Prepared for Climate? A Director’s Readiness Guide

January 17, 2023


In March 2022, the U.S. Securities and Exchange Commission (SEC) issued for public comment a rule proposal regarding certain climate-related disclosures that reporting companies would need to include in their registration statements and annual reports filed with the SEC.

Although a majority of commenters generally expressed support for the proposed rule, many supporting parties, neutral parties and opposing parties alike requested changes (often significant ones) be made for the final rule.[1]  

The most prevalent areas of requested changes include:

  • MaterialityAdjusting the materiality threshold or definition to better fit existing notions of materiality under SEC disclosure rules.
  • Framework ConsistencyBetter leveraging existing disclosure frameworks, including  International Sustainability Standards Board (ISSB) standards, to create a more uniform disclosure framework across jurisdictions.
  • Compliance Allowing for a longer implementation timeline.
  • Scope 3 EmissionsLessening the requirements for Scope 3 disclosures, which companies argue come at high cost without proportionate benefits for investors.
  • Safe HarborsEnhancing safe harbor provisions beyond just Scope 3 emissions disclosures, including allowing disclosures be furnished rather than filed.
  • Regulation S-XFully removing the proposed amendments to Regulation S-X, or, at least, altering the 5% financial impact threshold for each line item.
  • Principles-Based RulesAligning the proposed climate rules with the trend toward a more principles-based approach that the SEC had taken in recent years with other rule simplification amendments, as opposed to the more prescriptive nature of the proposed rules.

Although the final rule may demonstrate the SEC’s responsiveness to some of these requested changes, public company directors should start now (to the extent they have not already done so) to prepare a concrete plan for how to satisfy their oversight responsibilities with respect to the proposed climate disclosure rules once they are finalized — which we expect will be in early 2023.  Below are some key action steps that boards should consider as part of such a plan.

First Step: Process

Determine Division of Labor among Board Members/Committees

  • Before diving into the substance, have a game plan as to how the board should approach its oversight responsibilities.  
  • Given the nature of the proposed rule requirements, a natural choice may be to delegate these new responsibilities to the audit committee, if there is not already a delegation for ESG and climate/sustainability-related matters to another committee.  
  • However, the proposed rules will require substantial additional work and many audit committees already juggle too many responsibilities.  It may make sense for a different committee(s) (or the full board) to share some of the burden, particularly with respect to those requirements that do not fall within the financial statements.

Identify the Right Resources within the Company

  • Work with management to identify the right individuals to whom the board or committee(s) should have regular access in order to receive the appropriate information on climate-related data and disclosures.
  • Although a CEO or CFO may be well-positioned to speak on substantive climate matters, other senior personnel, including sustainability officers may be better-situated.

Consider Engaging External Experts

  • Consider whether it would be appropriate to engage third party consultants and advisors who can assist the board in its oversight responsibilities, as climate-related metrics, greenhouse gas (GHG) emissions and other topics in the scope of the SEC proposed rules are all specialized substantive areas; supplement particularly where the board is less-equipped with relevant expertise.

Schedule Board Trainings

  • Since directors sign and take liability on the disclosures included in annual reports on Form 10-K and Form 20-F, make sure to have a working knowledge of the requirements of the proposed rules and the kinds of substantive climate-related information that must be disclosed.
  • Trainings could cover the disclosure itself, the substantive data behind the disclosure, and/or the implementation of processes that boards should oversee in connection with data collection, verification, audit and disclosure.

Second Step: Substance

Identify Appropriate Governance Enhancements

  • Review (i) board committee charters to ensure they reflect any decisions made regarding the division of delegated responsibilities with respect to ESG and climate (including climate initiatives and strategies, climate risk oversight and management, climate metrics and targets, climate-related data gathering and climate disclosures) and (ii) corporate guidelines and policies to ensure they are aligned with any new or existing processes for executing on these areas.
  • Ensure management and reporting teams are sufficiently robust to handle additional reporting work and consider whether additional personnel may be needed.
  • Review management reporting channels for climate-related matters to ensure the board has an understanding of information flow and can identify any areas for improvement.   

