Companies weigh in on proposed SEC climate disclosure rule

WASHINGTON

The Securities and Exchange Commission moved closer Friday to a final rule that would dramatically change what public companies tell shareholders about climate change — both the risks it poses to their operations and their own contributions to the problem.

Public comment on the proposal is now closed, with more than 10,000 comments submitted since March from companies, auditors, trade groups, lawmakers, individuals and others.

Comments ranged from concerns about the costs involved in upgrading companies, the SEC’s authority to regulate such data, and praise that the nation’s top financial regulator was moving to mandate reporting of risk data. climatic. If enacted, public companies in their annual reports and stock registration statements would have to report their greenhouse gas emissions. Larger companies should also disclose emissions data related to their suppliers and whether their climate-related risks are material to investors.

For example, the SEC rule would require companies to disclose in their annual filings whether climate change is expected to affect more than 1% of a position and explain how. “It’s incredibly granular,” said Margaret Peloso, a partner at Vinson & Elkins who specializes in climate change risk management and environmental litigation. “It’s much more detailed than many other financial reporting requirements.”

Companies should also report on the physical impact of storms, drought and higher temperatures caused by global warming. They should explain how extreme weather events affect their finances, present plans to reduce climate risks, and describe any progress made in meeting climate-related goals.

“This fixes a market problem…which is that investors currently don’t have all the climate risk information they need to make their investment decisions,” said Alex Thornton, senior policy director. tax at the Center for American Progress. .

But Republicans who oppose the SEC measure insist that climate disclosures must remain voluntary. In May, a group of Republican governors, including Texas Governor Greg Abbott and Doug Ducey of Arizona, wrote that the rule “forces investors to see companies through the eyes of a set of vocal stakeholders.” , and added that it would unduly penalize oil and gas companies.

In a March statement, the U.S. Chamber of Commerce called the proposal overly prescriptive, saying that as written, the rule “would limit companies’ ability to provide information that shareholders and stakeholders find significant”.

Auditing firms, trade groups and some lawmakers have repeatedly pointed to the proposal’s inclusion of indirect corporate climate effects — known as Scope 3 emissions — as a thorny area to report on. account. Lawyers and auditors say the information could be difficult to obtain for companies with international suppliers or suppliers who are private companies.

“One of the biggest concerns with the Scope 3 emissions requirement is that the data is not controlled or owned by the disclosing company,” the Bipartisan Policy Center said. He added that the SEC has given “little reason why the benefits of requiring its disclosure outweigh what will likely be an extremely expensive process.”

But proponents say having detailed information on indirect emissions is essential to understanding how companies are affecting the climate.

Many public companies already publish data on their emissions, as investor interest in such information has increased in recent years. The SEC issued voluntary guidelines in 2010 on how companies can disclose climate change information. In 2020, more than 90% of S&P 500 companies published sustainability reports, according to the Governance and Accountability Institute.

The SEC’s climate disclosure rule would standardize what public companies report. It would also require them to seek independent certification for certain reports, which would provide investors with much more reliable information than what is currently disclosed, according to environmental lawyers, auditors and climate data software companies.

“There’s a mega demand trend for this information,” said Tim Mohin, chief sustainability officer of Persefoni, a startup that uses artificial intelligence for carbon accounting. Yet the current emissions data that companies are reporting across a patchwork of disclosures is not uniform in quality or timeliness, he said.

“The SEC rule is a major cleanup action,” Mohin said. He previously worked at the Environmental Protection Agency and the Senate on environmental policy.

Climate activists, sustainable finance supporters and investors have long advocated for mandatory emissions reporting required of all companies. Once finalized, the United States would join a growing number of countries, including the United Kingdom and Japan, that require large companies to disclose such information. The European Union is in the process of finalizing its reporting standards.

But the SEC’s proposed rule is far from certain. Opponents, including conservative trade groups, Republican lawmakers and others, have questioned whether regulation of emissions-related data falls within the purview of the SEC. As a result, lawyers say any finalized rule would almost certainly be challenged in court on the question of the commission’s jurisdiction.

The SEC estimates that staying compliant with the new rule will cost an average additional $420,000 per year for smaller public companies and $530,000 per year for larger ones. But costs will vary depending on what companies already disclose and factors such as how much bookkeeping can be done in-house, experts say.

Proponents of the rule hope mandatory emissions disclosure will force companies to reduce their climate impacts and drive investors away from companies that don’t take action to reduce their emissions. But some commentators wondered if investors would be able to make sense of the sheer volume of information requested.

Accountancy firm Deloitte said the level of detail requested in financial information “could risk confusing investors”. But he praised the commission for basing the proposal on the Task Force on Climate-Related Financial Disclosures, a group created by G20 countries to standardize climate-related financial disclosures.

“It’s going to be a learning curve for a lot of companies as they’re going to have to hire new people and buy new systems and processes. So that’s important,” said Mohin, of climate accounting startup Persefoni.

If passed, the SEC’s measure would be a victory for President Joe Biden’s largely stalled climate agenda, a point agreed by critics and supporters.

Once the commission has responded to the comments submitted, they will draft a final rule that must be approved by a majority of the 4-person commission.

“It’s a really big piece of how the Biden administration views climate policy,” Peloso of Vinson & Elkins said. She said that would likely motivate the commission to finalize it by the end of the year.