Climate Disclosure and the Transformation of Gatekeeping

How might enhanced climate disclosures disrupt the verification practices of gatekeepers in capital markets transactions? Relatedly, should GHG emissions metrics be certified by experts? In a recent essay, I explore these questions, using the SEC’s now-stayed 2024 Climate Rule as a guide.

Enhanced climate disclosures are inevitable, and their credibility will depend on robust verification mechanisms. Moreover, the Climate Rule itself still matters, whatever its eventual fate. Shaped by years of input and detailed analysis, it offers lessons to guide future regulatory design. And even if the Rule, or a revised version, never takes effect, disclosure regimes in other jurisdictions are likely to require similar disclosures and have a comparable impact on issuers and gatekeepers.

I. Gatekeepers’ Certification Practices: The Gatekeeping Web

The essay begins by examining the established architecture of gatekeepers’ verification practices. These are complex, yet standardized, relying on a web of experts, each with their own area of specialization, constructed in response to liability concerns.

Under Section 11 of the Securities Act, underwriters alone among gatekeepers bear responsibility for disclosure errors in non-expertised parts of registration statements, the core US documents required of US companies making public offerings. Underwriters can avoid liability by establishing due diligence defenses, which they can often satisfy by relying on the services of other gatekeepers, including lawyers and accountants. As the essay shows, underwriters rely on other gatekeepers in the following ways, to varying degrees: engaging other gatekeepers at market prices; employing them and thereby bringing their services within the underwriting firm; or obtaining written assurances from issuer-engaged gatekeepers. In doing so, underwriters seek to avoid Section 11 liability and shift risk if liability arises. The resulting appraisal of issuer claims helps overcome information asymmetries and thereby promotes market efficiency, although it is imperfect.

Figure 1: Potential Section 11 Liability for Non-Expertised Portions of Registration Statements

Gatekeeping of expertised portions of registration statements looks a bit different. Here, gatekeeper responsibility tends to lie only with the specific experts, such as auditors and engineers, who provide the relied-upon expertise. These experts face liability for defects in any part of a registration statement purporting to be made on their expert authority, liability they can avoid through their own satisfactory due diligence. Underwriters must be wary of red flags in expertised sections of statements, but because they benefit from a more generous reliance defense for expertised sections, they need not shift risk for these sections to other gatekeepers.

The question is what might happen to this complex, but predictable, gatekeeping ecosystem under enhanced climate disclosure, such as the SEC Climate Rule.

II. Gatekeeping After Mandatory Disclosure and Attestation

Enhanced climate disclosure would likely transform this pattern of information verification by gatekeepers, both because climate disclosure encourages firms to rely on a new type of gatekeeper and because it may inspire new practices by traditional gatekeepers striving to establish due diligence defenses. The essay considers the liability risk gatekeepers would face under the SEC Climate Rule, were it implemented, and theorizes how gatekeeping practices would change in response. In doing so, it offers guidance as to how information verification practices will likely change under enhanced climate disclosures.

A. Green Gatekeepers: A New and Uncertain Frontier

One of the most consequential provisions of the Climate Rule requires accelerated filers and large accelerated filers to disclose Scope 1 and/or Scope 2 GHG emissions, if material to the registrant. The Rule further requires that attestation providers assure the accuracy of material Scope 1 and/or Scope 2 GHG emissions in attestation reports. Terminology notwithstanding, attestation providers are to submit reports providing “assurance” rather than “attestation”: according to the SEC, attestation is somewhat synonymous with verification, while assurance refers to a narrower class of services performed in accordance with professional standards. The Climate Rule provides for two levels of assurance in attestation reports, depending on the type of registrant: large accelerated filers must provide reasonable assurance (equivalent to the assurance provided by an audit of a company’s financial statements included in a Form 10-K), while accelerated filers need only provide limited assurance (equivalent to the “negative assurance” or 10b-5 letters provided by legal counsel in a securities offering).

Figure 2. GHG emissions disclosure and attestation requirements under the SEC Climate Rule

Mandatory assurance of GHG emissions metrics by large, listed companies—which is also required under the European Union’s Corporate Sustainability Reporting Directive, adopted in 2022—opens the door for a new type of “green” gatekeeper: the attestation provider. As more fully explained in joint work with Luca Enriques and Alessandro Romano, Green gatekeepers verify claims made about the sustainability characteristics of products or firms, promising to mitigate information asymmetries between firms and investors or consumers.

Whether attestation providers are also experts under Section 11 depends on the level of assurance they provide: only attestation providers that give reasonable assurance face Section 11 liability as experts. In contrast, attestation providers offering limited assurance are not experts under Section 11 and so would avoid Section 11 liability for their reports. Concerned that “the potential for [S]ection 11 liability would deter or reduce the number of attestation providers willing to accept these engagements,” the SEC imposed Section 11 liability only on those providers giving attestation reports at the higher assurance level—that is, providers of reports for large accelerated filers.

