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between climate change risk consider- ■ Reduction in capital availability. The SEC recognizes these issues
ations and financial reporting.8 Each of these risks could have major and is focusing more on ESG reporting.
The TCFD framework takes a implications to a business. Resource allo- Then-Acting Chair Allison Herren Lee
traditional approach of including both cations a company can make to mitigate in March 2021 called for comments,
risk and opportunity in a company’s potential negative outcomes may merit noting that the SEC is planning on
planning process. The report categorizes substantial investment. updating its reporting requirements for
risk into “transition risks” and “physical public companies.11 Issues the SEC is
risks.” Transition risks are uncertainties Financial accounting seeking to address include:
a company faces as overall economies considerations ■ How to provide more consistent,
move from the current state of activities The TCFD links its recommendations comparable, and reliable information
and emissions toward reductions to ad- and environmental strategy to existing to investors while also providing
dress global climate challenges. Within accounting standards. Both the Inter- greater clarity on expectations of
transition risks, the TCFD identifies national Accounting Standards Board registrants; and
policy and legal, technology, market, and (IASB) and FASB have issued standards ■ How, if at all, should registrants
reputation outcomes as potential impacts to address risks and uncertainties affect- disclose their internal governance and
on companies. ing companies. The TCFD report states: oversight of climate-related issues?
Considerations regarding VCOs Companies that are proactive in mov-
could fall in any of the underlying cat- The disclosures of both contingen- ing toward and reaching net-zero emis-
egories, but, in particular, VCOs fit into cies and management’s assessment sions combined with effective reporting
the reputation category (nonvoluntary and evaluation of long-lived assets for may reap a number of benefits. As noted
compliance offsets would likely fall into potential impairment are critically above, these businesses may have an
the policy and legal group). The report important in assisting stakeholders in advantage in obtaining capital, attract-
defines the reputational risk of climate understanding an organization’s abil- ing customers, recruiting and retaining
change during transition as “tied to ity to meet future reported earnings employees, avoiding supply chain disrup-
changing customer or community per- and cash flow goals.10 tions, and other benefits. The approach is
ceptions of an organization’s contribu- not currently a mandate; however, these
tion to or detraction from the transition The discussion implies that the considerations will likely continue to in-
to a lower-carbon economy.”9 expenses are maintained to protect centivize firms to implement VCOs and
The report identifies potential nega- reputational capital. other climate-related strategies.
tive outcomes resulting from reputa- In most G20 jurisdictions, compa-
tional damage: nies with public debt or equity have Tax deductibility or
■ Shifts in consumer preferences; a legal obligation to disclose material capitalization: Secs. 162
■ Stigmatization of sector; risks in their financial reports — in- and 263
■ Increased stakeholder concern or cluding material climate-related risks. The above considerations must be put
negative stakeholder feedback; However, the absence of a standardized into the context of income tax principles
■ Reduced revenue from decreased framework for disclosing climate- to determine deductibility of these
demand for goods/services; related financial risks makes it dif- resource allocations. For instance, the
■ Reduced revenue from decreased ficult for organizations to determine amounts paid for VCOs must meet the
production capacity (e.g., delayed what information should be included requirements to be currently deductible
planning approvals, supply chain in their filings and how it should be expenses under Sec. 162 or as capitaliz-
interruptions); presented. Even when reporting similar able expenses under Sec. 263.
■ Reduced revenue from negative climate-related information, disclosures Sec. 162 requires an expense incurred
impacts on workforce management are often difficult to compare due to in carrying on a trade or business to be
and planning (e.g., employee attrac- variances in mandatory and volun- “ordinary and necessary” to qualify for
tion and retention); and tary frameworks. potential deductibility. An expense is

8. Task Force on Climate-Related Financial Disclosures. Final Report: Recom- 11. SEC, public statement by Lee (now a commissioner), “Public Input Wel-
mendations of the Task Force on Climate-related Financial Disclosures (June comed on Climate Change Disclosures” (March 15, 2021), available at
2017), p. 8, available at tinyurl.com/4ey3232p. tinyurl.com/yn3dwpay.
9. Id., p. 6.
10. Id., p. 37.

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