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.
The proposed rules are enormous in scope, complexity, and ramifications with a polarizing comment response largely along party lines. The comment period ended June 17, 2022, after a relatively short, but necessary extension by the SEC. Despite the controversy, there is no doubt that the rules, even if somewhat modified, will be passed and public companies need to start preparing now. The recently published Reg Flex Agenda indicates we should see final rules in October 2022. The rules will require compliance with extraordinarily granular complex disclosures that are beyond the expertise of attorneys and accountants. Companies will need to engage third-party experts and/or staff up in-house to not only comply with the disclosure requirements but also to carry out and monitor the necessary risk management and transition plans that accompany the new disclosures.
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). The fifth blog in the series delved into risk management and transition plan disclosures (see HERE).
The sixth blog provided an overview of the extremely complex financial statement metrics requirements (see HERE). This seventh blog in the series covered GHG emissions disclosures and Scope 1 and 2 attestations (see HERE). This eighth and final blog in the lengthy series covers miscellaneous items including the disclosure of targets and goals and affected reporting companies and forms.
Targets and Goals Disclosures
If a company has set any climate-related targets or goals related to, for example, a reduction in GHG emissions, energy usage, water usage, or shifting revenues to low-carbon products, it would be required to disclose information such as:
- The scope of activities and emissions encompassed in the target (e.g., Scope 1 and Scope 2 only, domestic operations only).
- The time horizon envisioned for achieving the target and whether the time horizon is consistent with one or more goals established by a climate related treaty, law, regulation, policy or organization (e.g., a 50% reduction in GHG emission by 2032).
- Any interim targets established.
- How the target is measured including whether the measurement is absolute or intensity-based (e.g., reduction of CO2e emitted, reduction of CO2e emitted per unit of revenue).
- How the company plans to achieve its targets or goals.
- An update each year of the company’s progress relative to its targets or goals and how (or whether) such progress has been achieved.
Also, if, as part of its net emissions reduction strategy, a company uses carbon offsets or renewable energy credits or certificates (“RECs”), the proposed rules would require it to disclose the role that carbon offsets or RECs play in its climate-related business strategy. The definition of REC mirrors the EPA’s definition to mean a credit or certificate representing each purchased megawatt-hour (1 MWh or 1000 kilowatt-hours) of renewable electricity generated and delivered to a registrant’s power grid.
Carbon offsets and RECs are used to mitigate GHG emissions. A company can use the offsets or RECs to meet 100% of a GHG reduction goal or couple them with operational changes and modifications to products or the development of renewable energy sources. The SEC release illustrates several examples of risks associated with carbon offsets or RECs, including: (i) the more a company uses them in place of operational changes, the more the company will be impacted by increased prices (which may be caused by increased demand) and decreased credit per offset or REC; and (ii) changes in laws eliminating or reducing the use of offsets or credits.
Companies Subject to the New Rules; Affected Forms
The proposed new climate disclosure rules apply to all companies subject to the Exchange Act reporting obligations pursuant to Sections 13 or 15(d) and to all registration statements filed under either the Securities Act or Exchange Act (Securities Act Forms S-1, F-1, S-3, F-3, S-4, F-4, and S11, and Exchange Act Forms 10 and 20-F). The affected Exchange Act forms include annual reports on Forms 10-K and 20-F, quarterly reports on Form 10-Q and where appropriate, foreign issuer reports on Form 6-K.
In addition, no class of company is totally exempt from compliance; however, smaller reporting companies are exempt from the Scope 3 emissions disclosure requirements (for the definition of a smaller reporting company, see HERE). Emerging growth companies and foreign private issuers are not so exempt.
The disclosure requirements have a phase-in schedule depending on the size of the company, as illustrated in the table below:
|Registrant Type||All Disclosures Except Scope of 3 GHG Emission Disclosures (Reports for FYE)||Scope 3 GHG Emission Disclosures (Reports for FYE)||Attestation on Scope 1 and Scope 2 GHG Emission Disclosures|
|Large Accelerated Filer||2023||2024||Limited Assurance – 2024
Reasonable Assurance – 2026
|Accelerated Filer||2024||2025||Limited Assurance – 2025
Reasonable Assurance – 2027
|Non-accelerated Filer||2024||2025||Not Required|
|Smaller Reporting Company||2025||Not Required||Not Required|
Climate-related disclosures are subject to tagging using Inline XBRL.
Treatment for Purposes of Securities Act and Exchange Act
Climate-related disclosures will be treated as filed (not furnished) and therefore subject to the full liability under Securities Act Section 11 and Exchange Act Section 18. Form 6-K disclosures would not be treated as “filed” because the form, by its own terms, states that “information and documents furnished in this report shall not be deemed to be “filed” for the purposes of Section 18 of the Act or otherwise subject to the liabilities of that section.
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.
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