On March 21, 2022, the SEC proposed rules that would require publicly reporting companies to include certain climate-related disclosures in their registration statements and periodic reports. Among other information, the new disclosures would require information about greenhouse gas emissions (GHG), climate-related risks that are reasonably likely to have a material impact on a company’s business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to its audited financial statements. As a natural result of the new disclosure requirements, management of companies will be required to implement disclosure controls and procedures, including methodologies for identifying and assessing risks, and attest to their effectiveness.
The proposed rules, which are heady and complex, initially only allotted for a 39-day comment period. Considering the size (490-page rules release), scope, complexity and ramifications, the marketplace pushed back on such a short window. On May 9, 2022, the SEC extended the comment period through June 17, 2022, and all aspects of the industry are weighing in. Other than the small but powerful group of environmental activists and institutional investors that influenced the proposed rule, the vast majority of the commenters believe the SEC is overreaching its authority. The rules are clearly driven by “investor demand” as opposed to “investor protection” and, once passed, will likely face constitutional challenges from the plaintiff’s bar for years to come.
In the first blog in this series, I provided some background and an introduction to the rules (see HERE). The second provided a high-level summary of the proposed rules including the phase in compliance schedule (see HERE). The third blog in the series discussed the disclosures of climate-related risks (see HERE). The fourth moved on to disclosures regarding climate-related impacts on strategy, business model and outlook (see HERE). This fifth blog in the series will delve into risk management and transition plan disclosures.
Risk Management Disclosure
Disclosure of Processes for Identifying, Assessing, and Managing Climate-Related Risks
The proposed rules would require a company to describe any processes the company has for identifying, assessing, and managing climate-related risks. The goal of the disclosure is to help investors evaluate whether a particular company has implemented adequate processes for identifying, assessing, and managing climate-related risks.
When describing the processes for identifying and assessing climate-related risks, the company would be required to disclose, as applicable:
- How it determines the relative significance of climate-related risks compared to other risks;
- How it considers existing or likely regulatory requirements or policies, such as GHG emissions limits, when identifying climate-related risks;
- How it considers shifts in customer or counterparty preferences, technological changes, or changes in market prices in assessing potential transition risks; and
- How it determines the materiality of climate-related risks, including how it assesses the potential size and scope of any identified climate-related risk.
When describing any processes for managing climate-related risks, a company would be required to disclose, as applicable:
- How it decides whether to mitigate, accept, or adapt to a particular risk;
- How it prioritizes addressing climate-related risks; and
- How it determines how to mitigate a high priority risk.
To the extent a company carries insurance or other financial products to manage its risk exposure, a description of such insurance or financial products would need to be included. A company will also need to describe how climate-related risk management is integrated with other risk-management analysis such as whether there is a separate committee of the board of directors.
Transition Plan Disclosure
Although not all companies will adopt a transition plan some will do so voluntarily, and some will be required to do so by outside factors such as if it operates in a jurisdiction that has made commitments under the Paris Agreement to reduce its GHG emissions. Under the proposed rules, a “transition plan” would be defined to mean a company’s strategy and implementation plan to reduce climate-related risks.
Transition plans could include, but not be limited to: (i) reduction of GHG emissions; (ii) adjusting to customer or business counterparty preferences; (iii) technological changes; or (iv) changes required by market pricing. Drilling down, a plan may include: (i) the production of products that move towards lower carbon emissions, such as electric vehicles; (ii) the generation or use of renewable power; (iii) the production of low waste or recycled products; (iv) setting conservation goals and targets to reduce GHG emissions; and (v) providing goods and services geared to a lower carbon economy.
If a company does adopt a transition plan, it will be required to describe its plan including the relevant metrics and targets used to identify and manage physical and transition risks. Physical risks may include exposure to rising sea levels, extreme weather events, wildfires, drought and severe heat. Related to those risks transition plans might include a geographical move of operations, reinforcement of existing structures, uses of alternative sources of water, energy or other resources, or technological changes.
In addition to the general principles-based disclosure requirements, the proposed rules contain prescriptive requirements including plans to mitigate or adapt to identified risks including:
- Laws, regulations or policies that restrict GHG emissions or products with high GHG footprints, including emissions caps;
- Laws, regulations or policies that require the protection of high-conservation-value land or natural assets;
- The imposition of a carbon price; and
- Changing demands or preferences of consumers, investors, employees, and business counterparties.
Moreover, disclosure of a transition plan must be updated each fiscal year and include a description of the actions taken during the year to achieve the plan’s targets and goals. As transition plans naturally include forward-looking judgement and predictions, the disclosures would be generally protected by the PSLRA (see here for more information about the PSLRA protections, including exemptions from such protection – HERE).
The Author
Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm
LAnthony@AnthonyPLLC.com
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
Contact Anthony L.G., PLLC. Inquiries of a technical nature are always encouraged.
Follow Anthony L.G., PLLC on Facebook, LinkedIn, YouTube, Pinterest and Twitter.
Listen to our podcast on iTunes Podcast channel.
law·cast
Noun
Lawcast is derived from the term podcast and specifically refers to a series of news segments that explain the technical aspects of corporate finance and securities law. The accepted interpretation of lawcast is most commonly used when referring to LawCast.com, the securities law network. Example: “LawCast expounds on NASDAQ listing requirements.”
Anthony L.G., PLLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.
This information is not intended to be advertising, and Anthony L.G., PLLC does not desire to represent anyone desiring representation based upon viewing this information in a jurisdiction where this information fails to comply with all laws and ethical rules of that jurisdiction. This information may only be reproduced in its entirety (without modification) for the individual reader’s personal and/or educational use and must include this notice.
© Anthony L.G., PLLC
