SEC proposes climate disclosure requirements

A divided SEC on Monday voted to propose highly anticipated rule changes that, if approved, will require companies to make climate-related disclosures including on climate-related risks that are expected to have a significant impact on them.

The more than 500-page-long proposal covers disclosures in companies’ registration statements and periodic reports, and would include disclosure of their greenhouse gas (GHG) emissions as a metric to assess their exposure to climate risks.

Specifically, the proposed rule changes would require a company to report on:

• Its governance of climate-related risks and relevant risk management processes
• How any climate-related risks the company identifies have had or are likely to have a material impact on its business and consolidated financial statements in the short, medium or long term
• How any identified climate-related risks have affected or are likely to affect the company’s strategy, business model and outlook
• The impact of climate-related events, such as severe weather incidents, and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

The proposed changes would require companies that already conduct scenario analysis, have developed transition plans or publicly set climate-related targets or goals to make disclosures enabling investors to understand those aspects of the companies’ climate risk management.

An important element of discussion around the proposal has been which types of GHG emissions it would cover in terms of reporting. The proposed changes would require a company to disclose information about its direct GHG emissions – Scope 1 – and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a company would have to disclose GHG emissions from upstream and downstream activities in its value chain – Scope 3 – if these are material or if the company has set a GHG emissions target or goal that includes Scope 3 emissions.

The proposed rule changes would provide a safe harbor for liability from Scope 3 emissions disclosure and an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies.

According to an SEC annoucement, the proposed disclosures are similar to those many companies already provide based on disclosure frameworks such as the TCFD.

Under the proposed rule changes, larger companies known as accelerated filers and large accelerated filers would have to include an attestation report from an independent service provider covering Scope 1 and Scope 2 emissions disclosures.


INITIAL REACTIONS

Initial reactions to the proposal have been predictably mixed within and outside the commission. ‘I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers,’ says SEC chair Gary Gensler in a statement.

Commissioner Allison Herren Lee, who voted for the proposal, describes it in a statement as a ‘watershed moment for investors and financial markets… The science is clear and alarming, and the links to capital markets are direct and evident.’

She adds, with a nod toward other current or pending SEC rulemaking proposals: ‘Climate change has broader implications than those within the commission’s remit that we address today. Other regulators or lawmakers may consider or take action based on their own jurisdictions and responsibilities. [But] our responsibility to help ensure accurate and complete disclosure of risks for investors and markets is long-standing and central to our mission. Climate risk is not unique in this regard. It is not unlike similarly pressing concerns for investors such as cyber-security threats, or risks related to supply chains and worker safety brought to the fore by the pandemic.’

Outside the SEC, investor and environmental groups welcomed the proposal. Ceres CEO and president Mindy Lubber says in a statement: ‘The SEC is finally heeding the calls from institutional investors, companies, regulators and the public. The thoughtful climate disclosure proposal announced today would allow investors and companies to better tackle climate-related financial risks across investment portfolios and global supply chains and seize the opportunities that come with acting on those risks.’

Lubber notes that other regulators around the world have already required climate disclosure requirements aligned with the TCFD.

Mary Schapiro, head of the TCFD secretariat and a former SEC chair, says in a statement: ‘Climate risk is financial risk, and today’s announcement from the [SEC] meets the long-standing demand from investors for transparency into how climate change is impacting the global economy… There can be no healthy economy without a healthy planet, and the time has come for mandatory disclosure in the US.’

‘The new climate disclosure rule is truly a watershed moment in responding to investor demand for accurate climate disclosure,’ says Danielle Fugere, As You Sow president and chief counsel, in a statement. ‘Clear and standardized reporting of GHG emissions is the bedrock of sound investor decision-making. The new rule provides investors with more robust, complete and comparable disclosure of risk and the emissions data to determine which companies are aligning their business activities with Paris targets and minimizing transition risks.’

Green Century Capital Management president Leslie Samuelrich also welcomed the agency’s action. ‘We applaud the SEC for including a phased-in requirement that large companies disclose Scope 3 emissions when these emissions are material or when the company has Scope 3 emissions targets,’ she says in a statement. ‘Investors need these disclosures in order to understand a company’s true exposure to climate risk, and to evaluate whether companies are authentically reducing the emissions associated with their value chains.’

Green Century earlier this year successfully brought a proposal requesting that Costco adopt short, medium and long-term science-based GHG reduction targets – including Scope 3 emissions – in order to reach net-zero emissions by 2050 or sooner. Just under 70 percent of the votes cast at Costco’s January 20 AGM backed the measure.


CRITICISM
Not everyone is in favor of the SEC’s proposal. Commission member Hester Peirce, who voted against the proposal, argues that it would undermine the existing regulatory framework that has underpinned consistent, comparable and reliable company disclosures.

‘The proposal turns the disclosure regime on its head,’ she says in her dissent. ‘Current SEC disclosure mandates are intended to provide investors with an accurate picture of the company’s present and prospective performance through managers’ own eyes… The proposal, by contrast, tells corporate managers how regulators, doing the bidding of an array of non-investor stakeholders, expect them to run their companies. It identifies a set of risks and opportunities – some perhaps real, others clearly theoretical – that managers should be considering and even suggests specific ways to mitigate those risks. It forces investors to view companies through the eyes of a vocal set of stakeholders, for whom a company’s climate reputation is of equal or greater importance than a company’s financial performance.’

Tom Quaadman, executive vice president for the US Chamber of Commerce’s Center for Capital Markets Competitiveness, says in a release: ‘As a result of marketplace dynamics, the current state of ESG reporting is strong. Public companies have been and will continue to meet the interests of their investors on climate-related information...  The chamber is concerned that the prescriptive approach taken by the SEC will limit companies’ ability to provide information that shareholders and stakeholders find meaningful while at the same time requiring that companies provide information in securities filings that are not material to investors. The [US] Supreme Court has been clear that any required disclosures under securities laws must meet the test of materiality, and we will advocate against provisions of this proposal that deviate from that standard or are unnecessarily broad.

‘We are committed to working constructively with the SEC to develop clear and workable rules for climate disclosures that build from industry experience and provide meaningful information to investors.’