Environmental, social, and governance risks and opportunities

You Should Comment on the SEC’s Transformative Proposed ESG Rule

SEC proposed new ESG rule mandates GHG emission disclosures
ESG law

Note, after this was posted, the SEC extended the public comment period on the proposed rulemaking to enhance and standardize climate related disclosures from the originally scheduled close date of May 20, 2022 until June 17, 2022.

We posted some weeks ago when the U.S. Securities and Exchange Commission issued a long awaited proposed new ESG rule to mandate climate risk disclosures by public companies and other businesses in their supply chains.

You could read the proposed rule that takes more than a ream of paper to print or read our 600 word post, SEC Climate Risk Rule is Transformative at a Cost. Given the impact that this rule will have on the economy not to mention individual businesses in America, you should comment to the SEC. Comments are due before May 20.

We are drafting comments to the SEC on behalf of clients to the proposed, “The Enhancement and Standardization of Climate-Related Disclosures for Investors” rule. Leading by example, what follows is an edited version of the comment we personally offered the SEC.

Selecting a single matter to comment on in the more than 500 page document, the proposal to require registrants to provide certain climate related information in their registration statements and annual reports, including information about climate related financial risks and the like in their financial statements, the matter of sole greatest concern is that the proposed rule is made too narrow with the limitation on who may be a “GHG emissions attestation provider.”

The proposal appears to not acknowledge that, today, there are lawyers already providing these and associated services, including law firms and attorneys associated with this commenter’s law firm, who have provided law and non-law professional services in the GHG emissions and larger climate change space, for more than 10 years.

One can only speculate that as proposed, a whole new cottage industry of large accounting firm associated businesses would spring up to begin to calculate GHG emissions? Admittedly the proposed rule does not require the attestation be by a registered public accounting firm, but it leans hard in that direction.

As noted in the proposal itself, the regulation builds on the SEC’s previous rules and guidance on climate related disclosures, which date back to the 1970s. In 2010, the SEC published guidance for registrants on how the Commission’s existing disclosure rules may require disclosure of the impacts of climate change on a business or its financial condition.

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Attorneys, including the attorney drafting this comment, have since 2010 undertaken the efforts to make law and non-law recommendations on the impact of climate change on an annual basis advising those with management oversight and board oversight, including advising their accounting firm representatives.”

Additionally, this attorney commenter has done this and similar work for organizations voluntarily making climate related disclosures and has recently begun working with business required to measure and report GHG emissions to the State of Maryland under that state’s new mandatory statute.

This attorney commenter is an environmental practitioner and widely recognized as an expert in climate change including GHG emissions, with significant experience in measuring, analyzing, reporting, and attesting to GHG emissions.

The proposal describes that the SEC “staff has reviewed more than a dozen studies of climate-related disclosures conducted by third parties,” and all or all but one was apparently from a large accounting firm, but none appear to have been from a law firm or attributed to an attorney.

One can quibble about the ability “to obtain reasonable assurance such that its GHG emissions disclosure receives the same level of assurance as its financial statements” and such is not at all certain. That is in many instances, the science on climate change may be playing catch up to the law? Additionally, there are legitimate concerns about the time, inconvenience and expense associated with attempting to reach that level of certainty across the many sectors of the U.S. economy.

But the larger and more important matter is that attorneys are uniquely qualified to do this work and should be expressly including in any SEC final rule.

Attorneys regularly provide written “legal opinions of counsel” and are well organized (with ethical protections including matters of independence built into the profession by mandatory state ethical rules) to prepare and sign a GHG emissions attestation report, as a GHG emissions attestation provider (see, proposed 17 CFR 229.1505(b)).

Attorneys currently regularly do very similar climate change work not only for existing SEC required climate disclosures but giving opinions of counsel for other federal and state government instrumentalities, including possibly most often in the realm of green mortgage finance to HUD, Fannie Mae and Freddie Mac (.. accountants cannot provide those certifications).

So, specifically in response to the proposal request for comment 144., “no” to the extent such is inconsistent with attorneys at law being the GHG emissions attestation provider, the SEC should not require a registrant to obtain a GHG emissions attestation report that is provided by a GHG emissions attestation provider that meets specified requirements, as proposed.

In response to request for comment 145., “yes” to the extent such is inconsistent with attorneys at law being the GHG emissions attestation provider, yes additional guidance is needed with respect to the proposed expertise requirement to make clear that attorneys are within the coteries? The SEC should not instead include prescriptive requirements related to the qualifications and characteristics of an expert under the proposed rules.

In response to request for comment 146., “yes” to the extent such is inconsistent with attorneys at law being the GHG emissions attestation provider, yes the SEC could require the GHG emissions attestation provider to be independent with respect to the registrant, and any of its affiliates, for whom it is providing the attestation report, as proposed.

In response to request for comment 147., “yes” to the extent such is inconsistent with attorneys at law being the GHG emissions attestation provider, yes the SEC could specify that the factors the Commission would consider in determining whether a GHG emissions attestation provider is independent.

If there is a second concern in the 510 page proposed rule, it is matters of Scope 3 GHG emissions (those that are from assets not owned or controlled by the reporting organization but that the organization indirectly impacts) and that the SEC should sever from these disclosure requirements Scope 3 GHG emissions, which there is little good science to support and the structure and behavior of which cannot be systematically studied through observation or experiment under current circumstances.

This proposed rule may well alter the trajectory of the U.S. economy and to make this expansive and complex regulation efficacious while also reasonably frictionless, recognizing the role that attorneys are today playing, the final rule should expressly identify attorneys as possible GHG emissions attestation providers.

We expect an active comment period and that a final rule, very much like that proposed, will be issued by mid 2022. The resultant regulation will change the way business and the economy function. Like the analogy of building the plane while flying it, you should seek to advantage your business by commenting while also preparing to make GHG emission disclosures.

About the Author

Nancy Hudes and Stuart Kaplow, two Maryland attorneys who are among the principals at ESG Legal Solutions have combined forces, joining together to publish this blog leveraging their focused experience and legal knowledge for business interests in the ESG space.

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