SEC Floats Mandatory Disclosure of Climate-Change Risks, Emissions

March 21, 2022
By Paul Kiernan
Wall Street Journal

U.S. regulators proposed stringent requirements for publicly traded companies to report information on greenhouse-gas emissions and risks related to climate change, in one of the Biden administration’s potentially most significant environmental actions to date.

The Securities and Exchange Commission formally offered a 534-page proposal Monday that would force publicly traded companies to report greenhouse-gas emissions from their own operations as well as from the energy they consume, and to obtain independent certification of their estimates.

In some cases, companies also would be required to report greenhouse-gas output of both their supply chains and consumers, known as Scope 3 emissions. An SEC official said most companies in the S&P 500 would likely have to report Scope 3 emissions. Companies would have to include the information in SEC filings such as annual reports.

The proposal comes as President Biden’s efforts to address global warming through legislation have stalled in Congress, putting pressure on regulatory agencies to deliver on a core Democratic priority. That has drawn criticism from Republicans, who accused Democratic SEC Chairman Gary Gensler of overreach.

Mr. Gensler says investors and asset managers representing tens of trillions of dollars have called for companies’ climate-related disclosures to be more standardized. While hundreds of firms have already begun reporting data about their carbon emissions and other climate-related metrics, SEC officials say current disclosures are inconsistent and hard for investors to compare.

“Companies and investors alike would benefit from the clear rules of the road proposed in this release,” Mr. Gensler said in a statement.

Meredith Cross, a partner at corporate law firm WilmerHale and former SEC division director, said the proposed rule is “the most extensive, comprehensive and complicated disclosure initiative in decades.”

SEC members voted 3-1 to issue the proposal, which will be open for public comment for at least two months before the agency will begin work on a final rule. Commissioners voted along party lines, with all three Democrats backing the proposal.

Republicans and some industry groups have been gearing up for months to fight the new requirements, which are a hallmark of Mr. Gensler’s ambitious policy agenda. They say the proposed rules would increase compliance costs and go far beyond a strict interpretation of the SEC’s mandate to protect investors by requiring disclosure of information relevant to companies’ financial performance.

“Today’s action hijacks the democratic process and disrespects the limited scope of authority that Congress gave to the SEC,” Sen. Pat Toomey (R., Pa.) said in an emailed statement. “This is a thinly veiled effort to have unelected financial regulators set climate and energy policy for America.”

Democrats in Congress and members of the Biden administration touted the proposal as delivering on a key promise of the president to address climate change.

“Investors and businesses have for years asked for reliable information that can be used to assess climate-related risks and opportunities,” Treasury Secretary Janet Yellen said in a statement, adding that the rule will protect investors and make the financial system more resilient. The Financial Stability Oversight Council, which Ms. Yellen leads, formally designated climate change an emerging and growing risk to U.S. financial stability last year.

SEC commissioners, staff and advisers spent months negotiating the contours of the proposal. Their challenge is to reconcile two conflicting goals: To make public as much information about climate change and associated risks as they can feasibly demand from companies, and to craft rules that withstand legal scrutiny in federal courts that have grown increasingly conservative.

A sticking point in the deliberations were the circumstances in which the SEC would mandate disclosure of Scope 3 emissions, which is typically much larger than a company’s direct greenhouse-gas output. But companies struggle to accurately estimate the emissions from their suppliers, who may not offer their own calculations of greenhouse-gas output, or from customers who use their products and services.

The rules proposed Monday would allow companies a degree of flexibility. Disclosure of Scope 3 emissions would be mandatory only if output of those greenhouse gasses is material, or significant to investors, or if companies outline specific targets for them.

For instance, if a company announces plans to reach “net-zero” emissions by a certain date, it would have to specify whether that goal includes all scopes of greenhouse-gas output. If so, disclosure of its Scope 3 emissions would have to be included in its SEC filings starting in 2025 for large firms. Companies wouldn’t, however, be required to obtain independent assurance that their Scope 3 estimates are accurate and wouldn’t be held liable for the estimates if they were provided in good faith.

Many regulators say the threats to companies from global warming fall into two buckets: First are the so-called physical risks posed to a company’s facilities and operations by the increased frequency of extreme weather events—droughts, floods, wildfires and hurricanes—in regions where such occurrences used to be rare. Second are “transition risks” resulting from efforts to both wean the economy off fossil fuels and prepare for the effects of climate change.

The SEC’s proposal would require publicly traded companies to include in their financial statements estimates of the impact of both sets of risks. Companies also would have to provide broader explanations about their long-term vulnerabilities to climate change and their processes for addressing those concerns.

Republican SEC Commissioner Hester Peirce voted against the proposal and issued dissenting statement of 6,300-words—not including footnotes.

“We are here laying the cornerstone of a new disclosure framework that will eventually rival our existing securities-disclosure framework in magnitude and cost, and probably outpace it in complexity,” Ms. Peirce said. She warned that the proposed rules will enrich “the climate-industrial complex” while hurting investors, the economy and the SEC.

The U.S. Chamber of Commerce said companies already provide strong reporting around environmental issues and said the SEC proposal is too prescriptive and could lead to filings that aren’t of importance to investors.

“The Supreme Court has been clear that any required disclosures under securities laws must meet the test of materiality, and we will advocate against provisions of this proposal that deviate from that standard or are unnecessarily broad,” said Tom Quaadman, head of the chamber’s capital-markets division.

While energy and transportation firms have opposed far-reaching disclosure requirements around climate, other industries and investor groups have been supportive. The Investment Company Institute, which represents asset managers, said it was pleased with aspects of the SEC proposal while saying it will “carefully study” the approach toward Scope 3 disclosures.

“Having consistent, comparable, and reliable data makes it easier for fund managers to better assess current and future sustainability-related risks on behalf of the millions of investors who invest in their funds,” ICI President Eric Pan said.

The requirements outlined Monday would dramatically increase disclosure from companies under the SEC’s oversight. The U.S. is viewed by some as having fallen behind some other jurisdictions on climate reporting in recent years.

Mr. Biden, who nominated Mr. Gensler last year, said in his 2020 campaign platform that there was no greater threat than climate change. He promised to reduce carbon emissions and invest in more-sustainable energy. Democratic legislation that would have dedicated significant funding for such efforts died in the Senate last year, though Mr. Biden’s climate-change plans have regained momentum more recently.

Regulators have been quicker to act. For example, the Environmental Protection Agency has finished rules that limit the use of coolant chemicals that are potent greenhouse gasses, and rules to lower emissions from passenger cars and trucks. The agency also has announced preliminary steps to limit greenhouse-gas emissions from the oil and gas industry.

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