Impact of Proposed SEC Climate Disclosures on Utilities

 By Cecilia Bremner, Law and Policy Clerk

NASA on The Commons 2017

All companies face great physical, transitional, and legal risks from climate change. For utilities specifically, these risks are numerous. They include exposure to natural disasters; regulatory uncertainty as environmental compliance requirements change; customer base variations; and inherent technology, supply, workforce, and cybersecurity threats. These risks also overlap with concerns over fuel uncertainty, asset divestment, business model overhauls, decommissioning, safety, and geopolitics. 

Stakeholders are becoming increasingly aware of such climate-related risks and are increasingly requesting more detailed climate-related disclosures from SEC registrants, including investor-held utilities. This has led to the current situation where utility companies are all at different stages of their environmental, social, and governance (ESG) journey and climate reports are inconsistent and potentially include greenwashing. In response, on March 21, 2022, the U.S. Securities and Exchange Commission (SEC) proposed a new rule to enhance and standardize climate-related disclosures. 

Adopting this new SEC rule “would require registrants [to] provide certain climate-related information in their registration statements and annual reports.” The rule proposes numerous climate-related disclosures broadly aligned with accepted climate disclosure frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD). The disclosures proposed include reporting potential risks and material business and strategy impacts; Scope 1, 2, and 3 (if material or if the registrant has a Scope 3 target) greenhouse gas (GHG) emissions; other qualitative and quantitative climate risks such as financial impacts of severe weather events and natural disasters; and climate-related risk governance and risk-management processes. In addition, the rule would require registrants to provide plans to comply with their publicized environmental claims and would phase in assurance requirements for certain SEC filers. 

These reporting requirements signal that all public companies need to transition to investor-grade reporting, and quickly. Such a transition would involve accelerating climate-related reporting processes and building or transitioning to effective reporting controls. PricewaterhouseCoopers (PwC) identifies five actions that every company should consider now for this transition: 1) form a cross-functional team for ESG performance accountability; 2) ensure expected data is appropriately collated for regulators; 3) establish an ESG strategy; 4) upskill corporate leadership; and 5) prepare for independent, third-party assurance. 

In addition to these five generally applicable actions, PwC also identified three considerations for utilities specifically. First, utilities should consider how they will delineate between routine costs of supplying reliable energy to customers and recovering from typical weather incidents versus the proposed SEC climate-related disclosures. Second, utilities should consider how they will deal with Scope 3 emissions that are material or for which they have set GHG targets. Even with decarbonization efforts, Scope 3 emissions will likely be material for utilities in “industry-specific, high-emitting categories such as ‘fuel and energy-related activities’ and ‘use of sold products.’” Third, utilities should consider how they will address the challenge of providing accurate and reliable data by zip code in the proposed rule’s accelerated timeline. 

Despite such challenges, adopting the proposed SEC rule is likely to drive real action in the transition to a low-carbon economy and utilities can be a major player. Utility operations result in Scope 2 emissions which are indirect emissions from purchased electricity, steam, heating, and cooling. In 2020, Scope 2 emissions accounted for 25 percent of U.S. GHG emissions. Transitioning to low-carbon power can therefore have a significant impact on reducing overall U.S. GHG emissions. 

Reducing Scope 2 emissions is also one of the initial and increasingly more economical decisions. Utilities focused on clean energy and low-carbon energy will have a competitive advantage over higher carbon footprint companies. Stakeholders will trend towards supporting companies responsible with their emissions and other climate impacts, as we are already seeing. Thus, utilities that take the initiative to transition to a renewables-based grid and build resilience against climate change will capture a significant portion of the market in transition while also protecting their business in the long-term. 

Furthermore, U.S. investor-owned utilities are in a good position to incorporate the proposed SEC rule. The industry already has an ESG sustainability reporting template. This template was last updated in May 2021, after the SEC announced its plans to release the proposed rule. It seems the energy sector has therefore, seriously considered how to properly report climate information for the industry and that those utilities already using the industry template are in a good position to adapt their climate reports to any final SEC rule.

