If you’re a private company that’s part of public company value chains, you may well find yourself confronting some pretty significant – and costly – challenges imposed on you by virtue of those public companies’ need to comply with the SEC’s proposed “Scope 3” GHG emissions disclosure requirements. Scope 3 emissions include all indirect GHG emissions occurring in the upstream and downstream activities of a company’s value chain, and in case you’re wondering where public companies will look to get that kind of information, this CFO Dive article says that you need wonder no longer:
“If the private company is within the value chain, upwards or downwards, of a company that has to provide the Scope 3 metric in their report, they will be asked to help provide that information,” says Julie Rizzo, a partner in the capital markets group of K&L Gates. “They’ll roll up into that company’s Scope 3 emissions that have to go into their SEC reporting.”
Scope 3 refers to greenhouse gas emissions from companies that help a covered company make money, either by being part of its supply chain or providing other value-added services. And whether or not they are subject to SEC reporting requirements themselves, they are expected to cooperate with the covered company. That means measuring and sharing the emissions that stem from their work for that company.
“So, you’re going to have companies that aren’t necessarily thinking that they would be covered by this rule having to provide information to companies that need to provide that information,” Rizzo told Legal Dive.
Opponents of the SEC’s proposals have highlighted the potential impact of the Scope 3 emissions disclosure requirement on private companies. However, supporters discount those concerns. For example, this recent comment letter from group of Senate Democrats (see p. 5) contends that that, among other things, the requirement to provide Scope 1 and Scope 2 information will make the process of obtaining Scope 3 information – which won’t be required until a year later – easier for all parties. In addition, the signatories to that letter argue that a public company’s ability under the proposed rules to use an EPA-published emission factor in its calculations in the absence of activity data will help “some privately held companies with data collection challenges, like small family farm operations, that supply registrants responsible for Scope 3 disclosures.”
While the SEC’s Scope 3 emissions disclosure proposal has its detractors, there are also some who want to see the proposed Scope 3 disclosure requirement enhanced. Fans of Scope 3 disclosure include SEC commissioners Lee & Crenshaw, who recently expressed a desire to see the proposed attestation requirement that would apply to Scope 1 & 2 disclosures extend to Scope 3 as well. Here’s an excerpt from Cydney Posner’s recent blog:
While the proposed requirement to disclose material Scope 3 greenhouse gas emissions seems to be one of the most contentious—if not the most contentious—element of the SEC’s climate disclosure proposal (see this PubCo post and this PubCo post), two of the SEC’s Democratic Commissioners, Allison Herren Lee and Caroline Crenshaw, told Bloomberg that they think it still doesn’t go far enough. They are advocating that Scope 3 GHG emissions data be subject to attestation—like the proposed requirement for Scopes 1 and 2—to ensure that it is reliable. This discussion might just be a continuation—or perhaps a reinvigoration—of an internal debate that reportedly led to delays in issuing the proposal to begin with.
The commissioners’ concerns arise from a combination of the importance of Scope 3 emissions data – which accounts for the vast majority of most companies’ GHG emissions – and concerns about the reliability of the Scope 3 data that would be generated under the proposed rules. I get the concern, but I’m not thinking this is the best idea I’ve ever heard, for three reasons.
– First, as things stand now, the same reliability issues that prompt the commissioners’ concern make me skeptical that a reputable professional would be able to provide an attestation opinion of any kind on a company’s Scope 3 emissions data.
– Second, there’s a huge “garbage in/garbage out” issue lurking with Scope 3 disclosure that an attestation doesn’t solve. Even assuming I’ve underestimated the willingness or the ability of service providers to render such an opinion, the question remains – what good will it do? As the Risk Management Association pointed out in a recent comment letter calling for the SEC to “recalibrate” the Scope 3 emissions proposal, “the methodologies, standards, data and internal capabilities necessary to produce the proposed quantitative disclosures are in development or are just beginning to be explored, calling into question the feasibility and practical benefits of the disclosures, at least in the near term.”
– Third, my guess is that even a limited assurance attestation of Scope 3 data would cost the average company around eleventy squijillion dollars, and that simply doesn’t seem justifiable based on the questionable benefits to be derived from requiring it.
