Experts share governance insights on SEC climate-disclosure rules

Governance Intelligence and IR Magazine, in partnership with Broadridge, recently hosted a webinar in which a panel of experts shared their insights on what boards and governance teams are considering about the SEC’s climate disclosure rules and the next steps they should be taking.

Although there continues to be uncertainty about the future of the rules, which are being challenged in court, and companies find themselves in widely different circumstances, the panel underlined the need for the rules to be taken seriously alongside regulatory developments across the world.

Here we present some of the speakers’ takeaways. The full webinar can be viewed here. 

‘It would be a mistake for many companies not to do anything’
Seth Gastwirth, deputy general counsel and assistant corporate secretary at JLL, noted that some companies are weighing whether and how much work to put into complying with the SEC’s rules given the uncertainty around the litigation and the compliance costs involved. But he warned: ‘There’s going to be some level of disclosure that’s required with respect to climate emissions and your footprint. I think it would be a mistake for many companies not to do anything in connection with their preparedness.’

Gastwirth told the webinar audience that preparation for the rules will involve a lot of time to set up the necessary policies, get the right practices and people in place, engage third-party advisers and implement the right governance structures to comply with ‘whatever [things] look like after the court cases are resolved.’

On the plus side, he said, recent SEC rules such as on cyber-security offer guidance on what companies will need to report under the climate rules in terms of their governance frameworks. That being the case, it would be useful for companies to look at their existing governance structures, including board committee charters, board corporate governance guidelines and bylaws to see whether they are clear enough regarding where responsibility and oversight will be located at the board level in terms of climate and sustainability issues, Gastwirth said.

JLL did this more than a year ago and amended the nominating and governance committee’s charter to specifically include sustainability issues. Climate-related issues require responsibility being shared across committees and JLL’s audit and risk committee will take on close oversight and governance controls over the company’s climate emissions in the future under the SEC rules, California’s climate legislation and the EU’s Corporate Sustainability Reporting Directive (CSRD), Gastwirth said.

The importance of benchmarking
Aaron Rudd, vice president and ESG practice lead with Broadridge Financial Solutions, pointed out that the increasingly complex regulatory environment companies face means prioritizing their efforts is critical and benchmarking themselves against other companies is increasingly important.

There is a growing demand for data and an understanding of which data is relevant, and those needs vary widely, often based on company size, Rudd said. Large or mega-cap companies that have already done a lot of the work required to comply may only need to focus on a gap analysis but small or mid-cap firms that haven’t done so need information on what to do next, he said. Technology can be helpful in benchmarking companies against others that are further down the road, including larger firms, 90 percent of which already publish a sustainability report, Rudd added. AI, for example, can help sift through the volumes of available data.

Many small and mid-caps lack internal relevant expertise to take benchmarking data and put it into action, so there is a lot of demand for consulting services to help boards and companies understand what’s material and what steps to take next, Rudd said.    

Companies not sweating the details… yet
‘I’m not getting a lot of questions [from clients] about the nuance of the [SEC] rules, which I think is a little bit telling,’ said fellow panelist Sarah Fortt, partner with Latham & Watkins. This lack of prioritization on the details can be attributed at least in part to management having other pressing issues to deal with, she commented, while some companies already produce sophisticated reporting and so will need to perform more of a gap analysis regarding the SEC rules.

In the meantime, she reported fielding a lot of questions from companies about the litigation surrounding the rules and how it might affect compliance deadlines. Companies are also asking many questions about materiality-related issues arising from the rules, particularly from those that will need to comply with both the SEC rules and the CSRD, which includes a double-materiality assessment requirement.

In addition, clients are asking about which aspects of the SEC rules may persist and which may be stayed, overturned or not enforced by a future commission, Fortt said, adding: ‘But I think it’s important to understand that the existence of these rules has changed the conversation around climate-related reporting in the US.’

She noted that the SEC has issued a number of comment letters on the topic in recent years, creating a precedent for the agency’s views even if the rules themselves are overturned. Fortt added that several US states are considering potential climate disclosure legislation.

Investor demand persists regardless of litigation
The pressure on companies to make climate-related disclosures is enhanced by but also goes beyond regulatory requirements. Chad Spitler, founder and CEO of Third Economy, described investor attitudes as falling along a bell curve. A small percentage at one end of the curve doesn’t care, a small percentage at the other end is pursuing climate-related action and activism and a large majority is mainly interested in understanding climate risks from a financial risk and opportunity perspective, he told the audience.

Spitler noted there is a degree of frustration among some investors – a sense of ‘Let’s just get on with this’ – when it comes to climate reporting. Many companies already make such disclosures, particularly if they have global businesses and will have to comply with the CSRD, he noted. Other investors are frustrated that the SEC ultimately did not include Scope 3 greenhouse gas emissions in the reporting requirements of its final rules.