In March of this year, the Securities and Exchange Commission (SEC), posted a request for input on how the commission could best support climate risk disclosure among publicly traded U.S. companies. Recently, many stakeholder groups, including investors and regulators, have increased their consideration of climate related financial risks. As the impacts of climate change are increasingly visible, and as global policy action accelerates, investors and financial industry groups like the Task Force on Climate-related Financial Disclosures (TCFD) have begun paying close attention to how climate change can impact financial investments and markets.
A key part of this effort is centered on climate risk disclosure, where companies share with investors the risks or opportunities that may arise from investing in their traded securities. While the SEC issued guidance in 2010 on how companies can disclose potential climate risks in their required regulatory filings, investors and global regulators want to prioritize further action. While many countries, including the United Kingdom, New Zealand, and Hong Kong, currently have mandatory climate risk reporting, the United States is at an earlier stage of climate related financial regulation.
C2ES responded to the SEC’s request for input with a detailed look at how such climate related financial disclosures could best be accomplished. Developed after engagement with many of the companies in our Business Environmental Leadership Council, these recommendations are centered around 10 key suggestions to the SEC:
- The SEC should immediately begin rulemaking on mandatory disclosure of companies’ climate-related financial risks.
- The specifics of disclosure requirements should be phased in over time to reflect current availability of data and reporting standards and to allow for the development of new reporting standards or guidance; the SEC should lead a pre-determined stakeholder engagement process to regularly convene both investors and companies as best practice emerges.
- Scope 3 emissions should be required in mandatory disclosures for certain sectors and/or under certain contexts; however, flexibility is needed.
- The SEC should carefully consider how best to approach scenario analysis and provide guidance on use of scenario analysis.
- The SEC’s disclosure requirements and subsequent stakeholder engagement process should be segmented by industry/sector and could initially focus on those industries/sectors deemed highest risk.
- The SEC should consider safe harbor provisions or liability protections for forward-looking climate disclosures.
- The SEC should immediately undertake an internal research agenda focused on relevant topics such as understanding transition and physical risk disclosures at an industry-level.
- The SEC should immediately engage other key financial system organizations, such as Financial Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB) to assess how new climate change disclosure rules may affect their work in accounting standard setting and auditing oversight, and how these organizations can support mainstreaming non-financial disclosure.
- The SEC should convene an interagency working group to coordinate input from across the financial regulatory agencies and agencies with experience working with industry on climate change, on climate disclosure needs.
- Where appropriate, the SEC should consider harmonizing with and/or building off existing multistakeholder, global, and comprehensive standard setting efforts for climate risk disclosure, including an effort currently underway at the International Financial Reporting Standards Foundation (IFRS).
These recommendations are designed to recognize the urgency and scale of climate-related financial risk, while identifying key policy questions that require careful and ongoing consideration. For instance, scenario analysis, a tool companies and investors use to model different policy or temperature outcomes, is a critical component of climate risk assessment. However, scenario analysis, by it’s nature, involves subjective assumptions around inputs like a carbon price, market demand, and/or plausibility of physical temperature pathways.
Further, there are different considerations in undertaking scenario analysis, including data availability and analytic capabilities, in assessing either physical or transition risk. Physical risk refers to financial damage arising from climate events like hurricanes or heat waves, whereas transition risk refers to risks arising from the energy transition such as carbon pricing or reduced demand for oil and gas. These considerations raise important questions for the SEC in determining how best to guide the use of scenario analysis, with the ultimate goal of ensuring that companies can accurately describe their risks, and that investors can consistently look across their portfolios to assess those risks.
In our comments, which lay out a transparent and ongoing multi-stakeholder engagement process that can convene both industries and their investors, C2ES hopes to support the SEC in answering these key questions. We look forward to following this issue closely as the policy and regulatory landscape continues to evolve.