If attestation reports must be included in registration statements but are non-expertized, it is the underwriters who face liability for their accuracy and completeness, per Figure 2. Accordingly, relieving attestation providers of Section 11 liability simply shifts such liability to underwriters, requiring them to reasonably investigate the accuracy of the registrant’s GHG emissions metrics. Underwriters can attempt to fulfill this requirement by, as noted above engaging third-party attestation providers, employing such providers, or obtaining assurances from issuer-engaged attestation providers—or through some combination of these practices.

In discussing these options, the essay argues that courts assessing a due diligence defense are likely to expect from underwriters the same sorts of precautions they would from expert attestation providers. However, it is important to keep in mind that courts haven’t yet established a consistent interpretation of green-gatekeeper obligations. Sustainability assurance is at a nascent stage of development; in contrast with the more mature state of financial auditing, the standards of sustainability assurance are unsettled and none are “generally accepted.”

B. Effects on Traditional Gatekeepers

In addition to requiring a new type of gatekeeper, the Climate Rule, were it given effect, would meaningfully expand the role of traditional gatekeepers by imposing new disclosure mandates that they would be tasked with vetting. The Rule requires all registrants to disclose a range of climate-related information in non-expertised parts of registration statements, including climate-related risks and their impact on strategy, results of operations, and financial condition; information about governance, oversight, and management of climate-related risks; climate-related targets or goals; and GHG emissions metrics. Among gatekeepers, underwriters bear sole responsibility for the accuracy and completeness of these extensive new disclosures.

Consider underwriters’ likely response to the threat of Section 11 liability for errors in GHG emissions metrics in non-expertised parts of registration statements. Their likely response would depend on a comparison of costs and benefits, with a special focus on the probability that any of the options would provide a satisfactory due diligence defense. It stands to reason that underwriters would prefer to rely on assurances from issuer-engaged attestation providers, as illustrated in Figure 3. This method would shift responsibility at low cost: underwriters typically do not pay for assurances provided by issuer-provided gatekeepers, making this option less expensive than engaging or employing those gatekeepers. However, it is not clear how far a negative assurance letter from an attestation provider would go toward satisfying underwriters’ due diligence defense, since judicial guidance is ambiguous concerning the comfort that underwriters may draw from experts’ assurance letters.

Figure 3: Potential Section 11 Liability for Non-Expertised Portions of Registration Statement under Mandatory Climate Disclosure

If issuer-provided gatekeepers are not available or are unwilling to provide assurances for underwriters, or if underwriters conclude they cannot rely on letters from attestation providers to satisfy due diligence, underwriters would either employ (make) or engage (buy) attestation services. Analysis of this make-or-buy decision would require a comparison of the production-cost benefits of engaging third-party attestation services against the transaction costs of doing so. As to the production-cost advantages, one could imagine substantial economies of experience—the reduction in costs owing to the accumulation of experience over time in labor-intensive activities like attesting to GHG emissions.

The essay also examines underwriters’ likely responses to Section 11 liability for non-expertised climate disclosures apart from disclosures of GHG emissions, as well as auditors’ likely responses to enhanced climate disclosures in audited financial statements.

III. Gatekeeper Liability for GHG Emissions Disclosures

The essay concludes by addressing a core policy question: Should GHG emissions metrics be certified by experts? My answer is somewhat counterintuitive. I argue that, while the threat of Section 11 liability would lead attestation providers to take more precautions, the goal of deterring climate disclosure errors may be better served, at least in the near term, by treating GHG emissions information as non-expertised. This would mean underwriters, rather than attestation providers, would be liable for their accuracy, subject to defenses.

Why underwriters, rather than attestation providers? Attestation providers range widely in expertise and, relative to underwriters, lack resources and reputational constraints. Underwriters, on the other hand, can use their clout to marshal the resources of numerous gatekeepers as they seek to mitigate their exposure to liability. While some concerns about attestation providers might be overcome if their services were performed by public accounting firms (that also audit financial statements), the essay urges caution in requiring the expertisation of attestation reports for GHG emissions because the quality of assurance given by attestation providers is dubious, both because the standards they use are unsettled and evolving and because their adherence to these standards is an open question.

To be clear, this is not an argument against expertisation generally. Where verification standards are well established, expertisation is uncontroversial. Thus, financial statements are routinely expertised by accounting firms, actuaries expertise insurance and reinsurance reserves, and engineers expertise natural resource reserves. But in these areas, the verification standards experts employ are significantly more settled than those of attestation providers.

Despite the deficiencies of attestation providers and their reports, mandated attestation may still make sense—but not the expertisation of their reports. It is sufficient to hold underwriters responsible for GHG emissions disclosures, which might, in any case, compel them to use attestation providers in their investigations.

It is not easy to target the right gatekeeper, but the genius of Section 11 is that it ensures both expertised and non-expertized information are verified by gatekeepers seeking to perform due diligence. Ultimately, non-expertisation may be preferable, given current attestation standards and the incentives and capacities of underwriters.

The essay, recently published in a symposium issue of the Berkeley Business Law Journal, is available here.