On Wednesday April 6, 2022, in a 5-4 vote, the U.S. Supreme Court justices stayed a California district court’s October 21, 2021 decision to vacate the Section 401 Water Quality Certification Rule (401 WQC Rule). The U.S. Environmental Protection Agency (EPA) had requested that the district court remand the rule, saying it was planning
Emerging Legislation and Regulation
Scope 1 and 2 Emissions Attestation Requirements under SEC’s Proposed Climate Disclosure Rule
We previously reported on requirements for Scope 3 emissions in the proposed climate disclosure rule released by the U.S. Securities Exchange Commission (“SEC”) on March 21, 2022 (“Proposed Rule”). In addition to Scope 3 emissions, the Proposed Rule would also require a registrant to disclose information about its direct GHG emissions (Scope 1) and indirect emissions from purchased electricity or energy sources (Scope 2). This post focuses on attestation requirements in the Proposed Rule for those Scope 1 and Scope 2 disclosures.
Who is subject to Scope 1 and Scope 2 attestation requirements and when is compliance required?
Section 229.1505 of the Proposed Rule would require a company that is an accelerated filer or large accelerated filer to include an attestation report in its Scope 1 and 2 disclosures. The attestation requirement also applies to foreign private issuers.
The Proposed Rule does not make compliance with Scope 1 and 2 disclosure and attestation requirements immediate. Instead, subject companies are provided a grace period to achieve compliance with Scope 1 and 2 disclosure requirements. The Proposed Rule would also provide a transition period for the assurances required for the Scope 1 and 2 disclosure attestations (see further discussion below). The proposed compliance timeframes are as follows:
|Filer Type||Scopes 1 and 2 GHG Disclosure Compliance Date||Limited Assurance||Reasonable Assurance|
|Accelerated Filer||Fiscal year 2024 (filed in 2025)||Fiscal year 2025 (filed in 2026)||Fiscal year 2027 (filed in 2028)|
|Large Accelerated Filer||Fiscal year 2023 (filed in 2024)||Fiscal year 2024 (filed in 2025)||Fiscal year 2026 (filed in 2027)|
Who prepares the attestation report?
Under the Proposed Rule, a GHG emissions attestation provider would be required to prepare and sign the attestation report. The attestation provider would not need to be a registered public accounting firm. However, the Proposed Rule includes characteristics of acceptable attestation providers including:
- Expertise in GHG emission based on significant experience in measuring, analyzing, reporting, or attesting to GHG emissions.
- Independence from the reporting company and any of its affiliates.
According to the agency, the proposed expertise requirement is intended to ensure that the attestation provider is sufficiently competent to perform the attestation engagement. With respect to independence, SEC states that emissions disclosures by independent attestation providers should improve the reliability of the disclosure.…
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The SEC’s proposed climate change rule: impact on private companies
The Securities and Exchange Commission recently proposed amendments to their existing disclosure policy that would require publicly traded corporations to disclose more information regarding climate change related risks, and how those risks may impact the company’s business and outlook (read, “bottom line and stock value”). While the SEC regulates publicly traded corporations, privately held companies need to also track these proposed rule amendments:
- The SEC has been requiring reporting on climate change / greenhouse gas emission information since 2010, so this overall concept is not new. However, the proposed disclosures would expand these obligation by requiring the publicly traded corporation to disclose (among other things):
- The company’s process for identifying, managing, measuring and managing climate change risks;
- If the company uses (“best,” “worst” and “most-likely” case) scenarios to assess risk, what assumptions and analytical choices the company uses to reach these outcomes;
- The Company’s “direct” and “indirect” emissions (the latter, from purchased electricity or other forms of energy); and, of particular significance; and – possibly of greatest significance,
- The Company’s indirect emissions from upstream and downstream activities.
This last bullet is far-reaching and likely to be controversial due to its impact on upstream privately held companies that sell products or services to publicly traded companies. Should this proposal be promulgated:
- Publicly traded companies will be obliged to make heightened demands upon their upstream vendors and suppliers to measure and disclose information re carbon dioxide (or other greenhouse gas) emissions associated with the sourcing, manufacture and transport of products to the SEC-regulated customer;
- Commercial counter-parties should anticipate new terms in contracts that would require such disclosures from private companies – including possibly indemnification for misstatements about carbon emissions;
- Small and medium-sized enterprise are likely not going to have in-house capabilities to perform such assessments, so an increased potential for out-sourcing this would be necessary if vendors want to remain on their customers’ “preferred provider” lists.
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Understanding the Scope of the SEC’s Proposed Scope 3 Emissions Reporting Mandate
On March 21, 2022, the U.S. Securities Exchange Commission (“SEC”) approved and released a proposed rulemaking package (the “Proposed Rule”) that would enact sweeping changes to climate-related disclosures. One key component of the Proposed Rule is a reporting requirement for certain Scope 3 emissions.
