SEC moves to require public companies to report on their climate-related risks

The comment period came to a close last week for the U.S. Securities and Exchange Commission’s proposed rule on climate-related risk disclosures, which if adopted, would require public companies to provide detailed reporting of their climate-related risks, emissions, and net-zero transition plans.

Public Citizen, along with Americans for Financial Reform Education Fund, the Sierra Club, the Ocean Conservancy, the Sunrise Project, and Evergreen Action submitted a 180 page comment supporting the rule and suggesting it be strengthened by:

• adding mandatory, independently verified disclosures of value chain (Scope 3) emissions by all companies;
• speeding up required disclosures and assurance of emissions information that is critical for protecting investors; and
• ensuring disclosures around a company’s environmental, racial, and community impacts.

Over 60,000 people support strong climate disclosure rules proposed by the SEC, and more than 10,000 individual comments were submitted during the public input period, over 75% of which were supportive of a strong rule.

“The people have spoken. The vast majority of comments call for a strong rule from the SEC because a strong rule would benefit the vast majority of American investors, households, and retirees,” said Kathleen Brophy, senior strategist with The Sunrise Project.

“There is strong, unmet investor demand for standardized information regarding companies’ climate-related financial risks,” said Jessica Garcia, climate finance policy analyst at Americans for Financial Reform Education Fund. “The SEC must strengthen and finalize the proposal to require public companies to provide the information that investors need to manage the significant risks to individual companies, portfolios, and markets posed by the climate crisis and the clean-energy transition.“

The proposed rule comes in the context of growing global momentum toward climate action and standardized disclosure of climate-related risks. The United Kingdom, New Zealand, Japan, Hong Kong, and the EU are all moving ahead with similar measures.

The Task Force on Climate-related Financial Disclosures (TCFD) created a voluntary framework in 2017 designed to provide a lens into the financial system’s exposure to climate-related risk.

At that time, few understood the real risks of a warming climate to companies but since then, more than 3,000 organizations representing a market capitalization of over $28 trillion have supported the framework, and eight jurisdictions have established reporting requirements based on it.

“Warming of the planet caused by greenhouse gas emissions poses serious risks to the global economy and will have an impact across many economic sectors,” said Mike Bloomberg, who advocated the reporting requirement. “It is difficult for investors to know which companies are most at risk from climate change, which are best prepared, and which are taking action.”

“The climate crisis presents a financial risk to the global economy,” said climate activist Lisa McCormick. “There can be no healthy economy without a healthy planet, so I am pleased that the USA will join other nations of the world in requiring public companies to disclose their emissions and other environmental risks.”

“Investors deserve to know how companies are reacting to the global shifts created by climate change and the zero-carbon transition. Some corporations are worried that investors will move their money when they learn how companies are handling, or failing to handle, climate-related risks. That’s how disclosures are supposed to work,” said David Arkush, managing director of Public Citizen’s Climate Program. “The proposal should be strengthened to give investors even more of what they need to make sound decisions—disclosures of all Scope 3 emissions, a major indicator of transition risk, and data on community impacts.”

The SEC rule would require three categories of disclosure: material climate impacts, greenhouse-gas emissions, and any targets or transition plans.

On material risks and strategic implications, the rule as written would require companies to disclose risks from physical climate-related hazards such as fires or floods by location and by share of assets exposed.

It also asks for disclosure of transition risks, which could be regulatory, technological, market, or reputational risks, over the short*, medium-, or long-term.

Filers would need to disclose strategic impacts, financial impacts, and operational impacts, as well as their governance and risk management processes to manage these risks.

The proposed rule would apply to US 10-K filers as well as foreign private issuers who file 20-F forms with the SEC.

Large companies would have to disclose most of this information as of fiscal year 2023, so filing year 2024. Smaller companies would have a yearlong grace period until fiscal year 2024.

For Scope 3 emissions, the SEC would provide an additional year beyond those deadlines, allowing companies to lean on Scope 1 and 2 filings by other companies in the prior year. That said, Scope 3 quantification is extremely hard because few companies have a detailed understanding of emissions in their supply chains.