My Crypto Lawyer
Washington D.C.
Dec. 7, 2022
Thank you, Ben [Zycher], and thanks to the American Enterprise Institute for the opportunity to be part of today’s event. Before I begin, I must remind you that my views are my own and not necessarily those of the Securities and Exchange Commission (“SEC”) or my fellow Commissioners. As an SEC Commissioner, I appreciate hearing about people’s views of the SEC, even negative ones. Recently, for example, an email came in saying, “I can’t remember when the SEC was held in such LOW ESTEEM. . . . I honestly believe the SEC needs to re-evaluate the quality of and STANDARDS for SEC ON-AIR COMMENTATORS & while you are at it, please re-evaluate the SEC Referees, too.” A similar concern about SEC refereeing came in another recent weekend email: “Just sayin’ my ex boyfriend accidentally tackle[s] someone and y’all made him leave the game and then one of [the other team’s][1] players punched someone and then just got to walk on the field. That’s just not right!” I admire both writers for being devoted enough fans to reach out to an SEC Commissioner, even if they intended their emails for the Southeastern Conference Commissioner rather than for this Commissioner.
In fairness, these super fans are not alone in being confused about where I work. A family member, when I first got this job, looked up the Southeastern Conference Commissioner’s salary and was impressed at my professional success. A couple years ago, a newspaper article, which appeared fleetingly online, listed me as the Commissioner of the Southeastern Conference. I am confident, however, that by the end of this speech, no one will confuse me for the Southeastern Conference Commissioner, especially after I demonstrate how little I know about football by running this analogy into the wrong end zone or maybe even into the stands.
Having said all that, we are, in fact, here to talk about football, but in this case, a political football—the SEC’s proposed climate change disclosure rule for public companies.[2] That rule, which we have yet to finalize, has drawn thousands of comment letters with a wide variety of passionate perspectives. Regardless of their views on the proposed rule’s merits, commenters seem to agree about its magnitude: if we adopt it, the rule will greatly expand public company disclosure. As Commissioner Uyeda recently pointed out, by the SEC’s own estimate, using recently updated cost assumptions for external legal advice, the proposal would roughly quadruple the external costs of preparing the Form S-1 and the Form 10-K.[3] Commenters suggested that the costs could be much higher than the SEC estimated.[4]
Many commenters have focused on two aspects of the rule: the proposal’s Scope 3 Greenhouse Gas (“GHG”) emission disclosure requirements and the proposed financial statement amendments to Regulation S-X. The former would require certain companies to disclose indirect greenhouse gas emissions from upstream and downstream activities. The latter would require companies to disclose certain climate metrics and related disclosures in the notes to their financial statements unless the aggregated effect of the severe weather events, other natural conditions, transition activities, and identified climate-related risks is less than one percent of the total line item for the relevant fiscal year.
I understand why commenters would focus on Scope 3 disclosures and the one-percent financial statement metrics, given the anticipated expense and, in some cases, the impossibility of producing disclosures that are anything better than best guesses. That prospect casts fear into the hearts of people committed to producing high-quality disclosures for investors. Yet, these patently difficult requirements may be distracting the public from other requirements proposed in the rule, which also could be extremely challenging from a compliance perspective and of limited or negative value to investors. I will mention several of these other elements of the proposal today, although the ones I mention are only the starting line-up; there are other problematic elements.
Interference and Inflexibility
It is not the Southeastern Conference Commissioner’s job to get into the huddle to pick what play the team should run. Nor is it the Securities and Exchange Commission’s job to tell companies how to operate. SEC disclosure mandates are intended to be flexible enough to facilitate material disclosures by companies of all sizes and types. Sometimes, however, the SEC looks more like a coach that is deciding a team’s offensive and defensive strategy than a neutral observer. Some aspects of the climate proposal, rather than simply ferreting out information about what companies are doing with regard to climate, may end up interfering with corporate decision-making and may do so in an inflexible way that does not take into consideration differences across companies.
