‘Preparation, Preparation, Preparation’: How Smaller Tech Companies Can Mitigate Climate Disclosure Risks

A potentially forthcoming climate reporting requirement from the U.S. Securities and Exchange Commission (SEC) has legal experts worried about a looming litigation risk for companies that don’t have a robust team in place for tracking emissions data.

The SEC announced and opened a public comment period for its proposed climate disclosure rule in March 2022. The rule aims to standardize the climate-reporting information required from companies across the board, and is expected to go into effect this April for large public companies and in 2025 for smaller companies.

The proposal requires companies to disclose information on “Scope 1” direct emissions (greenhouse gases) and “Scope 2” indirect emissions (purchased energy), as well as upstream and downstream (“Scope 3”) emissions for some companies. Scope 3 emissions disclosures are the most contentious requirement of the proposal because they require some companies to scrutinize global supply chains and the indirect impact of their products or services.

The rule’s proposal has not gone without challenges. Opposition was swift among large corporations and asset managers, particularly among companies whose climate disclosure obligations would increase dramatically as a result of the proposed rules.

Companies are expected to face increased exposure over how they are managing the risks and how they are addressing the potential destabilizing effect of the climate on investors and investments.

The biggest of Big Tech players are unlikely to face data infrastructure problems, but smaller companies—in many other sectors—could find themselves underprepared for the coming data crunch.

Attorney Gerald J. Pels, chair of the Firmwide Environmental Section’s Energy and Industry and ESG practice at Locke Lord in Houston, said that having the right team available to assist in the development of the climate-related data could be a companywide effort involving operations, accounting, legal, and even human resources.

Financial accounting is not greenhouse gas accounting, he said, and compliance will require a thorough understanding of each industry.

“I’m very concerned that if companies don’t have an opportunity to really develop their infrastructure and knowledge base to develop the data, there could be a lot of litigation which could uncover issues that are uncomfortable for companies,” Pels said. “Preparation, preparation, preparation, in finding the right team, is what I think is so important and being comfortable to devote resources to it right now. Those resources will not be insubstantial because this is going to be a bigger list than companies think.”

Attorney Dan MacIntyre, chair of the business and transactional group at Parker MacIntyre in Atlanta and a frequent adviser on SEC compliance issues, said companies will face “huge amounts of non-revenue-generating work” in preparing climate reports and ensuring compliance. Companies with extensive supply chains could face liability if the production incorrectly reports a climate-related disclosure, he also said.

Companies with a larger climate footprint, such as those reliant on fossil fuels, have balked at the idea of being required to disclose more information about impacts across their value chains. These companies could face transition risks with the proposed rule’s expected adoption next month.

The resistance occurs because the companies are currently benefiting from a lack of mandatory reporting requirements and scrutiny of their climate impacts and promises, including their exposure to and management of mounting climate-related risks, said Nikki Reisch, director of the climate and energy program at the Center for International Environmental Law. The rule will make it much more difficult for companies to mask the disconnect between their climate rhetoric and the reality of their operational and investment decisions, Reisch said.

“Right now, what we see is that companies are quick to make commitments in their public statements, advertise around climate action, and attempt to portray their companies as ‘green’ or climate friendly,” Reisch said. “But few are willing to go disclose in detail about how they have been delivering on those pledges.”

The lack of standardized reporting leaves companies without regulatory or public oversight on how they are sticking to climate goals. A sharp rise in “greenwashing” and a real discrepancy between a company’s public promises and its practices has been seen, Reisch added.

“A robust disclosure rule would benefit members of the public who are trying to separate the wheat from the chaff, and the rhetoric from reality, and better understand both how major corporate actors are affecting the climate emergency that is increasingly impacting everyone and how those companies are likely to be affected by it,” Reisch said.

Reisch said that while the final content of the rule has not yet been announced, and there have been extensive public comments concerning the disclosure requirements, the rule’s implementation is critical to ensure standardized and mandatory reporting by public companies on climate-related risk.

“The rule is intended to fill a gap that exists now in public access to information about how these companies are addressing climate risk, which is clearly a material concern to investors,” Reisch said. “There’s near-universal consensus among financial regulators that climate risk poses a systemic threat to financial stability.”

But the proposal could still face challenges. Pels, of Locke Lord, said the SEC could face a challenge under the major questions doctrine, similar to the one raised in the 2022 U.S. Supreme Court case West Virginia v. EPA.

From an environmental standpoint, Reisch said, she hopes the SEC and current administration do not bend to the will of the corporations resisting the change, “given that climate change is one of the greatest threats not just to human rights and the environment, but to financial stability,” Reisch said. “Requiring disclosures about companies’ impacts on, and responses to and management of, climate risk is a very basic and essential requirement for protecting investors and the economy, and preventing the worst climate-related outcomes.”

From: Corporate Counsel