What are Scope 3 Emissions
Scope 3 emissions are “all other indirect emissions not accounted for in Scope 2 emissions.” These emissions relate to emissions from sources outside a company’s control – for example, Scope 1 emissions are direct emissions from sources owned or controlled by a company, and Scope 2 emissions are emissions primarily resulting from the generation of electricity consumed by the company. While companies generally can calculate Scope 1 and 2 emissions without significant difficulty, estimating Scope 3 emissions presents additional challenges, as Scope 3 emissions occur from other entities not owned or controlled by the company that serve the company’s value chain.
Who Must Report
The Proposed Rule requires non-smaller-reporting-company (“SRC”) registrants to disclose Scope 3 emissions and intensity: (i) if material or (ii) if the registrant set a GHG emissions reduction target or goal that includes Scope 3 emissions. Thus, the Proposed Rule does not require reporting of all Scope 3 emissions, and a company’s obligation to report would depend on company-specific factors, discussed below.
First, the Proposed Rule exempts SRCs from disclosing Scope 3 emissions. The SEC defines SRCs as an issuer that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that: (1) had a public float of less than $250 million; or (2) had annual revenues of less than $100 million and either: (i) no public float; or (ii) a public float of less than $700 million.
Second, the Proposed Rule applies a materiality qualifier to Scope 3 emissions that companies must report. SEC regulations and Supreme Court precedent define “material” emission as emissions with a “substantial likelihood that a reasonable investor would consider them important when making an investment or voting decision.” The SEC provides several examples of material Scope 3 emissions. Generally, the SEC advises that Scope 3 emissions may be material where they assist investors to understand transaction risks. Companies with significant Scope 3 emissions could face disruptions in cash flow and business models to the extent new laws or policies encourage changes to products, suppliers, distributors, or other commercial providers in a company’s value chain. Moreover, consumer demand could influence a shift to less carbon-intensive products and services. Conversely, companies sourcing materials and products with lower emissions compared to competitors may see cost savings and higher demand from consumers. Thus, the SEC’s materiality approach is quite broad and requires companies to understand their company’s value, risks, and opportunities in deciding whether to report Scope 3 emissions.
Third, even if Scope 3 emissions do not represent material emissions, a company must report Scope 3 emissions if it adopted emissions targets. The Proposed Rule requires a company to disclose whether its emissions targets include Scope 3 emissions, and if they do, report such emissions. This requirement allows investors to track a company’s compliance with its emissions targets and gauge what potential additional investments a company might need to implement to meet its targets.…
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EU public consultation on Commission’s review of the RoHS Directive
The European Commission is currently seeking public comment as part of its review of the Restriction of Hazardous Substances in Electrical and Electronic Equipment Directive (Directive 2011/65/EU) (the RoHS Directive).
The aim of the RoHS Directive is to reduce the risk to human and environmental health by restricting the use of certain hazardous substances in…
California Clean Hydrogen Bill Targets Alternative Energy Sources for Expansion
A new “Clean Hydrogen Bill” (SB 1075, Skinner) has been introduced in the California Legislature as a means of achieving the State’s goals for reducing greenhouse gas emissions and mitigating climate change. If passed, this bill would significantly increase the emphasis on “green hydrogen” as an alternative fuel in California’s economy, opening up…
European Commission proposes to expand the EU emissions trading scheme
Last year, the European Commission published its proposal to expand the EU emissions trading scheme (“EU ETS”). The expansion of the EU ETS forms a central part of the Commission’s “Fit for 55” package, which seeks to revise EU climate, energy and transport-related legislation to align it with the wider 2030 and 2050 climate ambitions…
EPA PFAS testing targeted industry and will now look to public water systems
During 2021, the U.S. Environmental Protection Agency (EPA) collected discharge data for PFAS as part of its Multi-Industry PFAS Study. The purpose behind the study was to identify facilities producing or using PFAS, look at their wastewater characteristics, estimate PFAS in their discharges, and identify control practices and treatment options. As part of the study, EPA collected data from various EPA data sets and obtained information from other federal agencies (the U.S. Department of Transportation, Federal Aviation Administration (FAA), U.S. Department of Health and Human Services, and the Food and Drug Administration), states and EPA regions, as well as information from industrial users. After EPA collected its data, it categorically broke down the results of its study into the following groups:
- Organic chemicals, plastics, and synthetic fibers (OCPSF)
- Metal finishing
- Pulp, paper, and paperboard
- Textile mills
- Commercial airports
The information collected by EPA during its study will be used to further identify companies and facilities that manufacture, import, or process PFAS.…
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European Commission opens a public consultation on the “sustainable consumption of goods – promoting repair and reuse”
The European Commission recently opened a public consultation on the “sustainable consumption of goods – promoting repair and reuse”. The Commission is looking to amend the Sale of Goods Directive and possibly introduce a separate new legislative proposal on the right to repair. The initiative follows the New Consumer Agenda and the Circular Economy Action…
California extends comment period for proposed modifications to Proposition 65 warnings
California’s Office of Environmental Health Hazard Assessment (OEHHA) has extended the public comment period for the proposed amendments to their “short-form” Proposition 65 “safe harbor” warning regulations in response to a request from the California Chamber of Commerce. OEHHA’s proposed amendments change existing provisions addressing label size, catalog and internet warnings, and other issues (see…