For example, the climate proposal mandates disclosure about board oversight of climate-related risks, including identifying board members or board committees responsible for overseeing climate-related risks; detailing board member climate expertise; describing the processes and frequency of discussions about climate-related risks; explaining how the board is informed about, and how often it thinks about, climate-related risks and whether it considers climate-related risks as part of its business strategy, risk management, and financial oversight; and describing whether and how the board sets climate-related targets or goals and how it oversees progress in achieving them.[5] The proposal also includes a corresponding set of disclosures related to management: who is responsible for managing climate-related risks, what their climate expertise is, how they get informed about those risks, and how often the managers responsible for climate-related risks report to the board.[6]
Although these requirements are disclosure-based, they almost certainly will affect the substance of what companies do. In the words of one commenter, the proposal could “distort[] board priorities.”[7] Other commenters suggested that the rule could “alter[] registrants’ climate-related policies”[8] and focus companies on climate over other important core business issues.[9] By requiring disclosure of board-level climate expertise, the proposal could elevate climate risk over other types of risk and may insinuate that a board cannot exercise proper oversight of climate issues without a climate expert.[10] One comment letter objected that the “disclosures usurp the decision-making authority of corporate boards and executive management, authority specifically granted to them by state corporate law.”[11] The proposed board disclosure requirements also could lead to larger boards, which may not otherwise be desirable for some companies, or the inclusion of board members with narrow climate expertise instead of expertise spanning a broader set of issues likely to come before the board.[12] Smaller- and medium-sized companies may find it particularly difficult to attract board talent.[13] The management disclosures similarly could distort company behavior.[14]
Granularity and Immateriality
In football, as in life, people have limited attention. A football fan would not want TV commentators to provide a running commentary on what every player on the sidelines is doing throughout the game. Important plays and unusual events deserve attention and should not get lost in a sea of minutiae. Similarly, the SEC should not inundate investors with immaterial items, but should focus their attention on material information. Principles-based mandates enable companies to present information about risks and opportunities that are material to them and omit information that is not financially material. The climate proposal, by contrast, through numerous specific disclosure mandates, could elicit granular, immaterial information.
If the proposal were adopted, climate risk would occupy a lot of space in every company’s SEC filings. The resulting disclosure could over-emphasize climate issues and obscure differences across companies.[15] For example, the climate proposal would require companies to:
- “Describe any climate-related risks reasonably likely to have a material impact on the registrant . . . which may manifest over the short, medium, and long term.”[16] Note that these timeframes are not standard in SEC disclosures and may not produce comparable, meaningful disclosure.[17]
- Describe potential physical risks, which include “acute risks and chronic risks to the registrant’s business operations or the operations of those with whom it does business.”[18] One commenter pointed out that the lack of limiting principle for the qualifier “those with whom [a company] does business” “seemingly sweep[s] in a company’s entire supply chain through the definition of physical risks.”[19]
- “[D]escribe the nature of the risk . . . and the location and nature of the properties, processes, or operations subject to the physical risk.”[20] This information would have to be ZIP code-specific,[21] which commenters characterized as an unparalleled level of detail.[22]
- Detail how many of their assets are in potential flooding locations[23] and “high water stress “locations, including the “percentage of the registrant’s total water usage from water withdrawn in those [high stress] regions.”[24] One commenter questioned why the SEC proposes “singling out risks relating to flooding and high water stress for detailed prescriptive disclosures,” particularly because “flood risk information and high water stress risks are not comparable within a firm, across sectors, and across regions of the country, so investors are unlikely to make investment decisions based on this information.”[25]
- Disclose the emissions both disaggregated by each constituent greenhouse gas and in the aggregate.[26] Commenters pointed out that this level of granularity is not standard.[27]
- Explain how each identified risk affects, in the short-, medium-, and long-run, their strategy, business model, and outlook, including effects on business operations, products and services, “suppliers and other parties in [the company’s] value chain,” climate mitigation, and R&D.[28] As commenters have noted, the term “value chain” is expansive.[29] Accordingly, regardless of whether Scope 3 is included in the final rule, many private companies—large and small—and farmers will be pulled into the rule.
Designing the systems to collect and categorize the voluminous information likely will be difficult. One commenter put it this way: “Even if money were no object, it could take years to build and enhance data systems to accommodate these requirements.”[30] Companies’ experiences with Sarbanes-Oxley internal controls and conflict minerals supply chain reporting give them a sense of what lies ahead, but the climate proposal could be even more difficult.[31]
Conjecture and Confusion
A scan of a glossary of football phrases turned up the colorful term, “flea flicker,” which describes a “risky trick play designed to confuse the defense.”[32] The climate rule may be a flea flicker in its own right: cast as a rule to bring consistency, comparability, and reliability,[33] the proposal, much of which is rooted in conjecture, instead could bring investor confusion.
Commenters highlighted several portions of the proposal that could generate unreliable, speculative disclosure. Almost or all of the previously mentioned granular disclosure requirements around physical risk, particularly over the long-term time horizon, could be of limited use to investors because they will require companies to speculate about fundamentally unknowable risks.[34] The proposal also would require that companies make disclosures related to so-called transition risks, meaning “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.”[35] In other words, the SEC proposes to require companies to disclose whether and how a company is preparing for a risk that may or may not happen years in the future, the occurrence of which depends upon the actions of a multitude of other parties.[36] These disclosures will be inherently speculative.
