It would also require companies to disclose greenhouse gases generated by suppliers and partners, known as Scope 3 emissions, if they are material or included in any emissions targets the company has set
SEC chair Gary Gensler said the agency was responding to investor demand for consistent information on how climate change will affect the financial performance of companies they invest in
Washington:
The U.S. securities regulator on Monday proposed requiring U.S.-listed companies to disclose a range of climate-related risks and greenhouse gas emissions, part of President Joe Biden’s push to join global efforts to avert climate-related catastrophes.
The U.S. Securities and Exchange Commission (SEC) unveiled its long-anticipated draft rule under which companies would disclose their own direct and indirect greenhouse gas emissions, known as Scope 1 and Scope 2 emissions.
It would also require companies to disclose greenhouse gases generated by suppliers and partners, known as Scope 3 emissions, if they are material or included in any emissions targets the company has set.
SEC chair Gary Gensler said the agency was responding to investor demand for consistent information on how climate change will affect the financial performance of companies they invest in.
Gensler said the commission wants to simplify reporting as investor interest in climate data surges.
As of February 41 U.S. shareholder proposals called for some form of new climate disclosures, according to proxy solicitor Georgeson.
Gensler cited a report that found 65% of Russell 1000 companies published “sustainability reports” in 2019. But the report, by the Governance & Accountability Institute, found only around half of companies in some sectors like communications and finance published those reports, which companies organized using a range of frameworks.
“The reporting right now is all voluntary, so you have companies that don’t do any reporting, or they’re doing more communications or marketing reports than comparable, reliable investor-grade material,” said Gary Levante, senior vice president of corporate responsibility at Berkshire Bank.
“A ‘mixed bag’ is the best way to describe it,” he said.
But prominent Republicans accused the regulator of overstepping its authority, and the U.S. Chamber of Commerce vowed to fight parts of the rule.
The draft proposal, subject to public feedback and likely to be finalized later this year, should help investors get the information they need while increasing the reporting burden for Corporate America.
It would also require companies to disclose the “actual or likely material impacts” that climate-related risks will have on their business, strategy and outlook, including physical risks as well as possible new regulations such as a carbon tax.
Companies that have set emissions goals or announced other plans to transition away from fossil fuels would also have to provide details on how and when they expect to do so. Read full story
“Companies and investors alike would benefit from the clear rules of the road,” Gensler said.
Investors, including several who run environmentally focused funds, welcomed the U.S. government’s proposed new rule on corporate disclosure of climate-related risks and emissions, saying it would standardize reports that now are voluntary and vary widely in quality and breadth.
The investors said the U.S. Securities and Exchange Commission’s draft regulation, if finalized, would make it easier for money managers to judge how different companies and industries are handling the challenges and opportunities of a warming planet.
U.S. environmental, social and governance-focused funds (ESG) took in a record $71 billion last year, up from $51 billion in 2020, according to Morningstar, and experts noted shareholders have been seeking better data.
Their responses to the draft could shape the final version of the rule the SEC may eventually pass.
Lack of consistent corporate disclosures to date has made such analysis difficult for investors focused on ESG concerns.
“Right now you have a lot of disparate information coming from different places. This should streamline how all investors, not just those focused on ESG investing, can look at the data,” said Sarah Bratton Hughes, head of ESG and sustainable investing for American Century Investments in Kansas City.
Dan Abbasi, who runs a $200 million environmentally focused investment strategy for Douglass Winthrop Advisors in New York, said the proposed rules also could help fund managers select companies that stand to benefit from a transition to a lower-carbon economy.
“It’s going to give us additional material to work with in terms of how management not only sees the risks of climate change, but how they are seizing the opportunity,” he said.
Senator Patrick Toomey, the Senate Banking Committee’s top Republican, blasted the rule, saying it “extends far beyond the SEC’s mission.”
Progressives and activist investors have pushed for the SEC to require Scope 3 emissions disclosure to hold companies accountable for all the carbon dioxide and methane they help generate. Corporations have been pushing for a narrower rule that will not boost compliance costs.
“This proposal will be the light in a pathway toward addressing President Biden’s priority of disclosing climate risk to investors and all areas of our society,” said Tracey Lewis, a policy counsel at advocacy group Public Citizen.
The SEC said the Scope 3 requirement would include carve-outs based on a company’s size, and that all the emissions disclosures would be phased in between 2023 and 2026.
It was unclear how many companies would have to make Scope 3 disclosures, given they would have discretion to decide what counts as “material.” While 35% of North American companies have set greenhouse gas targets, those plans do not include Scope 3 emissions, according to S&P Global data.
The Chamber of Commerce, the country’s biggest business lobby, called the proposal too prescriptive and complained it would force companies to disclose information that was largely immaterial at the expense of more meaningful data.
“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,” Tom Quaadman, an executive vice president with the group, said in a statement.
The Investment Company Institute, which represents global investors, said the proposal “will provide investors with comparable, consistent, qualitative, and quantitative information.”
Legal Challenges
The SEC spent the past week shoring up the draft against potential legal challenges, six sources told Reuters.
Corporate groups say there is no agreed methodology for calculating Scope 3 emissions, and that providing that detail would be burdensome and would expose companies to litigation if third-party data ends up being wrong.
The SEC tried to address that concern by proposing to protect Scope 3 disclosures with a legal safe harbor that already exists for companies’ forward-looking statements.
Legal challenges to the rule will likely argue that the SEC lacks the authority to require Scope 3 emissions data, something the agency’s Republican Commissioner Hester Peirce said on Monday in voting against the proposal.
Some experts say the SEC clearly has authority in this area because investors urgently need better data. They noted that a record $71 billion flowed into U.S. environmental, social and governance-focused funds last year, according to Morningstar.