The Securities Exchange Commission issued a proposed rule this year that would require all publicly traded companies to disclose their climate-related financial risks to investors. Companies would need to describe how they are assessing and mitigating climate-related transition and physical risk, and how they are building resilience to these risks and shifting to a low-carbon future.
This proposed rule comes at an important time. We know by the latest scientific consensus that climate change caused by human activity is already affecting every region across the globe. We also know that limiting the rise in global temperatures to 1.5 degrees Celsius above preindustrial levels requires deep reductions in greenhouse gas emissions in this decade, achieving net-zero carbon dioxide emissions globally by midcentury. Even as they strive toward these goals, companies will still need to build resilience to physical threats — such as wildfires, floods, and extreme temperatures — that a changing climate has already set in motion. At the same time, investors increasingly seek more clarity on how companies are positioned to thrive in a low-carbon future, and how insulated they are from risks due to the transition to a cleaner economy
To ensure fair markets, efficiently allocated capital, and the fullest protection for investors, market participants need consistent, comparable, and reliable information on climate-related risks as well as mitigation and resilience efforts. Well-regulated risk disclosures meeting those standards can enable investors to assess their own material risks related to climate change across their portfolios.
Although data on greenhouse gas emissions, targets, and emissions reduction efforts that investors seek is available publicly or shared privately, mostly from leading companies, the proposed rule would help standardize the way publicly traded companies disclose their climate risks and provide more uniformity and clarity for investors.
C2ES commends aspects of the proposed rule in our submitted comments. Requiring information on climate-related risks, scenario analysis, and carbon transition plans, would provide a more holistic picture of how companies are positioned to build climate resilience and thrive in a low-carbon economy. The proposed rule aligns with recommendations from the Task Force on Climate-related Financial Disclosures, the leading global framework for assessing and reporting climate-related financial materiality. It also references using the Greenhouse Gas Protocol, a widely used methodology, as the basis for reporting. The proposed rule additionally requires disclosure of emissions in a company’s value chain, known as scope 3 emissions, but adds some flexibility, a nod to the challenges in collecting this data from suppliers. Importantly, it provides a safe harbor, or reasonable protection from legal liability, for certain disclosures.
Some changes are still needed for the rule to be operational and effective. First, companies should not be required to align exactly with the SEC’s financial reporting calendar, and instead be allowed to submit their emissions data for either their calendar or fiscal year, which is the current greenhouse gas reporting timeline. Not doing so would add significant reporting burden, making companies either develop two sets of greenhouse gas reports or report estimated fourth-quarter greenhouse gas emissions and then submit revised data within a few months.
Second, safe harbors, which protect companies from third-party litigation and action by the SEC, should apply to forward-looking information, such as scenario analysis, climate targets, transition plans, governance information and strategies for managing climate risk. Companies urgently need to strive to drive down their greenhouse gas emissions. Their climate targets are fluid and can evolve quickly as new scientific information becomes available, when the costs of clean-energy technologies decrease, or when new expectations from consumers and investors emerge. Safe harbors would provide the space for companies to continue to set ambitious targets without fear of being sued if they revise their targets based on new information.
Third, disclosure information, including all scopes of emissions, should only be required if considered material. The definition of “materiality” should be viewed consistently with the interpretation of materiality set out in securities laws. The SEC should issue guidance on how companies should assess materiality as it relates to climate change in this context and provide additional broader guidance to smaller companies on meeting the proposed disclosure requirements.
Finally, as there are no currently agreed upon controls or metrics auditors can use to assess climate-related financial risks, both the Financial Accounting Standards Board and the Public Company Accounting Oversight Board should be actively engaged in developing the standards for developing and auditing financial metrics.
The SEC’s proposed rule on financial disclosures, with our proposed modifications, could help to mainstream disclosure of climate-related financial risks and significantly improve transparency on climate-related risks across all sectors of the U.S. economy. C2ES supports such mandatory climate-related financial risk disclosure and believes that the proposed rule can play a vital role in helping the broader investor community gain better insights into how all publicly traded companies are managing their climate-related financial risks.