The proposal would require companies to model climate outcomes. Our host today, Ben Zycher, pointed out in his comment letter the difficulty of that task:
Any such projections of climate phenomena and resulting “risks” to investors — far into the future — are very far from trivial methodologically. Which climate model(s) should businesses use? Which assumptions about future emissions, about the sensitivity of the climate system, about policies to be adopted internationally, about the climate effects of those policies, ad infinitum, should public companies incorporate into those models? What confidence should be attached to the predictions made by the models?[37]
Even a commenter that supported the use of models, urged the SEC to proceed with care because of the limitations of models’ reliance on assumptions.[38] The proposal did not define extreme or severe weather, which could lead to lack of comparability across companies.[39] Investors are likely to be confused by the array of approaches companies will take, and SEC disclosure review staff will find their jobs challenging too.
The proposal could have the unintended consequence of discouraging companies from trying to improve their ability to assess future climate risks. The proposal would require companies to disclose their internal processes to manage and analyze climate risk, such as scenario analysis,[40] the process for estimating and using internal carbon prices,[41] and “climate-related targets or goals,” such as GHG reduction targets.[42] One commenter argued that “these reporting requirements could expose competitive information to the marketplace and potentially undermine manufacturers’ efforts to understand the impact of climate-related risks on their business and plan and innovate accordingly.”[43] Other commenters argued that mandated disclosure could either discourage companies from performing these kinds of analyses or setting any targets, or alternatively be unhelpful to investors because some processes are still “in the early stages of development . . . .”[44]
Another aspect of the proposed rule that could impede the consistency, comparability, and reliability of the rule relates to “value chain” disclosures. As I mentioned earlier, in order to assess their own physical and transition risks, public companies will need to obtain information from other companies in their supply chains. Companies must “[d]escribe the actual and potential impacts of any climate-related risks”[45] they have identified – meaning both physical risks and transition risks – including for “[s]uppliers and other parties in [their] value chain”[46] The proposal defines “value chain” as “the upstream and downstream activities related to a registrant’s operations,” which “may include activities by a [third] party that relate to the initial stages of a registrant’s production of a good or service” or “that relate to processing materials into a finished product and delivering it or providing a service to the end user.”[47] The breadth and ambiguity of the term suggest that companies could face quite a task in collecting the data they need to make the required disclosures.[48] Commenters argue that the value chain requirements could “inappropriately compel registrants to seek to assess and disclose risks for which they commonly have little or no insight,”[49] and even about which they cannot gather information.[50] As a result, companies will have to do the best they can with whatever information they can glean, but we should not expect those results to be particularly reliable, let alone comparable.
Conjecture will not be limited to disclosures about future risks. Companies will likely differ as to whether particular expenditures are tied to climate risk mitigation. One commenter provided examples to show how difficult this exercise could be:
[I]f a registrant upgrades a water treatment plant so that the plant can handle a greater volume of runoff, is this an action to mitigate risks of severe weather that must be disclosed? What if the registrant purchases additional water rights? Is this an action to mitigate climate risk that must be disclosed? Do mowing activities around registrant headquarters need to be disclosed because of a reduction in wildfire risk? . . . The sheer volume of activities that a registrant might engage in for a host of reasons entirely unrelated to climate change but that could have some sort of nexus to the effects of climate change are voluminous and incalculable.[51]
Perhaps the answers to these questions are not so hard. In an era when everyone from creditors to regulators are seeing green, everything will presumed to be related to climate.
Conclusion
As I promised, I have convinced you that a Commissioner of the Securities and Exchange Commission is not necessarily well-qualified to be Commissioner of the Southeastern Conference. As Chair Gensler pointed out in a recent speech, however, both SECs were formed at around the same time and both have “a focus on competition.”[52] He noted specifically that our governing statutes require us to “consider efficiency, competition, and capital formation” in our rulemaking endeavors.[53] Chair Gensler explained:
Competition increases returns for investors and lowers the cost of capital for issuers. It promotes innovation and efficiency in the middle of the markets. It helps capital markets more effectively price and allocate money and risk. It helps the U.S. maintain our global competitiveness.[54]
Chair Gensler is right that competitive markets have brought the United States great prosperity, which has enriched the lives of Americans. The SEC’s role is to serve as referee in those competitive markets, not as coach or player. Some of our current rulemaking endeavors seek to displace competitive forces with SEC mandates. If we do not listen to commenters as we proceed with those rulemakings, we might be getting lots of properly addressed complaint letters. Thank you, and I am happy to take some questions . . . as long as they are not about football.
[1] Appreciating the sensitivities of SEC fans, I omit the name of the allegedly offending team.