In April, I blogged about a cert petition seeking SCOTUS review of the SEC’s use of “gag orders” in connection with the settlement of enforcement proceedings. Despite divergent approaches taken by lower courts on the validity of those orders, the Court declined to grant cert in Romeril v. SEC yesterday. This Bloomberg Law article on the Court’s decision notes that the cert petition had the support of two of the SEC’s most vocal foes:
The US Supreme Court Tuesday rejected a challenge—backed by Elon Musk and Mark Cuban—of the SEC’s power to “gag” parties who settle with the agency. The case stems from a challenge by former Xerox Corp. chief financial officer Barry Romeril, who sued for the ability to deny the Securities and Exchange Commission’s fraud allegations after he signed a 2003 settlement with the agency.
Romeril asked the high court to weigh in on whether his SEC deal, including a “no-deny” provision he referred to as a “gag order,” violated First Amendment free speech protections or constitutional guarantees of due process.
Musk, who last week appealed a ruling upholding his own settlement with the agency, joined an April amicus brief in support of Romeril’s petition. Musk’s “Twitter sitter” SEC deal calls for a Tesla Inc. attorney to screen all of his tweets related to the automaker after his 2018 missive indicating he had secured funding to take the company private.
The SCOTUS may have taken a pass on this issue for now, but with lower courts taking different positions on the issue and the willingness of folks like Cuban & Musk to back a fight over it, I doubt we’ve heard the last on the enforceability of SEC gag orders.
I read the SEC’s climate disclosure proposals shortly after they were issued in order to prepare an article for The Corporate Counsel newsletter. As I worked my way through the 500+ page proposing release, it became clear to me that in light of the breathtaking scope of the proposals, companies simply can’t afford to wait to begin preparing for the new disclosure regime. If companies want to avoid the risk of stumbling out of the gate, they need to start to work on their compliance efforts immediately.
We’re eager to get the word out on this and share practical step-by-step guidance. As a follow-up to our April webcast about “first steps” in response to the SEC’s climate disclosure proposal – and as a precursor to PracticalESG.com’s “1st Annual Practical ESG Conference” on October 11th, join PracticalESG.com for a FREE video Climate Disclosure Event about these landmark rules on July 13th at 2:00 pm Eastern. Our experienced panelists – from a variety of industries & backgrounds – will discuss practical steps to take RIGHT NOW in anticipation of the disclosure mandate.
As a bonus, we’ll unveil model disclosure that Lawrence Heim, Dave Lynn and I prepared and discuss the drafting challenges we faced — providing meaningful lessons to anyone looking ahead and preparing.
This Event consists of two one-hour sessions. Our first session, beginning at 2:00 pm Eastern, will cover:
– How to convey to your bosses & colleagues the major differences between this proposal and traditional SEC reporting, and existing ESG disclosures;
– Tips for overcoming the new challenges that this disclosure will create;
– Key steps for companies to take right now to prepare for compliance;
– Former regulators’ perspectives; and
– Lessons learned from preparing our model disclosures.
Hear step-by-step action items from these experienced practitioners:
– Stephanie Bignon – Assistant General Counsel, Delta Airlines
– Meredith Cross – Partner, WilmerHale
– Karen J. Garnett – Managing Director, Head of ESG Policy and Reporting, Charles Schwab & Company
– Denis Jacob – Chief Audit Executive, GE
– Dave Lynn – Partner, Morrison Foerster
Our second session, beginning at 3:00 pm Eastern, will cover:
– ESG data that investors and others want, compared to what’s currently available;
– Types of questions and disclosure reviews companies can expect from regulators;
– How companies can prepare disclosure with an eye towards minimizing questions & risks;
– How asset managers, institutional investors and other external audiences use climate disclosure; and
– A look at our model disclosure and how it anticipates these issues.
This session features:
– Amy Borrus – Executive Director at the Council of Institutional Investors
– Devika Kaul – VP, Asset Stewardship, State Street Global Advisors
– Satyam Khanna – SIEPR Policy Fellow at the Stanford Institute for Economic Policy Research
– Dave Lynn – Partner, Morrison Foerster
– Kosmas Papadopoulos, Executive Director, Head of Sustainability Advisory Services – Americas, ISS Corporate Solutions
To make this event an even bigger value, attendees are eligible for $100 off our 1st Annual Practical ESG Conference AND $200 towards an annual subscription to PracticalESG.com! Email sales@ccrcorp.com or call 1-800-737-1271 to claim this offer.
Register today for this FREE event, and please share it with anyone on your team or in your network who may be interested. That includes ESG, Sustainability & Impact Officers, Environmental Health & Safety Officers, Investor Relations & Public Relations professionals, in-house and outside counsel who are advising boards or preparing disclosures, and anyone involved with ESG strategies and disclosures. To register for this event and learn about our model disclosure, click here.
