This is Part 3 of 3 of an IDFA series breaking down the SEC's new climate disclosure rules. Please stay tuned to the IDFA Blog for more on sustainability topics or visit the IDFA Sustainability Hub and check out the new SEC Disclosure resources from IDFA and partner PwC.

On March 21, 2022, the Securities and Exchange Commission (SEC) proposed a rule requiring domestic publicly traded corporations[1] to file specific climate-related[2] disclosures as part of the company’s annual report. The proposed rule would require detailed information about the company’s greenhouse gas (GHG) emissions footprint and the risks the emissions and associated climate change may have on the company’s financial statements and business. Many dairy processors are privately owned corporations that have no SEC filing obligations, but a majority sell to or co-pack dairy products/ingredients for publicly traded major brands and retailers that are registered with the SEC[3]. Moreover, most major financial institutions that service the dairy industry are publicly traded and would be required to comply with a final rule.

In this IDFA Blog series, we will highlight the major requirements in the SEC proposal that, if finalized, would likely have an impact on the dairy industry.

Given the existing investment and interest in digesters and other on-farm carbon reduction practices, the SEC’s proposal to exclude offset emissions from reported emissions totals accompanied by transparency requirements may have an impact on carbon markets and investor interest in agricultural offsets.

Key Takeaways from the SEC Proposed Rule

  • The SEC will make changes in the final rule, but various interest groups are likely to challenge the final rule as outside of the SEC’s statutory mandate. As a result, the timeline on the rule's implementation may slip, but IDFA feels strongly that GHG reporting at this level is here to stay from a regulatory and competitive perspective. Publicly traded companies in the EU are facing similar reporting and disclosure obligations, as are other major U.S. trading partners.
  • Sustainability has transitioned from marketing and storytelling to ESG compliance that is mainstreamed throughout companies and led by financial officers underpinned by metrics, transparency, and accountability to senior leadership, Boards, and shareholders.
  • One way to look at the SEC proposed rule is as a risk management rule--and it should be handled as such by companies, public or private. Companies should consider hiring an ESG Controller and begin conducting regular assessments (i.e., climate scenario analysis) of how they are accounting for environmental impacts within their supply chains down to the balance sheet.
  • Public companies will need to review their boards and financial departments to ensure they have the competence and expertise to navigate a final rule and to sign-off on documentation. The SEC closely examined the 2019 Marchand[4] decision and expects boards to manage ESG at the same level they oversee food safety.
  • Companies private and public need to consider how sustainability officers coordinate with the financial department. Many may need to move sustainability functions to the finance office, especially publicly traded companies.
  • Publicly traded companies face potential criminal and civil penalties for misrepresenting or omitting Scope 1 and 2 information. Even for Scope 3, dairy customers will likely demand documentation as it will be critical to meeting the Scope 3 safe harbor requirements.
  • Companies private and public should avoid product and label claims of “climate friendly” and “climate neutral” to minimize litigation risk. Substantiation of those claims would arguably need to align with the SEC’s final rule definitions. The SEC’s action will impact how courts examine claims and offer additional substance for plaintiffs’ and shareholder lawyers.
  • Companies should expect the SEC to propose human capital investment requirements as part of ESG accountability requirements, even for private companies that work with customers.

That concludes this series. For Blogs I and II, please visit our Newsroom.

[1] Private foreign issuers are also included in this proposed rule.

[2] Although the “social” prong of Environmental, Social and Governance (ESG) is not within the scope of this proposal, the SEC is expected to require mandatory reporting of diversity, equity, and inclusion metrics in the near future.

[3] Many dairy processors also sell to brands traded on European stock exchanges with similar carbon reporting mandates.

[4]Marchand v. Barnhill, 212 A.3d 805 (Del. 2019)