[2] The Enhancement and Standardization of Climate-Related Disclosures for Investors 87 FR 21334 (April 11, 2022), [hereinafter, “Proposed rule”]. While the pun is intended, it should not obscure the reality that SEC rulemakings are a poor tool for addressing issues that are the subject of heated societal debate, particularly those that lie outside our expertise. We would do better to allow citizens to hash out these issues in the halls of Congress and grassroots civic organizations. See, e.g., West Virginia v. EPA, 142 S. Ct. 2587, 2616 (2022) (holding that “[c]apping carbon dioxide emissions at a level that will force a nationwide transition away from the use of coal to generate electricity may be a sensible ‘solution to the crisis of the day[,]’ but that “a decision of such magnitude and consequence rests with Congress itself, or an agency acting pursuant to a clear delegation from that representative body.”) (citing New York v. United States, 505 U.S. 144, 187 (1992)). The SEC presumably ought to be even more cautious than the Environmental Protection Agency when wading into environmental standard-setting, even if doing so implicitly through disclosure mandates, given the SEC’s lack of climate expertise. See, e.g., Comment Letter from Boyden Gray & Associates PLLC at 2 (July 8, 2022), https://www.sec.gov/comments/s7-10-22/s71022.htm (“[T]he SEC has no ‘comparative expertise’ in climate, and Congress has specifically assigned this authority to another agency—the EPA—a fact that even the SEC tacitly acknowledges. This means that there is a strong presumption that Congress did not grant the SEC authority to mandate climate-related risk disclosures, a presumption that is in no way rebutted by the Securities Act or Exchange Act.”) (citation omitted); Comment Letter from Paul Ray at 3 (October 25, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20147524-313734.pdf (“Congress exists to choose which desires, among the countless number enjoying some sway among the public, are to be given effect in law; farming out that most quintessentially legislative task to the Commission would be a delegation impermissible under Article I of the Constitution.”). See also Business and Financial Disclosure Required by Regulation S-K, 81 Fed. Reg. at 23,916, 23,970 (April 22, 2016) (“The Commission . . . determined in the past that disclosure relating to environmental and other matters of social concern should not be required of all registrants unless appropriate to further a specific congressional mandate or unless, under the particular facts and circumstances, such matters are material.”) (citations omitted); Amanda M. Rose, A Response to Calls for SEC-Mandated ESG Disclosure, 98 Wash. U. L. Rev. 1821, 1842-43 (2021), https://openscholarship.wustl.edu/law_lawreview/vol98/iss6/10 (asking whether the SEC is “the right institution” to select “an ESG disclosure framework based in part on considerations that extend into the realm of politics [and] thrusts the SEC into a less familiar and more controversial role”).
[3] See Mark Uyeda, Commissioner, SEC, Remarks at the 2022 Cato Summit on Financial Regulation (November 17, 2022), https://www.sec.gov/news/speech/uyeda-remarks-cato-summit-financial-regulation-111722#_ftnref8 (“In its March 2022 proposal, the Commission estimated that the total existing external cost burden on companies to register their offerings on Form S-1 and file their annual reports on Form 10-K was a little more than $2 billion. The Commission then estimated that the marginal increase from the proposed climate disclosures alone would nearly triple these costs to over $6.3 billion. These estimates were based on the assumption that the cost for external legal advice was $400 per hour – an amount that has remained flat since 2006. Recently, the SEC adjusted the assumed cost to $600 per hour – and even this revision may be too low. Using this $600 assumption, the total estimated external costs quadruples to $8.4 billion.”) (footnotes omitted).
[4] See, e.g., Comment Letter from Society for Corporate Governance at 3 (November 1, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20148910-315865.pdf (“All of the approximately 140 Society issuer members who participated in the comment letter process and that specifically weighed in on this issue indicated that their company believes that the Proposing Release significantly underestimated the implementation and ongoing compliance costs.”); Comment Letter from Exxon at 12 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132323-302882.pdf (“[O]ur initial work indicates the cost of implementation and compliance for issuers will be orders of magnitude greater than the estimates in the Proposal.”); Comment Letter from American Forest & Paper Association at 19-20 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20131756-302190.pdf (“If the rules were to be finalized as proposed, we believe actual costs would be much higher than the estimates outlined in the proposal. Indeed, the actions of the ‘climate consulting firms’ the SEC states ‘are available to assist registrants’ (87 Fed. Reg. at 21352) are signaling the rules will have significantly higher costs.”); Comment Letter from U.S. Chamber of Commerce at 3, 10-15 (November 1, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20148911-315866.pdf (characterizing the Commission’s estimates as “grievously understated” and explaining why actual compliance costs would be much higher).
[5] Proposed rule 17 CFR § 229.1501(a)(1).
[6] Proposed rule 17 § 229.1501(b)(1).
[7] Comment Letter from Shearman and Sterling at 6 (June 20, 2022) [hereinafter “Shearman”], https://www.sec.gov/comments/s7-10-22/s71022-20132545-303082.pdf. This commenter explained:
Public companies face numerous risks in their businesses, of which climate related risks represent just one category, and for many companies it is not the most important one or even among the top risks the company faces. The required disclosures will pressure companies to elevate climate-related risks over others merely to allow the company to disclose “board level climate action” by putting climate matters on the already full agendas for board and committee meetings in an effort to manage public perception. Id.
