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How SEC Proposed Rules, ESG, and Greenhouse Gas Emissions Will Impact Your Request for Proposal

By John Weathington III - Apr 21, 2022 7:30:00 AM - 8 MINS READ

Expect new climate-related disclosure requirements on public companies

In March 2022, the U.S. Securities and Exchange Commission (SEC) issued a long-anticipated rule proposal that would impose new climate-related disclosure requirements on public companies, requiring them to disclose greenhouse gas emissions (GHG), business risks related to severe weather events, and business risks caused by transition to a lower carbon footprint. Under these new rules, companies would have to report the "material impacts" these climate risks will have on their business, strategy, and expenditures, as well as metrics detailing how the company assessed these material impacts.

The proposed rules fill almost 500 pages and read like...well...regulations.[1] Only SEC registrants (publicly traded companies) will have to comply, but Scope 3 emissions reporting, corporate ESG policies, and supply and value chain requirements will likely cause the final regulations to trickle down to private contractors and even up to public and private customers. So, here is the skinny on what the proposed rules would require companies to disclose:

  • Oversight and governance of climate-related risks by the board of directors and executive management.
  • Climate-related risks that have had or are likely to have a material impact on your business and consolidated financial statements over the short-, medium-, or long-term;
  • How identified climate-related risks have affected or are likely to affect your strategy, business model, and outlook;
  • Processes for identifying, assessing, and managing climate-related risks and whether such processes are integrated into your overall risk management system;
  • The impact of climate-related events, like severe weather events and other natural conditions, and climate-related transition activities on line items of your company's financial statements and related expenditures.
  • Scopes 1 and 2 GHG emissions metrics, separately disclosed, expressed:
    • by disaggregated constituent greenhouse gases and in the aggregate, and
    • in absolute and intensity terms.
  • Scope 3 GHG emissions and intensity, if "material" or if your company has set a GHG emissions reduction target or goal that includes Scope 3 emissions.
  • Your company's climate-related targets or goals, and transition plan, as well as any identified climate-related opportunities.
  • Public companies would have to file, in contrast, to furnish, their disclosures, including:
    • minimum attestation report requirements, and
    • certain minimum qualifications by any attestation service provider.

The proposed rules would therefore require public companies to disclose their Scope 1 and Scope 2 GHGs. And some companies would also be required to disclose Scope 3 emissions if material to investors or if the company made a commitment that includes reference to Scope 3 emissions.

Scope 1: Covers direct emissions from owned or controlled sources.

 

Scope 2: Covers indirect emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the reporting company.

 

Scope 3: Includes all other indirect emissions that occur in a company's value chain.

Scopes 1 and 2 are essentially within your company's purview, but Scope 3 is about other companies' carbon footprint. Scope 3 GHGs are emissions from upstream and downstream activities in a company’s value chain, if and to the extent (i) such Scope 3 GHGs would be material to investors or (ii) if the company has made a commitment that includes reference to Scope 3 GHGs.

Lightbulb Take

 

OutSolve’s Take

 

How will your customer determine whether GHGs from sources in its value chain might "materially impact" its business operations? 

Your customer is most likely going to require your company as its service provider to assess and report your company's GHG emissions in order to qualify to do business with and bid on services and supplies to that customer who has to (i) determine whether its Scope 3 GHGs are material, and (ii) honor that customer's Scope 3 GHG (ESG) commitment. Many of us have already begun to see our shareholders and customers questioning, assessing, and even mandating their ESG values and programs up and down their value chain. As OutSolve's ESG Director foretold here, a company that has adopted an ESG policy might include:

(E) The company’s carbon footprint 

(E) Policies on sustainable energy sources

(S) Suppliers that share values and commit to an ethical supply chain

(S) Diversity and commitment to fair wages 

(G) Diverse Board of Directors 

(G) Executive pay and internal controls tied to ESG.

In order to maintain your company's business operations up and down your value chain and comply with your customers', suppliers', and your own company’s ESG program, you may well want to consider the SEC's proposed rules on climate-related disclosure requirements on public companies.

John Weathington is a corporate and energy attorney[2] who is a long-time friend, a client of, and counsel to OutSolve.[3]

OutSolve can provide additional information, suggestions, and assistance in being better prepared. For further information or assistance, contact your OutSolve’s ESG Director, Charles Carriere, or OutSolve directly at 888-414-2410 or by email at info@outsolve.com.

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[1] https://www.sec.gov/rules/proposed/2022/33-11042.pdf

[2] https://www.loopergoodwine.com/attorney/john-weathington-iii/

[3] The information provided herein does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.  Readers should contact their attorney to obtain advice with respect to any particular legal matter.  No reader, user, or browser should act or refrain from acting on the basis of information on this site without first seeking legal advice from counsel in the relevant jurisdiction.  The views expressed above are those of the individual author only – not of his respective employer or OutSolve.  All liability with respect to actions taken or not taken based on the contents of this article are hereby expressly disclaimed.  The content on this posting is provided "as is;" no representations are made that the content is error-free.

John Weathington III

John Weathington is a corporate and energy attorney who is a long-time client of, and counsel to OutSolve.

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