SEC Set to Rule on Climate Change/ESG Disclosures in April-
The SEC is expected to make its final ruling on adoption of Climate Change Disclosure Rules (ESG) in April, according to the agency’s updated 52-item Rulemaking Agenda.
Also scheduled for final rulings in April are new disclosure requirements targeting cybersecurity, share repurchases and special purpose acquisition companies (SPACs).
The regulatory agency first proposed adoption of Climate Change Disclosure Rules in March 2022, but delayed its decision several times following receipt of 14,000 comment letters. The new rules are far reaching and would require US public companies to assess and disclose on Form 10-K how their businesses impact climate change. In certain cases, companies would be required to report on greenhouse gas emissions generated by themselves and their suppliers.
Significant pushback came from companies which said the proposed rules are unclear, burdensome, and costly. It also generated comments from lawmakers, legal scholars, and attorneys general from 12 states who challenged the SEC’s legal authority to enact ESG rules.
Cybersecurity Risk and SPAC disclosures also were proposed in March 2022. New cybersecurity rules would require companies to provide more detail on cyberattacks, including regular filings on cyber risk management, governance and what companies were doing to prevent attacks.
New SPAC disclosure rules would require SPAC targets to file the same S-4 registration forms that currently are required of the SPAC. In filing the S-4s, the target companies could be held liable for any false or misleading information that the company provided in its merger documents. In addition, SPAC targets would no longer be allowed to use certain disclaiming safe harbor clauses in forward-looking statements that are typically found in SPAC deals. Eliminating such safe harbor clauses treats SPAC deals like traditional IPOs, which prohibit companies from using projections that may entice investors.
New rules targeting share repurchase disclosures were first proposed in December 2021. If adopted in April, companies doing stock buybacks would be required to file a new Form SR within one business day after a share repurchase, providing details on the number of shares repurchased, the class of securities, date of the purchase and average price paid.
Of the 52 items on the agency’s agenda, 29 are in the Final Rule Stage and 23 are in the Proposed Rule Stage.
Feds to Require Big Banks to Disclose Climate Risk
Ahead of the SEC’s final ruling on Climate Change disclosure affecting public companies, the Federal Reserve Bank has told the nation’s six largest banks—all publicly traded, that they have until July 31 to disclose the impact that climate change could have on their operations.
In a January 17 announcement, the Fed provided details of its “Pilot Climate Scenario” analysis exercise, as well as information that will be required from the program’s first participants: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo. These banks will be required to show the anticipated impact that floods, wildfires, hurricanes, heat waves and droughts could have on their residential and commercial real estate portfolios. The first exercise will focus on portfolios in the Northeastern US.
The announcement comes just 7 days after Fed Chair Jerome Powell, speaking in Sweden at the Symposium on Central Bank Independence, said that “Decisions about policies to directly address climate change should be made by the elected branches of government and thus reflect the public’s will as expressed through elections. At the same time, in my view the Fed does have narrow, but important, responsibilities regarding climate-related financial risks.”
“But without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals. We are not, and will not be, a ‘climate policymaker’,” said Powell.
A summary of the report is expected to be released by year’s end, though it will not identify which bank made which responses.
FASB to Expand Expense Disclosures
During its first meeting of 2023, the Financial Accounting Standards Board (FASB) tentatively decided that companies be required to break out expenses for employee compensation, depreciation, intangible asset amortization and inventory in the notes of their financial statements—an action that has been dubbed “the disaggregation of income statement expenses project.”
Specifically, if adopted, companies would be required to disclose the amounts of (1) employee compensation, (2) depreciation of property, plant, and equipment, (3) amortization of intangible assets, and (4) inventory expense included in each relevant expense line item in the income statement. FASB’s Board indicated that it would discuss at a future meeting whether other types of depreciation, amortization, or depletion other than depreciation of property, plant, and equipment and amortization of intangible assets should also be disclosed.
FASB’s definition of employee compensation would include: “At a minimum, all forms of cash consideration (including deferred cash compensation), share- based payments, medical care benefits, retirement benefits, and other post-employment benefits, given by an entity in exchange for service rendered by employees or for the termination of employment. This includes wages, salaries, social security contributions, compensated absences, profit-sharing, bonuses, one-time employee termination benefits, non-retirement post-employment benefits, and any compensation cost recognized in accordance with the guidance in Topic 710, Compensation—General.
Other post-retirement benefits include post-employment life insurance and post-employment medical care. For defined benefit plans within the scope of Topic 715, Compensation—Retirement Benefits, employee compensation includes only the service cost component.”
“This is the most important project that we’re working on from an investor perspective by a factor of ten,” Board Member Gary Buesser said during the meeting adding that he is amazed at how little information some large companies provide in their reports. “There are costs to every standard we implement but many of our projects don’t really move the needle. This could move the needle.”
FASB is expected to issue a draft proposal by the end of Q2 2023.
Last of China State-Owned Companies to Delist
And then there were none. The last of the China state-owned enterprises listed on US exchanges, China Eastern Airlines and China Southern Airlines just announced their intent to delist from the New York Stock Exchange. The last day of trading for the airlines is expected in early February, and when that occurs there will be zero China state-owned companies trading on US exchanges.
Both companies cited limited trading volumes of their respective American Depository Receipts (ADRs), and the cost of maintaining listings in the US as reasons for delisting.
The move, however, comes just weeks after the US Congress on December 23 passed legislation to speed up the timeline for kicking companies off US exchanges if they don’t allow the PCAOB full access to review their audit work papers. That legislation reduced the timeline to two years, and was to take effect as early as March 2023.
China has, in many cases, preferred to delist rather than disclose. In August 2022, five of China’s largest state-owned enterprises announced their intent to exit from the US exchanges. Those included China Life Insurance Company, Petro China Co, China Petroleum & Chemical Corp, Aluminum Corp of China, and Sinopec Shanghai Petrochemical Co.
All five were listed on the NYSE, and prior to the delisting announcement had a combined market cap of $348.5 billion. This occurred just prior to the PCAOB’s September arrival in Hong Kong, when inspectors began their review of audit work papers of several China-based companies.
The combined market cap of the two airlines, which have been trading in the US since 1997, currently is around $31.5 billion.
Corey Fisher Recognized as Top Accountant
Weinberg is pleased to announce that Firm Managing Partner Corey Fischer has been named a Top 100 Accountant 2022 by the Los Angeles Business Journal (LABJ), which conducted the competition in partnership with CalCPA.
The winners were announced at a year-end celebratory awards dinner, with the LABJ’s publisher noting that the event’s aim was to put “the spotlight on the region’s outstanding accounting community by recognizing Los Angeles’ top 100 professionals for their achievements, community involvement and impacts on the profession.”
“Considering the fact that the Los Angeles region has long been known for its status as a hub for fiscal and financial thought leaders, being a standout in that field is particularly impressive,” said LABJ publisher Josh Schimmels.