You may have noticed that our upcoming PracticalESG.com event is a video webcast, so it’s not surprising that given my previously noted “radio face” issues, I’m not going to participate other than as a spectator. However, I did help draft the model disclosures that we’ll unveil there. Lawrence and Dave will share more details about the challenges we faced preparing them, but since I’m not going to be there, I thought I’d share a few of my own thoughts here:
– Shame is the Name of the Game. The disclosures required under the proposed rules are designed to promote a proactive approach to addressing climate change and to shame companies that don’t follow the script by compelling them to make awkward disclosures. For example, proposed Item 1501’s requirement to disclose “whether and how the board of directors sets climate-related targets or goals, and how it oversees progress against those targets or goals, including the establishment of any interim targets or goals” is going to result in uncomfortable disclosure for companies that haven’t established those targets or don’t provide board oversight of progress in attaining them.
– The Boilerplate Potential is High. When disclosure requirements lay out the path that regulators want companies to take and are designed to shame those that don’t, companies tend to follow that path. An unfortunate consequence of that approach is the potential for lemming-like behavior that will likely result in a lot of boilerplate disclosure. And yes, a lot of this stuff lends itself to boilerplate, even though that’s an outcome the Staff says it wants to avoid.
– Item 1502 of S-K may be a Comment Magnet. Companies aren’t the only ones who are going to need to ramp up their expertise on non-traditional topics. The Staff faces that challenge as well, which I think means that in the early years of implementation, new disclosure requirements that are similar to existing ones are likely to be a magnet for Staff comments. Proposed Item 1502, which calls for companies to provide what is essentially a climate-centric MD&A, seems to me to be a prime candidate for Staff comments.
– You Can’t Do This Yourself. The proposed rules will require compliance with extraordinarily granular disclosure requirements dealing with matters that are beyond the expertise of the lawyers and accountants who traditionally take the lead in preparing SEC filings. That means that many companies – even those that currently provide climate disclosure – will need to add capabilities, enhance disclosure controls and procedures, and expand the group responsible for SEC reporting to include people with experience in climate-related disclosures and metrics.
Finally, it’s worth noting that you don’t have to start with a blank piece of paper. In addition to our model disclosure, there are some other disclosure documents out there that can help you start the process. Perhaps the most useful of these are the standalone TCFD reports that many large cap companies put out. Since the proposed rules incorporate a lot of concepts from the TCFD framework, those reports are likely to be quite helpful – check out this example from Microsoft. We’ll be posting additional samples & checklists – along with our model disclosures – on PracticalESG.com.
The May-June issue of “The Corporate Counsel” newsletter is in the mail (email sales@ccrcorp.com to subscribe to this essential resource). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. This issue includes the following articles:
– Considering the Disclosure Implications of the War in Ukraine
– The Trouble with Hyperlinks
– Mandatory Electronic Filing of Form 144 is Here
– EGC Status and Transitions: 10 Frequently Unanswered Questions
Dave & I also have been doing a series of “Deep Dive with Dave” podcasts addressing the topics we’ve covered in recent issues. We’ll be posting one for this issue soon. Be sure to check it out on our “Podcasts” page!
The board composition report from Heidrick & Struggles that I blogged about yesterday noted that companies are looking to add directors whose backgrounds combine a mix of traditional expertise with other skills, such as sustainability or cybersecurity expertise. That need for new expertise may increase the opportunities for non-CEO executives to join the board of another company and may prompt some companies to rethink policies on outside board service to accommodate key executives’ desire to serve on a board.
This Perkins Coie blog provides some thoughts on outside board service by non-CEOs and offers recommendations on best practices in evaluating those opportunities and policing the issues that may arise. This excerpt addresses two significant issues – potential conflicts and time commitments:
– Conflicts & Related Party Transactions: Before anything else, ask – does the company making the invitation somehow raise the prospect of a risk of a conflict of interest – or even the appearance of one? Or might there be material related party transactions involved? This requires some homework and careful thought: the invited officer will need to learn the strategic goals of the inviting company – and consider if these now (or may in the future) overlap with and conflict the current employer’s interests. Even if the two companies are not competitors, could they enter into a related party transaction down the road that may need to be disclosed in either company’s proxy? Even seemingly innocuous disclosure could be considered a negative from an ISS, Glass Lewis or investor point of view.
