Year in review - Climate change in the spotlight

The SEC introduced draft climate disclosure rules, including requirements to disclose emissions produced due to a company's activities that it does not directly control (Scope 3). The Commission received over 14,000 comment letters, with many companies and business groups expressing opposition to the inclusion of Scope 3 emissions. The new rules are expected to be released next year, with litigation against the rules almost assured. Also, something to note: the SEC is seeking comment on whether the new requirements should apply to Canadian firms reporting through the multijurisdictional disclosure system. 

Canadian climate legal experts urged the Canadian Securities Administrators (CSA) to keep pace with their American counterparts. The CSA is considering its proposed disclosure requirements in light of the SEC proposal and the standards published by the International Sustainability Standards Board (ISSB). The CSA also highlighted ESG disclosure deficiencies in its recent continuous disclosure review report, warning companies against making "overly promotional” ESG claims. 

The Office of the Superintendent of Financial Institutions (OSFI) released new draft guidance in May outlining the regulator’s expectations for the oversight of climate change risks by financial institutions. Climate risk disclosures are to be phased in, with banks expected to provide enhanced climate risk disclosure in line with the Task Force on Climate-related Financial Disclosures (TCFD) by October 2023. Final OSFI guidance is expected in early 2023. 

Climate change-related shareholder resolutions were even more popular this year than last year. According to the Proxy Preview Project, 113 climate change proposals were filed in this year’s U.S. proxy season, an increase from 79 in 2021. A Costco shareholder resolution, which called on the company to implement a plan for reducing its greenhouse gas (GHG) emissions, passed with support from 70% of those voting. The proposal also required the company to create a plan to track and reduce its Scope 3 emissions. As a result, Costco introduced targets for direct and purchased energy sources and will introduce targets for Scope 3 in 2023. 

ISS is also amending its 2023 proxy voting guidelines for significant greenhouse gas emitters, recommending votes against boards that are not taking the "minimum steps needed to understand, assess, and mitigate risks related to climate change." Minimum steps should include climate risk disclosure within an appropriate framework, such as the TCFD and establishing appropriate GHG emission reduction targets. 

In other climate governance developments, the environmental group is planning to bring a derivative action in the UK against the board of directors of Royal Dutch Shell plc for not preparing to meet the Paris Agreement net-zero targets. The lawsuit alleges that Shell's directors failed to properly fulfil their responsibilities by inadequately accounting for climate change risks and not planning sufficiently for a transition to net-zero. Formal proceedings are pending which require the permission of the English High Court. 

This year, boards needed to adjust to rapidly evolving challenges related to climate change. The pressure from multiple stakeholders and shifting regulatory environments will continue to challenge boards into the new year and beyond.