[8] Comment Letter from National Mining Association at 38 (June 17, 2022) [hereinafter “NMA”], https://www.sec.gov/comments/s7-10-22/s71022-20132354-302919.pdf.
[9] See id.; see also Comment Letter from Society for Corporate Governance at 57 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132044-302525.pdf [hereinafter “SCG 1”], (“Climate change is the quintessential example of an occurrence that is likely to have a disparate impact on companies in different industries, of different sizes and scopes, and across business models. . . . . Corporate boards must be well-positioned to oversee a broad array of risks and opportunities, including those relating to the pandemic, geopolitical changes, succession/talent and human capital management, supply chain issues, economic uncertainties and volatility, competitive conditions, cybersecurity, data privacy, and regulation, to name a few. Climate or other expert directors may or may not be suitable to oversee any given company. It should be up to each company’s board to determine the requisite skills that need to be represented on the board to appropriately oversee the company and its operations.”).
[10] See, e.g., Comment Letter from NMA at 15 (“It is unclear why disclosing climate expertise is more important to investors than disclosing expertise in other critical areas and seemingly undermines a company’s ability to have a well-functioning board with members with diverse skill sets who can effectively oversee the full range of issues that companies face. Moreover, it is unclear why a board without a climate expert should be considered ill-equipped to oversee climate-related strategy.”); Comment Letter from Shearman at 6 (“In some cases, climate-related experience on the board may not be the best way for a company and the board to manage and oversee overall enterprise-wide risks as supporting the board with appropriate internal or external resources would provide the board with the subject matter expertise that is needed. Having to select board members for narrowly prescribed subject matter expertise rather than criteria relevant for good governance may adversely affect board effectiveness.”); Comment Letter from American Bar Association Business Law Section at 19 (June 24, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132946-303300.pdf [hereinafter “ABA Business Law”], (“Not all public companies present climate-related challenges that would make having a board member with expertise in climate-related risks a necessary advantage. In addition, we are concerned that requiring disclosure of such board member expertise would encourage populating boards with individuals having specialized expertise in discrete areas in contrast to those with broad business experience and judgment, which would be to the detriment of effective corporate governance.”).
[11] Comment Letter from Bernard Sharfman and James Copland at 18 (June 16, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20131661-302049.pdf.
[12] See, e.g., Comment Letter from U.S. Chamber of Commerce at 36 (June 16, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20131892-302347.pdf [hereinafter “Chamber 1”], (opposing board climate expertise requirement because it “could crowd out the broader enterprise governance and risk oversight skills and experience that directors must have” and noting that “finding qualified board members with particular subject-matter expertise could be difficult, creating a supply and demand imbalance that would be more costly to the quality of corporate governance – with respect to climate-related risks and other matters – than it would be helpful”); Comment Letter from SCG 1 at 58 (“[P]ressure on companies to elect a director with climate-focused expertise could also result in lower quality directors in the aggregate. The pool of available climate experts who can, while serving as a director, retain that expertise in the context of evolving risks in a way that is more common with day-to-day risk management (as opposed to oversight), and who also have the skills and experience to perform the director role more broadly, is not large.”).
[13] See, e.g., Comment Letter from SCG 1 at 58 (noting that more qualified board members “would likely be absorbed by large-cap companies that can afford to pay more for the experts’ services.”).
[14] See, e.g., Comment Letter from SCG at 58 (“When companies are compelled to disclose who on their management teams are experts, where that expertise originated, where those employees fit within the organization, how often they meet with other management experts and the board of directors, and other information, they will likely feel pressured to create a structure and program that looks ‘good’ on paper and conforms to other companies’ programs regardless of the materiality of the risk to the company or the company’s particular needs. Conversely, this proposed requirement will also disincentivize some companies from changing their personnel or programs, even where change will improve the management of relevant risks.”).
[15]See, e.g., Comment Letter from Committee on Securities Law of the Maryland State Bar Association at 3 (June 17 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132179-302680.pdf (“The placement of climate-related risks in its own subpart of Regulation S-K and the incredible level of detail about such risks that would be required thereby, as compared to the disclosure required about all other risks pursuant to Item 105 of Regulation S-K, however, implies importance with respect to disclosure in Commission filings that we believe is unwarranted (at least with respect to all registrants on an across-the-board basis).”); Comment Letter from Colorado Public Employees’ Retirement Association at 4, June 17, 2022, https://www.sec.gov/comments/s7-10-22/s71022-20132550-303091.pdf (“We believe materiality limitations should apply to each of the proposed climate-related disclosure requirements, and that the determination of materiality should be left with registrants. Otherwise, one-size-fits-all disclosure requirements that are not considerate to materiality may lead to more boiler-plate language in corporate disclosures as they subdue the need for companies to think critically and disclose material business-specific risks.”); Comment Letter from Amazon at 7 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132266-302794.pdf (“Adoption of the disclosure requirements as proposed, without any materiality qualification, will result in extensive and possibly indiscriminate boilerplate disclosures that would be costly to prepare and of limited utility to investors.”); Comment Letter from NMA at 5 (opining that “impos[ing] specific and non-material disclosure mandates relating to climate change is a proven recipe for clogging disclosure documents with unnecessary and meaningless data that obscure the truly material information being disclosed”).
