What’s the issue?
In March, the SEC issued a request for comment (Request) on fifteen broad questions about climate and ESG disclosures. In response, the SEC received nearly 600 comments, with a relatively small percentage from the oil and gas industry and its related trade associations.
Why does it matter?
By issuing the Request, the SEC took its first step to review and update the SEC’s existing guidance on climate disclosures. The SEC is moving quickly and is expected to issue a proposed rulemaking this fall. Should the SEC decide to adopt a broad, comprehensive disclosure framework, it could have huge financial consequences, create new disclosure liabilities, and require companies to create numerous new internal compliance positions.
What’s our view?
Given the expected impact of the new rules on the oil and gas industry, the comments so far seem limited. We expect that federal (FERC) and state regulatory commissions are keenly watching the SEC’s next move and could require their own industry-specific disclosures. Therefore, input from key stakeholders during the rulemaking stage is critical to ensuring industry and company specific issues are captured.
In March, the SEC issued a request for comment (Request) on fifteen broad questions about climate and ESG disclosures. In response, the SEC received nearly 600 comments, with just 17 from the oil and gas industry and its related trade associations. For many years, companies, including those across the energy industry, have published reports describing their environmental or sustainability efforts. These reports are now commonplace as major capital providers expect public companies to provide them. However, the information in these publications is not standardized, consistent or updated in a timely manner.
By issuing the Request, the SEC took its first step to review and update the SEC’s existing guidance on climate disclosures. The SEC is moving quickly and is expected to issue a proposed rulemaking this fall. Creating a standard framework across all industries, much like financial reporting, would be a daunting task, even across subsectors, such as oil and gas, but the SEC appears to be poised to tackle this head on.
Given the expected impact of the new rules on the oil and gas industry, the comments so far seem limited. Should the SEC decide to adopt a broad, comprehensive disclosure framework, it could have huge financial consequences, create new disclosure liabilities and require companies to create numerous new internal compliance positions. We expect that federal (FERC) and state regulators are keenly watching the SEC’s next move and could require their own industry-specific disclosures. Therefore, input from key stakeholders during the rulemaking stage is critical to ensuring industry and company-specific issues are captured.
The issue driving the SEC’s request is the “demand for climate change information and questions about whether current disclosures adequately inform investors.” To facilitate the SEC staff’s review, it requested comment on fifteen questions, ranging from how the SEC could best regulate climate disclosures to whether the SEC should expand its focus from climate disclosures to a focus on ESG matters as part of a broader, comprehensive disclosure framework.
With a notice of proposed rulemaking expected this fall, today we address some of the key themes with a focus on the comments made by just a handful of energy industry trade associations, such as EEI, AGA and API, and energy industry stakeholders, including Williams and Enbridge. While the ultimate specifics of the rulemaking are developing and uncertain, what’s clear is that transparency is rapidly becoming the new norm and regardless of the specificity of the SEC’s action, the energy industry should expect that its federal and state regulators are watching.
Nearly 600 comments were filed — interestingly, only 17 were from oil and gas industry companies and related trade associations. The comments are intended to influence the future framework for a proposed rulemaking. Comments ranged from structural — comments about the SEC’s authority and role; technical — about what might be disclosed and how the SEC might work with standard setters and achieve international harmonization; legal — about potential securities law liability considerations; comments about external and internal oversight of disclosures; and more — including whether the SEC’s forthcoming rulemaking should include private issuers, and whether it should be limited to climate, as opposed to including the full suite of ESG topics.
Some commenters, such as certain standard setters, investors and NGOs, supported expanding the requirements to private companies, explaining that investors would benefit from climate disclosures from private companies just as they would from public companies. Some argued that failure to treat public and private companies similarly could result in regulatory arbitrage and could discourage private companies from going public, as well as create a different regulatory regime as compared to the one developing in Europe. In contrast, other commenters argued it would be unnecessary, and a dramatic expansion of the SEC’s jurisdiction for it to impose a mandate on private issuers.
Another major issue involved the scope of the SEC Request: specifically, whether it should address just climate or a broader ESG disclosure framework. Some commenters argued that climate is so important that the SEC should address it first, and then ESG matters more broadly, in a phased approach. Others opposed mandatory ESG disclosures altogether. Still others supported including climate as part of a broader ESG disclosure package.
