the board of director’s oversight of climate-related risks.”  It then enumerates disclosures to include, as applicable, including:

  • Identification of any board members or committees responsible for the oversight of climate-related risks.
  • Whether any director has “expertise” in climate-related risks.
  • Board processes surrounding climate-related risk.

This disclosure would include information about climate-related risk discussions, how the board is informed about such risks and the frequency of such discussions.

  • Whether or not, and if yes how, the board considers climate-related risk in its oversight of business strategy, risk management and financial oversight.
  • Whether or not the board sets climate-related targets and if it does, information about how it sets and monitors progress for such targets.

Disclosures can also include information about how the board provides oversight of climate-related opportunities.

Management’s Role

The proposed management’s role disclosures again begin with a broad requirement to “describe management’s role in assessing and managing climate-related risks.”  Disclosures would include, to the extent applicable:

  • Whether certain management positions or committees are responsible for assessing and managing climate-related risks.
  • The identity, if they exist, of such positions or committees.
  • If such positions or committees are in place, the relevant expertise of the position holders or members. Disclosure should include appropriate detail to fully describe the nature of the expertise.
  • How relevant management or committees are provided information about and monitor climate-related risks.
  • How frequently such positions or committees report to the board or a committee of the board on climate-related risks.

Disclosures can also include information about management’s role in assessing and managing climate-related opportunities.

While proposed S-K Item 1501 is not long, it presents some challenging disclosure considerations.  The issue of board and management climate-related expertise will require significant discussion and documentation.  Requirements such as disclosing whether a board sets climate-related targets could have an impact on how companies choose to set or not set such targets.  Both these and other topics are likely to be the subject of comments in the SEC’s rulemaking process.

As always, your thoughts and comments are welcome!

 

 

For reference, here is proposed S-K Item 1501:

(Item 1501) Governance.

(a)(1) Describe the board of director’s oversight of climate-related risks. Include the following, as applicable:

(i) The identity of any board members or board committee responsible for the oversight of climate-related risks;

(ii) Whether any member of the board of directors has expertise in climate-related risks, with disclosure in such detail as necessary to fully describe the nature of the expertise;

(iii) The processes by which the board of directors or board committee discusses climate related risks, including how the board is informed about climate-related risks, and the frequency of such discussion;

(iv) Whether and how the board of directors or board committee considers climate-related risks as part of its business strategy, risk management, and financial oversight; and

(v) Whether and how the board of directors sets climate-related targets or goals, and how it oversees progress against those targets or goals, including the establishment of any interim targets or goals.

(2) If applicable, a registrant may also describe the board of director’s oversight of climate-related opportunities.

 

(b)(1) Describe management’s role in assessing and managing climate-related risks. Include the following, as applicable:

(i) Whether certain management positions or committees are responsible for assessing and managing climate-related risks and, if so, the identity of such positions or committees and the relevant expertise of the position holders or members in such detail as necessary to fully describe the nature of the expertise;

(ii) The processes by which such positions or committees are informed about and monitor climate-related risks; and

(iii) Whether and how frequently such positions or committees report to the board or a committee of the board on climate-related risks.

(2) If applicable, a registrant may also describe management’s role in assessing and managing climate-related opportunities.

Three Deep-Dive Climate Disclosure One-Hour Briefings

Hot Topic, Reporting

Understanding the scope, magnitude and implications of the SEC’s proposed new climate-related disclosures and building a readiness plan for eventual change are crucial actions items management can take now to ensure compliance if and when the proposed rules are adopted.  To help in this process, SECI is presenting a series of in-depth Briefings covering the three major areas included in the proposal.

Climate Disclosures – A Deep Dive Into the SEC’s Proposed New Governance, Strategy and Risk Disclosures – May 9, 2022

This Briefing focuses on the proposed new governance, strategy, business model, outlook, risk, and target disclosures. Discussion will include proposed disclosures surrounding board of directors’ climate expertise and implications of the new rules for setting climate-related targets.

Climate Disclosures – A Deep Dive Into the SEC’s Proposed New Greenhouse Gas Disclosures and Attestation Requirements – May 11, 2022

This Briefing focuses on proposed new disclosures about Greenhouse Gas Protocol Scope 1, 2 and 3 emissions and the related attestation requirements for accelerated and large accelerated filers.  Discussion will include the process of measuring greenhouse gas emissions, the complexities in measuring Scope 3 emissions, greenhouse gas intensity disclosures, and the levels of attestation as the disclosure phases in.

Climate Disclosures – A Deep Dive Into the SEC’s Proposed New Financial Statement Disclosures – May 18, 2022

This Briefing focuses on the proposed new financial statement disclosures for climate-related matters.  Discussion will include materiality considerations, line-item requirements, and severe weather event disclosures.

Each briefing will be available on-demand after its original presentation.

Also, if you missed our earlier Briefing where we provided an overview of the proposed rules, please be sure to check out “Climate Change – The SEC’s Proposed New Disclosures.”

As always, your thoughts, and suggestions for future briefing topics, are always welcome!

SEC Proposes New Rules for SPACs

Hot Topic, Reporting

On March 31, 2022, the SEC finished an active month of rulemaking by proposing new rules for SPACs.  (March also included proposed rules dealing with cybersecurity and climate change.) The SPAC proposed rules affect all phases of the SPAC life cycle and would:

Add new Regulation S-K Items to specify disclosures required in a SPAC’s IPO.  The proposed disclosures are similar to those addressed in SEC comment letters, CorpFin Disclosure Guidance Topic No. 11 and this Statement by Acting Chief Accountant Paul Munter.

Require new disclosures for de-SPACing transactions, including disclosures about the fairness of a de-SPACing transaction and any related financing for SPAC shareholders.

Create a rule that a business combination between a public shell company and an operating company is a sale of securities to the public shell company’s shareholders.  This would likely require some de-SPACing transactions to be registered on Form S-4 or F-4 rather than simply using a proxy statement.

Change provisions in the 1933 Securities Act to provide that the private company in a de-SPACing transaction would be a “co-registrant.”  This could raise liability concerns for the target and its directors.

Change the financial statement requirements for private operating companies in a transaction with a SPAC or other shell company to better align them with the financial statement requirements for an IPO.

Amend the SEC’s requirements in S-K Item 10 about the use of projections to provide information to help investors better assess the basis and reliability of projections.

Change the definition of a blank check company to include SPACs.  Because blank check companies cannot use the 1995 Private Securities Litigation Reform Act safe harbors for forward looking statements, SPACs would not be able to rely on these safe harbors.

Provide that underwriters of a SPAC’s IPO that are subsequently actively involved in the SPACs search for a merger partner would be considered underwriters in the related de-SPACing transaction.

Require a re-assessment of smaller reporting company status within four days of a de-SPACing transaction.

Clarify the status of SPACs as investment companies, by providing a new safe harbor from investment company status.

You can learn more in this Fact Sheet and the Proposed Rule.  The comment period for the proposal will be until the later of 30 days after publication in the Federal Register or May 31, 2022.

If you would like to learn more about the proposed rules they will be discussed in depth at SECI’s “The SPAC Life Cycle:  Business, Legal and Accounting Considerations Forum,” on April 19, 2022.  In addition, we are planning a One-Hour Briefing on this topic later in April.

As always, your thoughts and comments are welcome!