Democratic members of both houses of Congress reintroduced last month the Climate Risk Disclosure Act (“Act”), H.R. 2570, a bill that would require every public company to issue climate-related financial disclosures. This week, the House Financial Services Committee reported the bill out of committee by a narrow margin on a party-line vote. Consistent with steps the United States Securities and Exchange Commission (SEC) has taken in recent months, the Act aims to accelerate the promulgation of rules requiring public companies to disclose the risks they face from climate change and the strategies taken to address them. The goal, according to the bill’s sponsors, is to help investors evaluate companies’ climate risk profiles and make investment decisions in line with the transition to a clean-energy, climate friendly future.
Currently, companies disclose climate risks in securities filings only if they deem such risks material according to the SEC’s 2010 guidance. Even if companies choose to issue climate disclosures, they face no federal obligation to report their greenhouse gas (GHG) emissions. The Act would change that by requiring companies to submit interactive, electronic reports disclosing their direct and indirect GHG emissions as well as the input parameters and assumptions (e.g., discount rates and time horizons) used to support those figures. These requirements include identification of the total amount of fossil-fuel-related assets owned and managed and the total cost of emissions, which companies must calculate pursuant to the federal government’s social cost of carbon figures. The Act’s emissions reporting requirements are similar, but not identical, to those proposed recently in California, raising possible preemption concerns if both pieces of legislation pass (or, at the very least, the potential for duplicative disclosure requirements). Like the proposed California rules, the Act would require the SEC to publish a report each year on its website that compiles companies’ disclosures.
Not only would the Act require disclosure of emissions, but it would also force companies to quantify the financial impact of climate risks on their bottom line, describe their overarching climate strategies and detail board-level oversight of climate risks and opportunities. Eschewing the current, principles-based disclosure regime, companies would need to account for different scenarios, including one where global temperatures rise to more than 1.5 degrees Celsius above pre-industrial levels and another in which they do not. Additionally, the Act would require companies to identify specific steps taken to address climate risks—including both physical risks and those resulting from the political, legal and economic transition to a climate-resilient society—and indicate how their strategies have evolved over time. Any qualitative disclosures would be required to rely on quantitative analyses; a requirement intended to address, at least partially, so-called “greenwashing” concerns.
The requirements outlined above would apply to all public companies, but the Act also provides more fulsome disclosure obligations for companies engaged “in the commercial development of fossil fuels,” including: (1) an estimate of total and disaggregated amounts of direct and indirect GHG emissions attributable to combustion, flaring, process emissions, directly vented emissions, fugitive emission/leaks and land use changes; (2) the sensitivity of reserve levels to future price scenarios (informed by the government’s social cost of carbon estimates); (3) the percentage of companies’ reserves developed under different scenarios; (4) a forecast for development prospects under different scenarios; (5) potential GHG emissions embedded in proved and probable reserves; and (6) methodologies used for detecting and mitigating fugitive methane emissions. The final category requires a number of very specific disclosures of particular relevance to the oil and gas sector, such as data or information concerning the frequency of leak checks, processes and technology to detect leaks, the percentage of assets covered by disclosed methodologies, reduction goals for methane leaks, the amount of water withdrawn from freshwater sources to support operations and the percentage of water from regions of waste stress or wastewater management challenges.
To further the goal of providing complete climate-related information to investors, the Act directs the SEC to promulgate disclosure standards that foster comparisons both within and across industries, coupled with a mechanism to track how companies mitigate their exposure to climate risks over time. While the Act leaves it to the SEC to promulgate specific standards applicable to the finance, insurance, transportation, electric power and mining sectors, it defaults to disclosure pursuant to the Task Force on Climate-related Financial Disclosures (TCFD) in the event the Commission fails to issue standards within two years of the Act’s enactment. This default provision suggests that the SEC likely would look closely at the well-recognized TCFD standards in promulgating any standards.
The bill now moves to the House floor, where Speaker Pelosi will determine whether the bill will be wrapped into a broader climate package or proceed to a floor vote on its own. The Senate Banking Committee has not yet considered Sen. Elizabeth Warren’s (D-MA) Senate counterpart. Undoubtedly controversial, the bill may not survive both houses of Congress. However, its failure to become legislation will not doom mandatory climate disclosure requirements, as the SEC is in the process of reviewing its 2010 guidance and considering potential climate and Environmental, Social and Governance (ESG) disclosure rules. While the Commission might wait for Congress to act in order to increase the likelihood that its regulations survive judicial review, we expect it will be prepared to publish updated guidance or proposed rules promptly in absence of congressional action. SEC Chair Gary Gensler’s public statements all but confirm that the Commission is poised to move forward with new disclosure rules, as he recently characterized climate risk and human capital disclosure rules as one of his “top priorities” and “an early focus” of his tenure.
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Lucas F. Torres advises public energy companies and their underwriters in capital-raising transactions, in particular, in the electric and gas utility space.