[16] Proposed rule 17 CFR § 229.1502(a).
[17] See, e.g., Comment Letter from ABA Business Law at 22 (“We also do not believe all registrants have strategies with clear short-, medium- and long-term time horizons, and even those that do often do not clearly disclose those time horizons, including because (i) they are intentionally flexible to enable nimble strategic and crises-related planning and (ii) doing so could result in disclosure that may cause competitive harm. We do not believe the Commission has previously required registrants to specifically define or make disclosures of such time horizons in the critical areas of MD&A or the description of business, and to introduce that concept now in the relatively narrow area of climate-related risk and opportunity seems overly prescriptive, can pose meaningful challenges to management as they seek to adapt their strategies and can result in misalignment of climate-related disclosures with other, potentially more critical strategically-relevant disclosure issues, including the financial statements and MD&A.”); Comment Letter from SCG 1 at 20 (“The Proposed Rule’s requirement that a registrant disclose whether any climate-related risk is reasonably likely to have a material impact, including its business or consolidated financial statements, which may manifest over the short, medium, and long term, represents a clear departure from traditional materiality assessments regularly conducted by companies for securities law purposes.”); Comment Letter from Williams at 9 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132208-302726.pdf (“The SEC offers no guidance for how to reliably project medium-or long-term risks.”); Comment Letter from Cato at n. 69 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132199-302715.pdf (“The proposal does not define short, medium or long term, but asks for comment on whether the Commission should do so, suggesting that long-term time frame could be 10-20 years, 20-30 years, or 30-50 years. Notice at 67. None of these time frames are consistent with either the interests of an investor (even a long-term one) or the ability to predict risk exposure for an issuer.”).
[18] Proposed rule 17 CFR § 229.1500(c)(1).
[19] Comment Letter from NMA at 21 (emphasis in original).
[20] Proposed rule 17 CFR § 229.1502(a)(1)(i).
[21] Proposed rule 17 CFR § 229.1500(k).
[22] See, e.g., Comment Letter from Chamber 1 at 34 (“No other Regulation S-K disclosure Item requires information that is this particular – down to a ZIP code or plot sizes. For example, the materiality of providing the ZIP code for thousands or possibly hundreds of thousands of individual electric transmission and distribution towers and poles for electric utilities is of questionable value to investors.”); American Chemistry Council at 11 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132320-302878.pdf (contrasting proposed ZIP-code disclosure in the climate proposal with the country-, country group-, or continent-disclosure in SEC-mandated disclosures for the oil and gas industry).
[23] Proposed rule 17 CFR § 229.1502(a)(1)(i)(A).
[24] Proposed rule 17 CFR § 229.1502(a)(1)(i)(B).
[25] Comment Letter from American Fuel & Petrochemical Manufacturers at 16 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132115-302600.pdf.
[26] Proposed rule 17 CFR § 229.1504(b)(1).
[27] See, e.g., Comment Letter from T. Rowe Price at 3 (June 16, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20131721-302138.pdf (supporting Scope 1 and 2 greenhouse gas emissions disclosures, but questioning need for disaggregation by constituent GHG); SCG 1 at 51 (Disclosure of disaggregated GHG emissions should be required “only if and to the extent an issuer already publicly discloses such aggregated data elsewhere . . . and if material.”); ABA Business Law at 25 (objecting to “requirement to disclose emissions on a gas by gas basis”).
[28] Proposed rule 17 CFR § 229.1502(b).
[29] See, e.g., Comment Letter from New Mexico Farm & Livestock Bureau at 3 (June 16, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20131666-302055.pdf (“The proposal defines ‘value chain’ vaguely, extending upstream to ‘supplier activities’ without a clear limitation and extends to an ill-defined downstream scope. Nearly every farmer and rancher, irrespective of size, at some point finds themselves in the upstream or downstream activities of a registrant’s value chain.”); Comment Letter from United Airlines at 5 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132197-302713.pdf (“The inclusion of these ‘value chain’ concepts in the Proposed Rules would require registrants to analyze and factor into their reporting controls the climate-related risks of third parties and disclose information that they do not control or may not be able to reasonably assess. In addition, even obtaining the necessary data would be challenging as, for example, a third party may not be willing to disclose the information required by the Proposed Rules to a registrant for competitive purposes.”).