Also consider reputational issues of the company who is offering the board seat, and whether they could negatively impact the employer.
– Assess Committee Obligations & Expected Time Commitment: What will be the time commitment of a board seat? And is putting in that time practical from the standpoint of the amount of time the executive is expected to put in for her employer? Consider both the expected hours commitment – and the reality of periodic “crunch” times that pop up during the inevitable crises that arise. There may be some executive roles – a CFO for some companies – who would be hard-pressed to appropriately deal with an M&A transaction or serious investigation in their role as a director without interfering with that officer’s responsibilities during earnings season, for example.
Yet a Chief HR Officer, Chief Technology Officer, Chief Legal Officer or Chief Sustainability Officer, with the right staff support, may be able to juggle both.
Other recommendations include limiting on service to one outside board, establishing a formal pre-approval process, monitoring director compensation received by the executive, and including board service as part of the executive’s annual performance appraisal process.
According to a recent blog from Doug Greene, the SEC’s proposal to eliminate SPACs’ ability to rely on the safe harbor for forward looking statements in connection with deSPAC transactions may not turn out to have much impact in practice. Why? Because, as this excerpt explains, the PSLRA’s safe harbor for forward looking statements simply isn’t very protective to begin with:
Public companies understandably believe that the Reform Act’s safe harbor protects them from liability for their guidance and projections if they simply follow the statute’s requirements. But, as a practical matter, the safe harbor is not so safe; some judges think the Reform Act goes too far, so they go to great lengths to avoid the statute’s plain language. This is one significant reason why we always have advocated an approach to defending forward-looking statements that does not depend solely on the safe harbor, even when the statute’s plain language would indicate that it applies. Thus, while SPACs and de-SPACs are certainly better off with the safe harbor than without it, its loss should not be as consequential as some may think.
The blog reviews the erratic approach that courts have taken to the safe harbor, and argues that it may stem from judges’ disdain for the potential “license to lie” that the statutory language provides. It goes on to point out that in defending claims implicating forward looking statements, the parties should keep in mind that these also involve opinions, and therefore, regardless of the safe harbor, plaintiffs also must satisfy the Virginia Bankshares & Omnicare tests in order to bring securities fraud claims based on those statements.
With the stock market heading straight downhill, a major war in Europe & the SEC throwing a regulatory monkey wrench into SPAC offerings, it’s no surprise that the IPO market’s been in a bit of a funk lately. But the Jim Hamilton Blog reports that things reached a new low last week:
As the air continues to come out of the IPO market, it reached a level last week that has not been seen in more than two years—no completed offerings. April 2020 was the last time that a week passed without at least one company making its public market debut. The holiday may have played a role in the standstill, but with only one IPO in the prior week the market was already growing quieter as May progressed. The 14 new issues in May represented the lowest single-month IPO total since ten were completed in April 2020.
The calendar for next week looks pretty empty too, so don’t be surprised if you see a larger than usual number of investment bankers at your favorite beach this summer.
Heidrick & Struggles recently issued its report on 2021 board composition trends among Fortune 500 companies. The report says that boards have continued a trend that began in the second half of 2020 of reaching out to groups of people from increasingly more diverse backgrounds. It concludes that 2021 changes in board composition were mostly incremental but generally positive. Here are some of the highlights:
– A record share of seats (43%) was filled by first-time public company directors. On the whole, these directors bring more diversity of experience and background, and there was an increase in the share of seats that went to directors with sustainability and cybersecurity experience.
– A record share of seats (45%) went to women, but there was only mixed progress on racial and ethnic diversity. The share of seats filled by Black directors held relatively steady at 26%, after a sharp rise in 2020. However, both Asian or Asian American (9%) and and Hispanic or Latinx (6%) directors are still heavily underrepresented.
– There was little progress on age diversity. In 2021, as in recent years, two-thirds of seats were filled by people between ages 50 and 65. The average age of new appointees was 57.
The report provides more granular data concerning board composition and concludes with some thoughts on the actions being taken by “best in class” boards when it comes to board composition and succession. These include actively seeking new directors whose backgrounds combine a mix of traditional expertise with knowledge that is newer on boards’ skills matrix (such as sustainability or cybersecurity), bringing younger directors onto boards, staying tightly focused on racial, ethnic and gender diversity, and seeking new members who can assume a leadership role.
If you aren’t already a member with access to that guidance, sign up now and take advantage of our “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund! You can sign up online, by calling 800-737-1271, or by emailing sales@ccrcorp.com.
