SEC Proposes Climate Change Disclosure Rules
On March 21, the Securities and Exchange Commission (SEC) proposed rules for how publicly-traded companies will need to report the risk to their businesses from climate change in their audited financial statements. In other words, the proposal is aimed at requiring companies to disclose how they integrate climate risks and opportunities into their governance and corporate strategy along with a significant amount of related qualitative and quantitative information.
When these proposed climate disclosure rules go into effect, which could be as soon as 2023 for some companies, the result could help climate-conscious investors more accurately direct their money to businesses that are responding to climate risks, including metrics on companies’ carbon emissions and their vulnerabilities to climate change.
This is the most significant action on climate change yet under the current administration.
Specific environment, social, and governance investors, called ESG investors, have been pursuing this type of information for some time, as their interest has been to prioritize companies that disclose their risks to climate change and reduce their impact on the environment. Many of those companies that currently report their metrics have also been in favor of such proposed rules in order to level the playing field in their industries, since competitors have not always been up front when reporting their metrics or using comparable ones.
As part of the proposal, companies will also have to report their greenhouse gas emissions, including those from their business operations and the energy they consume. They can also decide whether to report Scope 3 emissions – those emissions generated in a company’s supply chain or through use of their goods – if they determine the information is “material” to investors or if they’ve set targets to reduce those emissions. Often, Scope 3 emissions represent the bulk of a company’s greenhouse gas emissions.
“Financial institutions globally are now widely committed to, and in the process of, setting climate targets for financed emissions,” said Ivan Frishberg, chief sustainability officer for Amalgamated Bank and a member of the Partnership for Carbon Accounting Financials (PCAF), a framework for banks to disclose the climate impact of their lending. “The disclosure of our Scope 3 is not breaking significant new ground and has been widely anticipated by the market with more than $64 trillion in assets already committed to the PCAF Global Standard. With the phase-in timeline allowed under the SEC proposal, I see a pretty smooth runway to compliance.”
The proposal defines “climate-related risks” as the actual or potential negative impacts of climate-related conditions and events on the registrant’s, domestic or foreign, consolidated financial statements, business operations or value chains, as a whole, and includes both physical and transition risks. A registrant would be required to describe how it defines short-, medium-, and long-term time horizons, including how it takes into account or reassesses the expected useful life of assets and the time horizons for the registrant’s planning processes and goals.
For physical risks, the proposal requires disclosure of both acute risks and chronic risks, as well as specific information regarding the location and nature of properties, processes or operations subject to such risks;
For transition risks, the proposal requires disclosure of the nature of the risk (e.g., regulatory, technological, reputational) and how those factors impact the registrant.
“I really do think that the SEC has a role to play here when this amount of investor demand and need is there,” said SEC Chairman Gary Gensler.
Under the proposal, the SEC would require companies to describe on Form 10-K their governance and strategy toward climate risk and their plan to achieve any targets they have set for curbing such risk.
Companies would also need to disclose data on their greenhouse gas emissions, either from their facilities or through their energy purchases, and obtain independent attestation of their data.
The rules would require a registrant to include certain climate-related information in its registration statements and periodic reports, including:
Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy, and outlook;
The registrant’s governance of climate-related risks and relevant risk management processes;
The registrant’s greenhouse gas emissions, which, for accelerated and large accelerated filers and with respect to certain emissions, would be subject to assurance;
Certain climate-related financial statement metrics and related disclosures in a note to its audited financial statements; and
Information about climate-related targets and goals, and transition plans, if any.
Disclosure is necessary because climate risk is an investment risk, and market participants have a significant interest in understanding the size and scope of that risk. Environmental groups hailed the rule as a crucial first step in forcing the private sector to confront the economic risks of a warming world, even as some said the SEC should have gone further in requiring all businesses to disclose the emissions generated by their supply chain and customers.