New Climate and ESG Disclosures Likely: Are recipients of federal grants and loans the next target? | Faegre Drinker Biddle & Reath LLP

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Giving momentum to a decade-long trend, the Biden administration accelerated the environmental, social and corporate governance (ESG) disclosure process. While climate disclosures, such as carbon emissions, are the most widely reported ESG disclosures, which are increasingly demanding investors, insurers and customers, the trend goes beyond that to include the broader social impact of a company or industry. These recent wide and varied climate-related ESG initiatives by the Biden administration suggest that the United States is following the path of the European Union by requiring public companies to provide expanded disclosure not only of climate-related risks, but also broader disclosures on environmental topics. social and corporate governance.

Biden Administration Signals ESG Extended Disclosure Potential

It is clear that, as shown by several actions taken over the past few months, the new administration is placing increased emphasis on disclosing climate risks as a priority. This March, Acting Chairman of the Securities and Exchange Commission (SEC) Allison Herren Lee requested public comments on 15 issues, focusing on whether climate change disclosures provide sufficient information for investors. The Securities and Exchange Commission (SEC) draws on its 2010 Climate Change Explanatory Guidelines, which clarifies existing requirements to “help companies meet their disclosure obligations under federal securities laws and regulations.” The March request primarily focuses on whether requiring more robust climate-related disclosures is warranted, but it also asks for information on whether the SEC should require broader ESG disclosures, specifically asking:[s]should climate-related requirements be a component of the broader ESG disclosure standard “and”[h]How should the Commission develop climate-related disclosure requirements that complement the broader ESG disclosure standard? »Following the request, SEC staff met with multiple stakeholder groups and received a significant number of emails with comments representing different points of view. While the comments and feedback received will inform any proposed rule-making, SEC Chairman Gary Gensler and SEC Acting Chief Financial Officer John Coates have publicly stated that the SEC is ready to act quickly to propose both a new climate and human capital management. relevant disclosure rules.

Acting Chairman Lee’s request for March came before President Biden issued Order on the financial risks associated with climate change, 20 May. The ordinance calls for a comprehensive analysis of both federal activities that could be affected by climate change and the current climate disclosure requirements applicable to publicly regulated companies. The decree requires White House economic officials to issue a report later this year outlining a nationwide strategy to identify the risks climate change poses to the federal government’s “programs, assets and liabilities,” as well as to assess other climate-related finance. risks. The report will identify the funding instruments the federal government will need to meet the Biden administration’s goal of zero net greenhouse gas emissions by 2050. In particular, the Ordinance specifically calls for an examination of how public and private investment can play a “complementary” role in meeting the financial needs needed to tackle climate change. While it is clear that the Ordinance is primarily aimed at assessing and applying the measures that the federal government must take to mitigate the impacts of climate change on both its operations and its operations, the Ordin’s reference to public-private partnerships to fund programs and projects signals about future possibilities. The decree also requires the Financial Stability Oversight Board to identify risks to the federal government’s financial stability associated with climate change, and requires an analysis of other government programs, such as pension and procurement systems.

Congress and the Climate Risk Disclosure Act

To keep up with the executive branch or the SEC, Congress is also present. Earlier this year Climate Risk Disclosure Act was again represented in both the House of Representatives and the Senate. This will require the Securities and Exchange Commission, in consultation with other federal agencies, to issue regulations no later than two years after entry into force requiring public companies to disclose:

  • direct and indirect greenhouse gas emissions.
  • the total amount of fossil fuel assets owned and operated.
  • the impact on its assessment if climate change continues on its current trajectory or, alternatively, if it is kept at 1.5 degrees Celsius.
  • strategies to manage risks associated with climate change, especially physical and transition risks associated with climate change.

It is unclear if the bill will be considered this year – or if it could even get the required 60 votes for Senate consideration. It is clear, however, that Democrats in Congress share the Biden administration’s urgency when it comes to broader public disclosure of the impact of state-owned companies on climate change and how they manage the associated risks.

What’s next?

An opportunity for advocates of broader disclosure of climate risks and broader ESG issues may emerge in the next few months. To date, federal government action has focused on climate impacts related to federal government activities and broader disclosure of ESG issues by state-owned companies. The federal government has yet to address disclosure requirements for participants in public-private partnerships and borrowers and recipients of federal money. As the federal government is poised to pass significant infrastructure law, it can be foreseen that Congress will begin to require an ESG materiality assessment as part of the application process for certain federal contracts, grant and loan programs, and for participants in certain public-private partnerships. … Such requirements will provide the federal government with greater transparency about the risks and opportunities faced by recipients of taxpayer-funded programs and how they manage them. If the federal government required ESG evaluations to be conducted as part of an application for certain grants, loans, or partnerships, it would have a significant impact on its borrowers, grant recipients, and partners by harnessing the federal government’s significant bargaining power.

Those doing business with the federal government must assess how they will meet the new materiality assessment requirement in grant and loan applications. These estimates are complex, time-consuming to prepare and, if required by new federal regulations, must be very accurate.

The question is no longer whether US public companies will face additional disclosure requirements related to climate and ESG – and they will likely – in private markets. The question is, is the federal government willing to make the disclosure of additional non-financial information a requirement for doing business with Uncle Sam? Recent climate-related actions by the Biden administration strongly suggest that this could happen soon.

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