Review Internal Audit & Controls Processes

  • Confirm that the company’s internal audit function is preparing for compliance under the new rules.  While there may be some time before compliance deadlines of final rules, financial disclosers may nonetheless cover current or prior periods.  Some work streams will require additional lead time and should begin now in case the final rules provide a short compliance deadline (e.g., some companies may not have processes to gather the required GHG emissions data, or the existing processes may not be adequate to measure up to SEC disclosure standards).
  • Identify the current status of the internal audit function with respect to climate, and have management regularly report back on developments leading up to the compliance deadline once the timing is known.

Review Impacts on Disclosure Controls & Internal Controls over Financial Reporting

  • Review and consider whether updates to the company’s disclosure controls and procedures (DCP) and internal controls over financial reporting (ICFR) are necessary to fold in the new climate-related information required to be disclosed under the proposed rules.
  • Items to consider for DCP include identifying (and training, if needed) responsible parties on processes (existing or newly implemented) for (i) gathering the data, (ii) verifying the data and preparing auditable data backup files, (iii) analyzing the data against the materiality thresholds under the rules and (iv) preparing the disclosure.
  • Items to consider for ICFR, particularly with respect to the proposed Regulation S-X rules, include how the company should be calculating climate risk metrics and transition plan impacts on the company’s financial statement line items (especially if the 1% threshold remains in the final rule).

Engage with Company Auditors

  • In connection with the proposed Regulation S-X rules, reach out early to the company’s independent auditing firm to understand how they are preparing to audit the new climate-related disclosures in the financial statements.  
  • Confirm what auditors will need from the company in order to give a clean audit report, and whether they need the company’s processes to be finalized at an earlier date to do test runs prior to the compliance deadline.
  • Consider if and how the board’s oversight role of the auditors may need adjustments as the board and the auditing firm navigate these rules for the first time, and understand whether the new climate rules will result in negotiating changes to auditor fees for their services.
  • Some firms may also be preparing to offer attestation report services for GHG emissions.  If the company’s auditor is doing so, confirm whether this results in any conflict of interest or independence issues.

Review Company Targets & Use of Credits

  • To the extent the company has already published targets, consider (i) whether management has a plan (with or without interim milestones) for achieving such targets and (ii) how management is thinking about the use of credits, including ensuring the quality of the credits and accounting for the increasing cost of credits over time, if the plan is to use credits.
  • Determine whether the responses to such questions are ones that the company wants to be disclosing publicly (particularly if the answer to the first question is “no”), and, if needed, identify the risks and most opportune time to walk back those targets.
  • To the extent the company has not already published targets but wants to do so, consider whether now is the right time in light of the forthcoming final rules and any impact on the substance of any published targets.

Identify the Board’s Role with Respect to Attestation Report Provider

  • Determine the scope and nature of the board’s role with respect to oversight of the attestation report provider for GHG emissions disclosure, including whether the board or a committee should oversee the selection and retention.
  • Establish criteria for evaluating and selecting a provider and a plan for how to best oversee them and their work.
  • Ensure management understands what information the provider needs to perform its review and give a clean report and how much lead time such processes may take.

Consider Having a Climate Expert on the Board

  • Determine whether the board would like to identify any director as a “climate expert” to be disclosed in the SEC reports.  There is no requirement to name one, and the proposed rules do not include a safe harbor for a board’s climate expert equivalent to the one available for a board’s financial expert (and it is unclear whether this was an inadvertent or intentional oversight on the SEC’s part).
  • Separately, update D&O questionnaires or otherwise collect information about any relevant expertise on the board for purposes of facilitating oversight responsibilities, even if the individual is not officially deemed a “climate expert” for purposes of the proposed rule requirement.

Engagement with Key Stakeholders

  • Understand the company’s investor relations strategy with respect to its climate disclosures and coordinate with management on relevant messaging and the overall strategy.  
  • Consider how the disclosure in the company’s SEC filings may be different from what was previously disclosed in a sustainability or ESG report published on the company’s website.
  • Consider whether any directors will engage with stakeholders directly on climate-related issues.

[1] Commonwealth Climate and Law Initiative, “Review of public comments to US Securities and Exchange Commission regarding the proposed rule for climate change disclosures” (September 5, 2022), available here.