Even if this proposed SEC rule does not go through, U.S.-based companies with entities abroad will likely have to comply with equivalent international climate-related reporting and measures like the European Commission’s Corporate Sustainability Directive (CSRD). In addition, although the concept of materiality does not create a specific duty to disclose climate-related matters, as climate issues become increasingly significant for business and investment decisions, public companies may find they need to report climate matters to the SEC under the agency’s materiality principle. Whether or not this proposed SEC rule is adopted, climate-related disclosure requirements are coming. Utilities should prepare for this inevitability by ensuring their own internal climate reporting mechanisms are investor-grade and that they are transitioning their product to reliable clean and low-carbon energy. 

The blogs posted on Charged Debate reflect the writers' opinions in their individual capacities, and do not necessarily reflect the perspective of the Green Energy Institute, Lewis & Clark Law School, Lewis & Clark College, or the writers’ past, present or future employers or other associations. Any information in any blog on Charged Debate is meant purely for general educational purposes, does not constitute legal advice and should not be relied upon for any purpose. No representations or warranties, express or implied, are made with respect to any content in any blog posted on Charged Debate.

Could New French Rules Lead to Better Corporate Disclosures About Climate Change Risks?

French Decree Enacting Energy Transition Law Might Provide US Financial Firms Pathway to Enhanced Reporting on Climate Change-Related Risks

Brandon Kline, Energy Law Fellow

The French National Assembly (pictured above) recently adopted the Energy Transition Law, broad legislation aimed at reducing French greenhouse gas emissions.

The French National Assembly (pictured above) recently adopted the Energy Transition Law, broad legislation aimed at reducing French greenhouse gas emissions.

In the United States, federal securities laws require public companies to keep investors abreast of ‘known trends’ that affect their industry. For example, certain companies with exposure to climate-change impacts are required to disclose material risks posed by climate change in their Securities and Exchange Commission (SEC) filings.

A few weeks ago, I explained that, in 2010, the SEC issued guidance indicating that, in the context of climate change, four areas are particularly relevant to investors – legal, technological, political and scientific developments.

However, investors representing more than $1.9 trillion in assets continue to warn that oil and gas companies are not disclosing sufficient information about several converging factors that, together, will profoundly affect the economics of the industry. Meanwhile, a recent GAO report suggests that a lack of SEC enforcement actions has done little to incentivize meaningful disclosures about climate change.

To be sure, providing guidance to the regulated community in this context is understandably tricky. Accordingly, it’s worth paying close attention to new rules by the French Treasury Department to integrate climate-change factors into financial-disclosure requirements. In July 2015, the French National Assembly adopted the Energy Transition Law, broad legislation aimed at reducing French greenhouse gas emissions.

The provision included strengthened mandatory climate disclosure requirements for listed companies and introduced the first mandatory requirements for institutional investors as part of Article 173 of the Law for the Energy Transition and Green Growth. A summary translation of the Final Decree on the Implementation of Article 173-VI of the French Law for the Energy Transition describes the relevant provisions, which became French law on January 1, 2016.

The decree imposes reporting requirements on institutional investors and financial asset managers registered in France. It builds on the European Union-wide disclosure requirements due to take effect in 2017, pursuant to Directive 2014/95/EU of the European Parliament and Council in October 2014, according to Columbia Law School’s Justin Gundlach.

Contrasting the New French Decree with Existing US Securities Law.

U.S. disclosure requirements are primarily focused on public companies. In contrast, the French Decree targets institutional investors and asset managers (i.e, insurance companies, pension and social security funds), and others. Under French law, those who invest assets on behalf of others must now indicate how the companies in which they invest provide information to investors, shareholders, clients and beneficiaries about environmental, social and governance (ESG) factors.

Under U.S. securities law, Regulation S-K, Item 303 (commonly known as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” or “MD&A”), requires public companies to disclose, among other things, “known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” 

Item 303 requires a company to disclose an investigation only if it “reasonably expects” the investigation will have a material adverse effect on the company. Thus, if management reasonably expects that government efforts to limit carbon emissions will have a material impact on net sales or revenue, then management must discuss and analyze this known trend in a disclosure to investors.

Some might argue that the French Decree is costly, off target, and will only indirectly result in increased disclosure. Still, the more direct approach favored in the United States has not satisfied institutional investors seeking improved corporate disclosure of material risks in the fossil fuel industry. As financial firms affected by the French decree begin to implement its provisions, no doubt the SEC and the regulated community will pay close attention to whether it leads to meaningful disclosure of known trends.