[30] American Exploration and Production Council at 31 (June 17, 2022). https://www.sec.gov/comments/s7-10-22/s71022-20132339-302904.pdf.
[31] See, e.g., Daktronics at 2 (June 17, 2022). https://www.sec.gov/comments/s7-10-22/s71022-20132347-302912.pdf (“We liken the gathering of Scope 1, 2, and 3 information to be infinitely more onerous than conflict minerals and would be an impossible/impractical task year after year.”); Comment Letter from Chamber 1 at 7 (“The Proposed Rules, taken as a whole, would impose a vast and costly new reporting regime on public companies that dwarfs even Sarbanes Oxley implementation costs.”); National Investor Relations Institute at 12 (June 21, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132552-303094.pdf (“In NIRI’s view, the Proposed Rule does not provide adequate time for companies to develop plans, processes, and procedures to comply with these new requirements. This is probably the most wide-ranging rule proposal that the SEC has issued in its history.”); American Petroleum Institute at 24 (June 17, 2022) [hereinafter, “API”], https://www.sec.gov/comments/s7-10-22/s71022-20131811-302248.pdf (“[P]rior experience indicates that the underlying factors in the Commissions’ estimates for these types of rules result in substantial underestimates of their costs. For example, the Commission’s estimated that compliance with the Section 404 requirements promulgated pursuant to the Sarbanes-Oxley Act would cost companies about $91,000 per year. But some large companies actually incurred millions of dollars in annual costs.”) (citing Lorraine Wooller, The Cost of Climate Regulation, POLITICO (Apr. 21, 2022), https://www.politico.com/newsletters/the-longgame/2022/04/21/the-cost-of-climate-regulation-00026694.)).
[32] 28 Football Terms to Make You Sound Like a Pro, Dictionary.com (Feb. 10, 2022), https://www.dictionary.com/e/football-terms/ (defining a “flea flicker” as a play in which the quarterback hands the ball off to a running back, who then throws it to the quarterback, who then passes it to a receiver).
[33] Proposed rule at 21,413 (“The primary benefit is that investors would have access to more consistent, comparable, and reliable disclosures with respect to registrants’ climate-related risks, which is expected to enable investors to make more informed investment or voting decisions.”).
[34] See, e.g., Comment Letter from Chamber 1 at 33 (“[I]n the context of climate events and associated impacts, long term could be many years from now, perhaps even generations. Depending on what constitutes ‘long term’ for these purposes, companies might have to disclose information that, because what it covers is so indeterminate, off in the future, and subject to change, would not be relevant or informative to include in a typical model of asset valuation or, worse, lead to unreasonable speculation.”); see also Comment Letter from National Retail Federation at 7 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132037-302514.pdf (“[T]he Proposal would require issuers to assess financial and business impacts that might occur over time frames that range from near to decades in the future. This is an unprecedented requirement and—especially over the long term—is inherently unreliable given the potential evolution of climate risks and opportunities.”); Comment Letter from Association of American Railroads at 6 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132073-302554.pdf (“Risks associated with climate-change are difficult for even climate scientists to predict beyond a few years into the future. We have seen the impacts of climate change come to fruition years sooner than originally anticipated, while other expected impacts have not yet materialized. To ask for such speculative disclosure by registrants, who are not climate scientists, considering mid- to long-term projections years to decades in advance amounts to little more than speculation, which is not helpful to investors and could be misunderstood by them as reliable.”) (citations omitted); Comment Letter from API at 18 (“Current climate models do not predict, for example, short-term risks to specific facilities, and API is not aware of any reliable methods that do. As such, the proposed requirement to report short-term and even more so long-term risks at the level of granularity required by the Proposal—down to the zip code or specific facility—will be based on subjective qualitative judgments with low degrees of certainty.”).
[35] Proposed rule 17 CFR 229.1500(c)(2).
[36] See, e.g., Comment Letter from Financial Reporting Committee of the Institute of Management Accountants at 4 (June 21, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132606-303129.pdf (noting that “long-term disclosures will be highly speculative and uncertain and may not be useful to investors”); Comment Letter from David Burton at 2, n. 9 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20131980-302443.pdf (“Neither the proposing release nor the proposed rule provide any meaningful guidance with respect to how issuers should assess and predict responses and policies in the future by a myriad of federal, state and foreign governments, future technological developments or market responses to these government policies or technological developments. Issuers will have to simply guess (i.e. make it up) in order to make issuer specific assessments”) (to illustrate the difficulty of tracking government policy changes, citing “Climate Change Laws of the World,” Grantham Research Institute on Climate Change and the Environment at LSE https://climate-laws.org/).
[37] Comment Letter from Benjamin Zycher at 14 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132286-302818.pdf.