There were a number of consistent themes across the limited comments filed by the oil and gas industry, including: developing standards at the domestic industry and sub industry level, including the use of existing standards, although disagreement exists as to which ones; concern over whether climate disclosures can/should meet the financial “materiality” standard; and the burdensome task of gathering, interpreting, quality checking and displaying the relevant data, especially if the scope of disclosures is very broad.
The joint comments filed by EEI/AGA, consistent with other industry groups outside of the energy industry, were focused on ensuring that disclosures are material to investors with flexibility to make disclosures that meet investor needs, “rather than by mandating one-size-fits-all solutions.” EEI/AGA recognized that relevant metrics differ across industries and recommended that disclosures should involve industry-specific metrics, similar to SEC industry guidance for other industry-specific disclosures. EEI/AGA were opposed to using groups focused specifically on developing climate-related disclosure standards to lead this work, as they are not primarily focused on the goal of financial securities disclosure and, thus, do not have enough experience with the financial materiality threshold.
According to the EEI/AGA, they have developed a “first-of-its-kind ESG reporting template with a focus on environmental and climate disclosure,” the EEI-AGA ESG/Sustainability Reporting Template, and advocated for using the template. They believe the template is unique because it was developed with and for investors, is transparent, regularly updated and inclusive because it benefited from input from policymakers and representatives of proxy advisory firms, rating agencies, ESG rating providers, NGOs, the Sustainability Accounting Standards Board, and the Task Force on Climate-related Financial Disclosures (TCFD).
The API offered another model for standards setting, although one modeled off of the EEI/AGA template and called the Climate Action Framework. This API initiative’s goal is to develop more consistent and comparable reporting of key GHG indicators in a template form for voluntary use by individual companies. An initial version of this template was developed by API member companies to guide reporting on GHG emissions, mitigation, and intensity on a normalized basis.
Among the industry commenters, the API offered the most robust overview of the cost of compliance with a new reporting regime. API explained that the cost could go well beyond what may already be reported to other government agencies when considered against experiences with other financial reporting rules. As an example, the API analogized to the development of the section 1504 resource extraction disclosure rules, which the SEC explained “would likely cost filers anywhere from $96 to $591 million per year collectively.”
Finally, API urged the SEC to take under consideration that there is already a large amount of activity in this area through existing climate reporting regimes and to not pile on potentially inconsistent information requirements. As we covered most recently in EPA Rules Don’t Apply to All Emissions -- Kinder Morgan and Energy Transfer as Examples, information provided through the EPA’s Greenhouse Gas Reporting Program by oil and natural gas companies is extremely detailed and requires the tracking of facility-level Scope 1 emissions from large greenhouse gas emitters with distinctions based upon industry segment (e.g., onshore vs. offshore), process emission sources (e.g., flare stacks, distribution mains and dehydrators), and geographic location by basin.
Williams’s comments expressed concern that any future climate disclosures would be “non-financial” and, thus, drawing a correlation between these types of information and the financial performance of a company is questionable. Their skepticism extended to “quantifiable” data such as GHG emissions, as there are numerous reasons for concerns relating to data aggregation, integrity and reliability. Williams offered an example that GHG emissions are estimated based upon the application of emissions factors and formulas, modeling and measurements, the result of which is then converted into a carbon dioxide equivalent. As a result, even standardization for calculating emissions within the pipeline industry would likely result in increased investor confusion. For these reasons, they advocated for a principle-based disclosure framework which, over time, might be adapted to address the industry specific requirements of issuers.
Williams also expressed concerns about requiring disclosure of climate/ESG information that does not meet the established materiality standard, principally because it is “likely to result in the very ‘avalanche’ of information sought to be avoided,” leading to a burdensome process to coordinate, prepare and report the required data.
Much like Williams and the other trade associations mentioned above, Enbridge believes that the SEC should be concerned with promoting the ability to increase comparability across companies and to support decision-useful information for investors. As a result, Enbridge “supports the development of industry-specific standards, metrics and performance indicators, such as the sustainability reporting guidelines developed by the natural gas and oil industry.” One way to do so, Enbridge suggested, is to leverage existing frameworks that have wide market acceptance, such as TCFD, as well as the work being undertaken by various industry associations discussed above in order to facilitate more consistent information for investors.
Based on comments from the industry and its trade groups, they seem aligned on the use of an existing, industry-specific framework, but not on any specific one. Given the far reaching and permanency of any new climate or ESG disclosure requirements, we expect to see much greater involvement from the industry during the rulemaking stage, likely this fall. In the interim, other state and federal regulators are likely also evaluating whether to institute climate and ESG disclosure requirements that fall within their jurisdiction.