Last month the Securities and Exchange Commission issued proposed regulations (PDF) that would require all domestic and foreign companies publicly traded in the U.S. to provide specific climate-related information in their registration statements and annual reports.
The information would address a company’s “climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition.” It would also include disclosing a company’s greenhouse gas emissions, a commonly used metric to assess exposure to such risks.
Additionally, the SEC would require certain climate-related financial metrics in a company’s audited financial statement.
According to the SEC, “How a company assesses and plans for climate-related risks may have a significant impact on its future financial performance and investors’ return on their investment in the company.”
The SEC expressed concerns in its proposed regulation that the existing disclosures of climate-related risks do not adequately protect investors, stating, “The disclosure of this information would provide consistent, comparable, and reliable — and therefore decision-useful — information to investors to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.”
The SEC cited the increasing investor demand, especially from institutional firms, for data on climate conditions.
The agency stated that many companies have recognized the potential financial effects of climate-related risks on their businesses and have begun to provide some of this information in response to shareholder demands.
All publicly-traded firms would be required to share the emissions they generate at their own facilities. Larger businesses would need to have these numbers vetted by an independent auditing firm. Firms that have set greenhouse gas emission goals would also be required to report on emissions in their supply chain and from downstream customers.
The identity of board members or committees responsible for oversight of climate-related risks would have to be disclosed, along with a description of the members’ expertise in such matters.
The SEC said it would require companies that have made public pledges to reduce their carbon footprint to detail how they intend to meet the goal and to share relevant data. This could tamp down the practice of greenwashing — making promises about improving the environment but not keeping them. Companies also would need to disclose their reliance on carbon offsets to meet their emissions reduction goals. (Some environmentalists reject offsets as a solution to climate change.)
According to SEC chairperson Gary Gensler, about a third of the public companies made voluntary climate disclosures in 2019 and 2020 in required reports to the SEC. Others did so outside the SEC’s jurisdiction, usually in standalone sustainability reports posted on corporate websites.
The SEC said the proposed requirements would be phased in over several years. Large companies would start disclosing climate risks in fiscal 2023, while others would commence in fiscal 2024. The European Union is set to require all large companies listed on a European stock exchange to report their emissions beginning in 2024.
Need for Uniformity
The SEC sees a need for uniformity in the data, asserting, “We also believe that enhanced climate disclosure requirements could increase confidence in the capital markets and help promote efficient valuation of securities and capital formation by requiring more consistent and comparable disclosure about climate-related risks.”
Investment portfolio managers at some of the largest firms are now looking at climate-related risks before making recommendations to their clients. They need a common set of data points for informed investment decisions.
The SEC proposal, issued on March 21, has a sixty-day comment period. The regulations may change before they become final.
The rules are controversial. Business groups may challenge whether the SEC has the authority to get involved with environmental issues. Some states that are home to heavy polluters, such as mining companies, have already declared their intent to challenge the proposed rules in court, citing government overreach.
Other critics argue that the SEC lacks expertise in environmental issues and is therefore ill-equipped to manage enforcement. Some opponents, such as trade groups that represent businesses, say that the SEC does not have the statutory authority to mandate environmental rules.
Nonetheless, sustainability organizations praised the SEC announcement. The American Sustainable Business Network, which represents 250,000 companies, issued a press release applauding the SEC’s action, stating, “The enhancement and standardization of climate-related disclosures are overdue and urgently needed to help investors and American businesses compete effectively in an economy that needs to move faster than it is today towards decarbonization.”