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.