SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures
Commentary by Steven Lofchie
The SEC proposed a series of rule changes that would standardize the inclusion and consistency of climate-related disclosures in registration statements and periodic reports. The information provided in these disclosures will include (i) climate-related risks that could have material impacts on business operations or financials, (ii) certain climate-related financial statement metrics, and (iii) disclosure of the registrant’s greenhouse gas emissions.
Rule Proposal
If adopted, the proposed changes will require both domestic and foreign registrants to include certain climate-related information in registration statements and periodic reports (e.g., Form 10-K or Form 20-F). Such climate-related information would include, but not be limited to:
- climate-related risks and their potential or actual material impacts on (i) the ability of the company to conduct business, or (ii) the company's financials;
- the risk management process the registrant uses to mitigate these risks and other relevant risk management processes;
- the level of greenhouse gas emissions the registrant emits;
- certain climate-related financial statement metrics and related disclosures compiled for audit purposes; and
- any pertinent information about climate-related goals and the registrant’s plan to achieve them.
The proposed disclosures included in the registration statements and periodic reports would include:
- the company’s oversight and governance of climate-related risks by the board and management;
- identifying climate-related risks the registrant either had, or are likely to have, and the short- and long-term impact on business capabilities;
- how climate-related risks have affected or will affect the registrant’s strategy or business model;
- the audit process the registrant uses to identify, assess and manage climate-related risks;
- any transition plan that has been adopted as part of climate-related risk management;
- the impact of climate-related events on the registrant’s business; and
- any publicly-set climate-related targets or goals.
Timing
The proposed amendments include gradual phase-in periods to implement these rule changes. The phase-in period consists of a compliance deadline that varies depending on the registrant’s filer status. The proposal also includes an additional phase-in period for certain items such as the Scope 3 emissions disclosure, which discloses climate-related financial metrics used to determine a registrant’s compliance. Additionally, there will be "limited assurance" and "reasonable assurance" deadlines to ensure registrants have proper methods in place to assess and maintain climate-related risks.
The SEC will be seeking comment on the proposed rules until 30 days after the date of publication in the Federal Register, or May 20, 2022, whichever period is longer.
Commissioner Statements
SEC Chairman Gary Gensler supported the proposed amendments, stating the proposal will provide investors with "consistent, comparable and decision-useful" information in order to provide the highest levels of due diligence for their investments.
Commissioner Allison Herren Lee supported the proposal, saying it further strengthens the disclosure regime for public companies so that they will continue to disclose as much information as is necessary for investors to make informed investment decisions. She stressed that crises arising outside of financial markets impact the markets, and that with climate risk, the industry has "ample, well-documented warning" of complex market impacts.
Commissioner Caroline A. Crenshaw supported the proposal, expressing concern that while requiring climate risk disclosures is a step in the right direction, ensuring the accuracy of the information will fall heavily on the SEC for enforcement.
Commissioner Hester M. Peirce dissented, highlighting several concerns, and noting that: (i) disclosure requirements already exist that cover climate-related risks; (ii) the proposal will not lead to "comparable, consistent and reliable" disclosures; (iii) the SEC lacks statutory authority to propose this rulemaking; (iv) the SEC is underestimating the cost to implement these changes; and (v) the proposal will adversely impact "investors, the economy and [the SEC]."
Commentary
The cost to every SEC-registered issuer producing information required by the rule will be astronomic, and that cost will hit every issuer, regardless of business. The information itself will be of little interest or use to the average citizen. Its users will be investment advisers who make capital allocation decisions, and the SEC which regulates advisers and thus has the power to push those decisions in favored directions.
On top of that, the thirty day comment period for consideration of a regulation that will impose potentially hundreds of billions of dollars of costs is disappointing. A six month comment period would not be excessive given the financial impact of the proposal.
To turn to unintended consequences, requiring every registered issuer to produce data on matters that may be largely irrelevant to its business will be a massive disincentive to companies going public; not least of all, because the SEC has now asserted it may force disclosure on any issues it thinks may be of interest to some group of investors.
If the ultimate goal of this regulation is to reduce the usage of fossil fuels, it is difficult to imagine a more cost-inefficient and undemocratic way to do so.