Climate Disclosure Rule Could Have Unforeseen Compliance Risks, Lawyers Warn

Two attorneys testified to the House Committee on Financial Services on Wednesday that the Securities and Exchange Commission’s climate disclosure rule will be a major compliance adjustment for public companies. Both attorneys were summoned by the Republicans on the Committee, who oppose the rule, and were two of five witnesses called to the hearing.

The climate disclosure rule was finalized in March and will require public companies to disclose their climate risks and strategies. Larger public companies will have to report their Scope 1 and 2 emissions if they are material to their investors, but there is some debate as to whether some companies will have to report Scope 3 emissions despite it not being required by the final rule. Scope 3 refers to emissions within a company’s supply chain.

Elad Roisman, a partner with Cravath, Swaine & Moore LLP and a former SEC commissioner and acting chair, testified that “compliance with the requirements will be a major undertaking for many public companies.” Roisman said that he would be counseling companies to “seriously consider disclosing Scope 3 emissions” because the SEC might find that it is material to emissions goals that the company has set.

Robert Strebbins, a partner with Willkie Farr & Gallagher LLP and a former general counsel with the SEC, agreed, and said that since many companies set voluntary environmental goals, “Scope 3 is going to be implicated.” Strebbins added that some companies have specific transition plans to reduce environmental risks and there “Scope 3 comes into play.”

The SEC did remove the requirement to disclose Scope 3 emissions in the finalizing release, but Strebbins said that: “It is an overstatement to say it is out of the release, but it is lessened.”

The final rule only requires companies to report Scope 1 and 2 emissions if they are material to investors, and specifically says that not all companies will be required to report them. However, Strebbins argued that “the only way to judge materiality is to do the work. You’re still going to have to do the work determining 1 and 2.”

The hearing was highlighted by an interaction between Representative Sean Casten, D-Illinois, and Liberty Energy CEO Chris Wright. Liberty Energy is a plaintiff in a lawsuit to overturn the rule, now in the U.S. Eighth Circuit Court of Appeals.

Wright said during the hearing that Liberty “fracks roughly 20% of the onshore wells in the United States and Canada.”

Casten then asked Wright about previous statements he made about carbon dioxide not being a pollutant and severe weather events not increasing in frequency; remarks Wright stood by.

But Casten, a co-founder of the sustainable investing caucus fired back at Wright, saying: “You don’t matter. You are an interchangeable person who comes here and finds it useful to misrepresent science in order to create short-term value for your shareholders. There are thousands of people like you.”