[38] See, e.g., Comment Letter from National Alliance of Forest Owners at 8 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132285-302817.pdf (“[C]limate scenario analyses of the effects of climate change are typically derived from models that incorporate subjective assumptions about future events, parameters and data choices. It is important to recognize that these models have significant limitations and their outputs are highly sensitive to assumptions and parameters. While consistent and standardized assumptions can be expected to settle over time, more technical development is needed. The SEC’s proposal to require registrants to disclose ‘the financial impacts on the registrant’s business strategy under each scenario’ with both ‘qualitative and quantitative information’ may not be decision-useful to investors and may result in confusing or misleading disclosures.”).
[39] See, e.g., Comment Letter from Impossible Foods at 6 (June 16, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20131603-301976.pdf (The proposed rule does not define the terms extreme or severe weather, which could allow for this framework to be interpreted and applied differently across various companies, depending on what management considers extreme or severe weather and how likely it is to happen, without enough guidance or examples to ensure complete physical risk disclosures. For example, is a thunderstorm covered by severe or extreme weather events? A thunderstorm that is currently not explicitly covered by the definition of physical risk could result in a significant impact on the financial position of a registrant as compared to a flood event. Additionally, as many of these extreme events may be unpredictable (the Texas freeze in 2021 for example), are the risks required for disclosure only based on historical precedence? (i.e. in California, wildfires should be a risk, while in New Orleans, hurricanes and flooding should be a risk).”).
[40] Proposed rule 17 CFR§ 229.1502(f).
[41] Proposed rule 17 CFR § 229.1502(e)(1).
[42] Proposed rule 17 CFR §229.1506.
[43] Comment Letter from National Association of Manufacturers at 40 (June 6, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20130306-296969.pdf.
[44] Comment Letter from Chamber 1 at 36; see also Comment Letter from Shearman at 7 (“Public companies, however, are faced with many challenges in growing and managing their businesses and regularly set internal goals on a variety of matters for operational purposes, to motivate teams or to measure performance. Many of these goals are not shared publicly. The proposed rules will subject registrants to increased liability and public scrutiny of their efforts which could have the chilling effect of discouraging companies from embarking on and refining their goal-setting in the first place. The same is true for the required disclosure of any carbon price that registrants may be using as part of their climate-related business strategy.”).
[45] Proposed rule 17 CFR § 229.1502(b).
[46] Proposed rule 17 CFR § 229.1502(b)(1)(iii).
[47] Proposed rule 17 CFR § 229.1500(t).
[48] See, e.g., Comment Letter from The Food Industry Association at 3 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132351-302916.pdf (“Large retailers have thousands and sometimes tens of thousands of suppliers located all over the United States and the globe. Under these circumstances any kind of granularity around the supply chain is extremely difficult to achieve and would result in literal volumes of disclosure.”); Comment Letter from NMA at n. 46 (contending that “it is unclear what [value chain] means or how companies are supposed to determine what is, or is not, part of their value chain”).
[49] Comment Letter from SCG 1 at 61.
[50] See, e.g., Comment Letter from HP at 5 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132241-302682.pdf (“By defining climate-related risks (and climate-related opportunities) to include actual or potential negative impacts on a registrant’s value chains, the Proposal would require an issuer to assess its exposure to climate-related risks well beyond its own operations, including ‘supplier activities’ and potentially consumers or customers.”); Comment Letter from SCG at 61 (“Mandating disclosure of the climate-related risks of a registrant’s entire value chain, as opposed to limiting the disclosure requirement to those material risks related to the registrant’s financial statements and operations, would inappropriately compel registrants to seek to assess and disclose risks for which they commonly have little or no insight.”); Comment Letter from NMA at 22 (“To the extent the proposed definition of physical risks is intended to cover this entire value chain, it will require registrants to gather detailed information about the physical risks to every entity in their global value chain. In most instances, registrants will not have the contractual rights to collect such information on physical risks from commercial counterparties – if it is available at all.”).
[51] Comment Letter from NMA at 8-9; see also Association for American Railroads at 11 (June 17, 2022), https://www.sec.gov/comments/s7-10-22/s71022-20132073-302554.pdf (“[T]he rail industry installs and maintains snow sheds in mountainous areas that have protected against avalanches on our rights-of-ways since the 1800s. To the extent a particular railroad adds a new shed or maintains an older shed, it would be impossible to calculate the percentage attributable to climate change versus routine investment. The Proposal appears to assume that financial impacts are either related to climate or unrelated, but in reality, there may be a variety of reasons for any particular business decision that cannot be clearly described under the Proposal.”).
[52] Gary Gensler, Chair, SEC, “Competition and the Two SECs” Remarks Before the SIFMA Annual Meeting (October 24, 2022), https://www.sec.gov/news/speech/gensler-sifma-speech-102422
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