Category Archives: Reporting

SEC Finalizes Rules to Require Electronic Filing of Annual Reports to Shareholders and Other Documents

Reporting

On June 2, 2022, the SEC adopted a Final Rule that requires companies to electronically file a number of documents currently filed on paper.  Included in the group of forms that will now be filed electronically are:

  • The annual report to shareholders required by the proxy rules,
  • Certain Rule 144 filings, and
  • Form 11-K, which will also require XBRL tagging.

You can read more details for all the forms that will be required to be filed electronically in this Press Release and the accompanying Fact Sheet.

The phase in requirements include:

  • For the annual report to shareholders, six months after the effective date of the amendments;
  • For Form 144, six months after the date of publication of the final Rule in the Federal Register; and
  • For Form 11-K, including application of XBRL, three years after the effective date of the applicable amendments

The rule will be effective 30 days after Federal Register publication.

As always, your thoughts and comments are welcome!

Acting Chief Accountant Addresses Auditor Independence and Ethical Cultures in Audit Firms

Reporting, Role of the Audit Committee, SEC Hot Topic

On June 8, 2022, Acting Chief Accountant Paul Munter issued a Statement titled “The Critical Importance of the General Standard of Auditor Independence and an Ethical Culture for the Accounting Profession.”

The Statement:

  • Reviews the principles in the SEC’s auditor independence framework,
  • Summarizes OCA’s approach to independence questions,
  • Lists recurring issues in independence consultations, and
  • Discusses the importance of an ethical culture to accounting firms.

The auditor independence framework section begins with a review of the foundational principles in S-X Rule 2.01:

The Commission will not recognize an accountant as independent, with respect to an audit client, if the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not, capable of exercising objective and impartial judgment on all issues encompassed within the accountant’s engagement. In determining whether an accountant is independent, the Commission will consider all relevant circumstances, including all relationships between the accountant and the audit client, and not just those relating to reports filed with the Commission.

The discussion emphasizes that a simple “checklist compliance exercise” with the detailed requirements in Regulation S-X will not assure that an auditor is independent.  All “relevant circumstances” must be considered when assessing independence.

The discussion of OCA’s approach to independence questions briefly reviews the staff’s process and emphasizes several considerations, including:

  • Consultations should include all information relevant to an independence determination, and
  • Companies and their auditors should not place undue reliance on previous independence consultations as circumstances, legal or regulatory requirements may be different.

The discussion of recurring issues in independence consultations begins with a discussion of concerns by the OCA staff that they are observing “loosening attitudes” about the general independence standards.  It also focuses on the “checklist mentality,” non-audit services, including providing non-audit services to affiliates, and risks in alternative practice structures.

The concluding section about ethical culture issues begins with this statement:

“It is of paramount importance that public accounting firms foster a culture of ethical behavior with respect to all aspects of their professional responsibilities, including auditor independence.”

Included are discussions of how firms should be willing to forgo engagements that are “close-to-the-line” for independence and the importance of quality control systems.

As always, your thoughts and comments are welcome!

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.

Effective May 31, 2022 – Filing Fee Payment Methods Modernized in EDGAR

Reporting

On October 13, 2021, the SEC adopted Final Rules modernizing how filing fees are paid in the EDGAR system.  As you can read in this Press Release, as of May 31, 2022, EDGAR, via pay.gov, will begin to accept credit cards, debit cards and ACH payments.  Filers will continue to be able to use the Fedwire method.  Checks will no longer be accepted.

As always, your thoughts and comments are welcome!

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 Changes to 13D and 13G Beneficial Ownership Reporting

Reporting

The cover pages of both Form 10-K and Form 10-Q have this seemingly random disclosure:

 Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

At first glance the reason for this disclosure is somewhat mysterious.  While it might be relevant to investors if the company has issued or repurchased shares after period-end, the most important purpose of this disclosure is actually for reporting major shareholdings.

Regulation 13D-G essentially requires owners of 5% or more of a class of common equity securities registered under Section 12 of the 1934 Act to make their ownership public.  (You can read more about the details of this reporting process here.)  The cover page disclosure about number of shares outstanding is used to determine if a shareholder owns 5% or more of the company’s common shares.

Generally, the Rules require that this ownership be reported on a Form 13D, but if the person  reporting does not have the purpose of “changing or influencing control of the issuer” then they can report on the shorter Form 13G.

On February 10, 2022, the SEC proposed changes to Regulation 13D-G.  The deadlines for Forms 13D and 13G have not been changed in decades.  In the Press Release announcing this proposal, Chair Gary Gensler stated:

“These amendments would update our reporting requirements for modern markets, reduce information asymmetries, and address the timeliness of Schedule 13D and 13G filings.  Investors currently can withhold market moving information from other shareholders for 10 days after crossing the 5 percent threshold before filing a Schedule 13D, which creates an information asymmetry between these investors and other shareholders.  The filing of Schedule 13D can have a material impact on a company’s share price, so it is important that shareholders get that information sooner.”

As you can read in this Fact Sheet, the Proposed Rule would:

  • Accelerate the filing deadlines for Schedules 13D and 13G,
  • Include certain derivative instruments in this reporting process,
  • Clarify when two or more persons comprise a “group” subject to 13D and 13G reporting, and
  • Require Schedules 13D and 13G to use a “structured, machine-readable data language.”

 This blog post from Nelson Mullins includes more discussion.

As always, your thoughts and comments are welcom

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!