On March 21 the SEC (Securities and Exchange Commission) released its long-anticipated proposal detailing new climate-related disclosures. If passed, the proposal would require publicly traded companies to include climate-related disclosures in registration statements and periodic reports.
According to SEC Chair Gary Gensler, the proposal aims to provide investors with consistent and comparable information for making investment decisions, and companies with consistent, clear reporting guidelines.
The proposal parallels existing and widely-adopted frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol (GHG). This will bring the United States in line with other countries including the United Kingdom, New Zealand, Japan, Singapore, Switzerland, Hong Kong and the European Union.
The information companies will be required to provide:
If implemented, the proposed rules would require registrants to disclose information on climate-related risks that are likely to impact the company’s operations, business or financial condition.
The SEC summarised key aspects of the information required in the initial press release announcing the proposal. This includes:
- The registrant’s governance of climate-related risks and risk management processes.
- How registrant-identified climate-related risks have had or are likely to have a material impact on business and consolidated financial statements.
- How identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook.
- The impact of climate-related events (severe weather events and other natural conditions) 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.
- Disclosure of direct (Scope 1) greenhouse gas emissions and indirect (Scope 2) emissions from purchased electricity or other forms of energy. Some registrants will also be required to disclose Scope 3 emissions, which include greenhouse gas emissions from upstream and downstream activities.
Mixed reactions to mandated climate disclosures
As expected, the proposal has been received with mixed reception.
The proposal has received public support from numerous asset managers, consultants and investors who say it will standardise current voluntary reporting that varies widely in quality and breadth.
SEC Chair Gary Gensler cited burgeoning demand from issuers and investors for information on material climate-related risks and highlighted that the SEC has historically stepped in when there is significant need for disclosure relevant to investor decisions.
“Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.”
Gary Gensler – SEC Chair
Commissioners Allison Herren Lee and Caroline Crenshaw echoed Gensler’s statement about the SEC’s role in providing investors with the necessary disclosures to make informed decisions. Lee called the proposal a “watershed moment for investors and markets” and Crenshaw said the proposal marked an “important step forward” for the SEC in providing both companies and investors with a modernised and standardised framework for climate-related disclosures.
New York State Comptroller Thomas P. DiNapoli, sole trustee of the NYS Common Retirement Fund, said in an official statement: “Access to consistent, comparable, and reliable information, across the marketplace, will greatly improve the state pension fund’s ability to assess and address risks and opportunities as we navigate our path to net zero by 2040.”
Bank of America publicly backed the proposal. Paul Donofrio, Head of Sustainability, commented “We are all in on this notion of companies providing the marketplace with disclosures that will help everybody understand what the emission status is at a company and what their plans are to get to net zero … so that market participants can allocate capital to the best and highest use .”
The proposal has faced swift political and industry opposition. So far, four key arguments have surfaced in opposition to the SEC’s proposed climate-related disclosures, these include:
- The SEC lacks the authority and expertise to impose legislation that mandates climate-related disclosures.
- The proposal requires the disclosure of information that does not qualify as financially material.
- Existing rules require registrants to disclose material risks so therefore the proposal is void of purpose.
- If passed, the proposal would be cost-prohibitive and impractical for a lot of companies to comply with.
Commissioner Hester Pierce released a statement that outlined several concerns – many of which are outlined in the list above. She argues that the proposed rules would “not apply a materiality threshold in some places and would distort materiality in other places”, particularly in reference to Scope 3 GHG emission disclosures.
In anticipation of the proposal, The American Legislative Exchange Council finalised model legislation that would challenge the “forced imposition” of the SEC’s ESG (environmental, social and governance) policies.
Missouri Attorney General Eric Schmitt said the proposal is “an ill-advised first step in an attempt politicize the SEC” and that “bending to the will of activist investors and money managers to compel climate-related disclosures, especially ones that favour “green” companies or punish “brown” ones, will lead to failure.”
“The Commission has no business regulating capital markets by favouring one set of climate values and investors over another.”
Eric Schmitt – Missouri Attorney General
Senator Kevin Cramer and colleagues on the Senate Banking Committee and Environment and Public Works Committee urged the SEC to withdraw the proposal. In a collective letter, the group questioned the SEC’s suitability and expertise in implementing climate-related policies:
“There are serious questions about whether the SEC has the technical expertise to assess climate models and underlying assumptions used in companies’ metrics and disclosures. Without such technical expertise, the SEC will likely review submissions arbitrarily, leading to uneven or unfair application.”
The letter also makes claims that potential results of implementing the proposal (i.e., increased compliance costs, capital reallocation and “hostility” towards fossil fuel companies) will have negative, long-term consequences on the US economy:
“This proposed rule will only further allocate capital away from domestic fossil fuel producers, increase the costs of energy for everyday Americans, and transfer investment to dirtier sources of energy overseas.”
What happens now?
Given the proposal’s mixed reception, the SEC can expect a tricky legal and administrative process to get it passed. However, if things go to plan, the SEC intends to adopt the proposed rules by December 2022.
Currently, the public comment period on the proposal will remain open until May 20, 2022.
How can companies prepare for mandatory climate disclosures?
In order to be well positioned for compliance, companies should have tools that collect and verify supply chain data.
STAMP Supply is a cloud-based platform that drives traceability, transparency and trust into company value chains.
It tracks commodities across multi-actor supply chains and consolidates disorganised and siloed data into one easy-to-use dashboard, empowering companies to:
- Easily audit commodity and operations data.
- Identify problematic facets in company supply chains.
- Make data-driven forecasting, planning and reporting decisions.
- Underpin ESG and compliance claims.