Conflict minerals may be present in SEC climate disclosure rules, according to ESG experts.
Practitioners speaking at Compliance Week's virtual ESG Summit projected that the Securities and Exchange Commission's (SEC) proposed climate-related disclosure regulation will eventually pass but not before enduring significant adjustments.
If businesses and trade associations follow through on their threats to sue to stop the regulation from going into effect, that may also postpone its implementation.
Speakers at the environmental, social, and governance (ESG) event urged attendees to continue preparing for the SEC's potential mandate even though they anticipated changes and delays. They advised doing so as if climate-related disclosures would be necessary for the 2023 fiscal year for large accelerated filers, as is currently proposed.
William Nelson, general counsel of the Investment Adviser Association, stated at a session on regulatory changes that "ESG is a process, not an outcome. If you wait to prepare until the rule is finalized, then you’re too late."
Partner at the accounting, consulting, and technology company Crowe Chris McClure described ESG as "an evolution of risks you have as an organization." " Make ESG part of your long-term plan," he advised.
The conference's chair, compliance expert Douglas Hileman, linked the probable court battle over the conflict minerals regulation to that over the climate-related disclosure requirement.
"There are a lot of parallels between the two," he claimed. "It’s like déjà vu all over again."
The conflict minerals regulation, which the SEC implemented in August 2012, mandates that businesses disclose information about the source of the tantalum, tin, gold, and tungsten used in their goods each calendar year. It is well known that these resources have supported bloody conflicts in the Democratic Republic of the Congo (DRC) and neighboring nations.
In response to the regulation, the National Association of Manufacturers, U.S. Chamber of Commerce, and Business Roundtable filed a lawsuit in federal court, arguing that requiring businesses to declare whether they obtained certain metals from the DRC violated their right to free expression. A U.S. appeals court determined that certain of the rule's provisions were in fact illegal in 2014. The modified regulation becomes effective in 2017.
In its spring regulatory agenda, the SEC declared its intention to pass the climate-related disclosure rule this year. According to a fact sheet that accompanied the regulation, major accelerated filers would have to start disclosing information on the environment in fiscal year 2023, followed by accelerated and nonaccelerated filers in fiscal year 2024, and smaller reporting firms in fiscal year 2025.
The implementation of the regulation would probably be delayed by a lawsuit. The Chamber of Commerce stated in June that the climate-related disclosure rule "exceed(s) the SEC’s lawful authority and [is] vast and unprecedented in [its] scope, complexity, rigidity, and prescriptive particularity," and that it could file a lawsuit in federal court like it did with the conflict minerals rule.
Thousands of comments were sent to the SEC by business, trade associations, investors, and individuals expressing support and opposition to the regulation.
The following are the primary issues that corporations and trade associations have with these comments: According to McClure, the idea of materiality in the regulation and Scope 3 emissions.
Commenters' criticism of the disclosure of Scope 1 (direct) and Scope 2 (indirect but still under an entity's control, such energy consumption) greenhouse gas emissions has not been as strong. According to Nelson, there is growing resistance to measuring and revealing your organization's Scope 3 emissions, which are produced through the value and supply chains of businesses.
Everyone agrees that scope 3 has to be examined, Nelson said.
In order to give them more time to prepare, commenters who oppose reporting their Scope 3 emissions have requested that the SEC postpone the implementation of that part of the rule. According to commentators, it will be challenging to get precise Scope 3 emissions data from all of their partners and providers.
The regulation would further specify materiality as occurring when the total financial effect exceeds 1% of the associated financial statement line item. According to Nelson, the business community has expressed significant anxiety about this 1% "bright line" for line-by-line materiality.
"It’s a very difficult threshold to meet," he remarked.
By fLEXI tEAM