SEC Votes to Propose Climate-Related Disclosure Rules

On Monday, the U.S. Securities and Exchange Commission voted to propose key rule amendments that would require a domestic or foreign registrant to include certain climate-related information in its registration statements and periodic reports, such as on Form 10-K.

Examples of the information to be disclosed include climate-related risks and their actual or likely material impacts on the registrant’s business, strategy and outlook. Other information to be disclosed includes the registrant’s governance of climate-related risks and relevant risk management processes, as well as the registrant’s greenhouse gas emissions, which, for accelerated and large accelerated filers and with respect to certain emissions, would be subject to assurance.

The amendments, as summarized by an SEC fact sheet, would further require the publication of climate-related financial statement metrics and related disclosures in a note attached to the registered entity’s audited financial statements. Finally, the SEC’s proposal demands the disclosure of information about climate-related targets and goals, and transition plans, if any exist.

According to SEC Chair Gary Gensler, the proposed disclosures are similar to those that many companies already provide. He says they are based on broadly accepted disclosure frameworks, such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.

In explaining the regulator’s motivation, Gensler says many investors are concerned about the potential impacts of climate-related risks to individual businesses. As a result, he says, investors are seeking more information about the effects of climate-related risks on a company’s business to inform their investment decisions.

Investors also have expressed a need for more consistent, comparable and reliable information about how a registrant has addressed climate-related risks when conducting its operations and developing its business strategy and financial plan, Gensler says. He argues the proposed rules are intended to enhance and standardize climate-related disclosures to address these investor needs.

“Many issuers currently seek to provide this information to meet investor demand, but current disclosure practices are fragmented and inconsistent,” Gensler adds. “The proposed rules would help issuers more efficiently and effectively disclose these risks, which would benefit both investors and issuers.”

This point of view is not held universally by the SEC’s leadership. In lengthy comments offered during the public hearing, Commissioner Hester Peirce, who was appointed by former President Donald Trump in 2018, suggested the rule amendments go beyond the traditional purview of the SEC. She argued the sustainability reports and disclosures required by the proposal are not sufficiently directed towards investors and that they will not necessarily provide material information to market participants.

According to the SEC’s fact sheet, the rule amendments will require disclosures regarding how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model and outlook. Disclosures will also be required with respect to the registrant’s processes for identifying, assessing and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes.

If a registrant has adopted a transition plan as part of its climate-related risk management strategy, the proposal requires disclosures that include a description of the plan, including the relevant metrics and targets used to identify and manage any physical and transition risks. Further, if the registrant uses scenario analysis to assess the resilience of its business strategy to climate-related risks, a description of the scenarios used, as well as the parameters, assumptions, analytical choices and projected principal financial impacts, must be disclosed.

Many other disclosures are required under the proposal, including that, if a registrant uses an internal carbon price, information must be disclosed about the price and how it is set. Additionally, registrants would have to disclose the impact of climate-related events and transition activities on the line items of a registrant’s consolidated financial statements, as well as the financial estimates and assumptions used in the financial statements.

Notably, if the registrant has publicly set climate-related targets or goals, information must be disclosed about the scope of activities and emissions included in the target and the defined time horizon by which the target is intended to be achieved.

The proposal has quickly generated both positive and negative feedback from stakeholders in the financial services and investment management marketplace. On the side of the supporters is Fionna Ross, a senior environmental, social and governance analyst at global asset manager ABRDN.

“We welcome the SEC’s proposal and view it as a positive move that will not only increase the availability to investors of more consistent data, but also increase the accountability placed on companies,” Ross tells PLANADVISER. “We believe that such disclosure requirements will allow investors to better understand how exposed their portfolios are to climate-related risks, in particular, but also increase the accountability of companies in addressing their climate-related risks.”

Ross says one challenge investors face today when integrating ESG into the investment process is being able to access reliable and consistent data.

“Although we have seen in recent years a general increase in the number of U.S. companies beginning to report data around their environmental and social performance, on the whole data is still patchy and inconsistent,” Ross says. “Common ‘excuses’ we hear from companies who do not currently report include being unclear on what they should report or being unwilling to disclose something if their peers do not report. So, the SEC’s proposal should help level the playing field in that respect.”

Among the early skeptics is Tom Quaadman, executive vice president for the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. He argues that, as a result of marketplace dynamics, the current state of ESG reporting is already sufficiently strong, and that the new proposal will be overly burdensome and complex in practice.

“Public companies have been and will continue to meet the interests of their investors on climate-related information,” Quaadman argues. “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 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.”

During the hearing, Jessica Wachter, SEC chief economist, suggested the new rules will provide greater comparability and reduce costs to investors who currently struggle to assess information from a “variety of reporting frameworks in a variety of places.” She also stressed how the new rule will reduce “information asymmetry,” insider trading, and investor costs by standardizing the format and location of material information.

“The new climate disclosure rule is truly a watershed moment in responding to investor demand for accurate climate disclosure,” says Danielle Fugere, president and chief counsel of the corporate social responsibility advocacy organization As You Sow. “Clear and standardized reporting of greenhouse gas emissions is the bedrock of sound investor decisionmaking. 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.”

David Metcalfe, CEO of the research and advisory firm Verdantix, says the proposal is likely to cause challenges for SEC registrants. In terms of future spending on climate strategy, assurance, compliance and data processing, Verdantix estimates that the companies covered by the rule will collectively spend nearly $7 billion through 2025. The firm suggests such expenses will pose an additional challenge for issuers, who may also struggle to find the internal and external experts to implement a robust management system for SEC climate rule disclosures.

“The SEC proposals will bring about a seismic shift in the U.S. market not just in the disclosure of climate risks and opportunities but also in how that information is used by financial markets participants,” Metcalfe says. “The primary purpose of [such] regulations is to provide investors and lenders with investment-grade, comparable data on listed equities’ carbon emissions intensities and the forward-looking analysis of the potential financial impacts of climate change on the business. Financial data providers like MSCI and S&P Global have spent several years building climate and ESG data platforms which will consolidate disclosures to provide climate risk and carbon emissions analytics to asset managers.”