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The Securities and Exchange Commission (SEC) has been debating enhanced environmental disclosure regulations for half a century. And climate change disclosure has been an increasing focus for the SEC since the change in U.S. administration in January 2021.
On March 21, 2022, in a much-anticipated move, the SEC voted 3:1 in favor of new rule changes—The Enhancement and Standardization of Climate-Related Disclosures for Investors," Release Nos. 33-11042, 34-94478—to their current climate-related disclosures. If the 534-page landmark proposal is adopted, the new rules would require public companies to include comprehensive climate-related disclosures in their periodic reports to the SEC. Companies would be required to explain the environmental impact of their overall business activity; the correlation (if any) between their business operations and climate change; and the effect their suppliers, business travel, and their company infrastructure have on the environment.
The new rules are based on the outlines announced by the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. They would add new Subpart 1500 to Regulation S-K and new Article 14 to Regulation S-X to require disclosure of climate-risk activities, including
- Metrics regarding the company’s governance of any climate-related risks and the corresponding risk management processes.
- The company’s approach to climate-relevant risks and the financial impact those risks could have on business operations.
- If and how any identified climate-related risks have affected or might affect the company’s overall business strategy,
- The effect that severe climate-related weather events, including droughts flooding, wildfires, and damaging storms, might have on the company’s financial statements.
The reports would also contain detailed metrics about the financial impact climate-change is likely to have on their business, including direct greenhouse gas emissions as well as greenhouse gas emissions from upstream and downstream business operations. Companies will also be required to disclose indirect emissions from other forms of energy.
"I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers," said SEC Chair Gary Gensler.
Benefits of the Proposed Climate-Change Disclosures
The proposal follows months of debate within the SEC and represents the most comprehensive requirements the SEC has ever proposed regarding climate-related disclosures. is considered a big win for the ambitious environmental agenda championed by the Biden administration. The purpose of the new disclosure rules is to provide investors with useful information to determine a company’s exposure to management of climate-related risks. They will help investors make more informed decisions, giving them vital information as they’re assessing a company’s valuation and the short- and long-term strategy to address climate change. The changes are the result of increasing investor demand for “consistent and comparable information that may affect financial performance”.
Increasing transparency and accountability around a company’s effects on the environment is considered a major step forward in the United States’ position on climate change. It’s using the market to influence action. The idea is that if companies are obligated to pull back the curtain and reveal how their operation is affecting people and the planet, they’ll be more mindful about how they do it.
Requiring companies to disclose what they’re doing to decrease their impact on the environment could influence them to voluntarily invest in green technologies. It could encourage businesses to adopt to more environmentally friendly practices, like installing solar panels or reducing packaging pollution.
One example of this already happening is Koch Industries, notoriously anti-environmental regulation, are venture arm investors in pioneering solid-state battery company Solid Power, Inc.
Challenges of the Proposed Climate-Change Disclosures
Opposition to the proposed changes was immediate. SEC Commissioner Hester M. Peirce said, “Regardless of what one generally thinks of the SEC mandating hyper-specific ESG disclosures, the proposals we are voting on today will fail of their purpose because they are not so much built on sand as they float on a cloud of smoke, false promises, and internal contradiction.”
Companies, trade associations, and state officials are likely to file legal challenges against the proposed rule changes if the new rules are adopted in their current form or a substantially similar iteration. The U.S. Chamber of Commerce has concerns about the ‘prescriptive approach’ of the new rules, which contrast the current principles-based rules that were put in place by the previous administration.
Opponents of the changes note that the disclosures required are too broad and vague to have any substantive impact. Most companies don’t or can’t measure what environmental impact their supply chain has upstream and downstream. And there are fears that companies will transfer certain operations to foreign or private firms who aren’t beholden to the SEC’s rules.
It’s also been debated that implementing and requiring climate-change disclosures of registrants is outside the SEC’s statutory rule-making authority. Multiple State Attorneys General have already argued that the SEC must operate within the confines of the SEC’s enabling statutes, which “make clear that legitimate mandatory disclosures are those required to protect investors from inflated prices and fraud, not merely helpful for investors interested in companies with corporate practices consistent with federally encouraged social views.” Detractors argue that it’s the role of Congress, not the SEC, to decide when and how to mandate climate-change disclosures.
Critics of the proposed changes also charge that they are unconstitutional. The First Amendment protects against compelling public companies to disclose information that could be highly subjective or otherwise be interpreted negatively.
The Future of the SEC’s Proposed Climate-Change Disclosers
On May 9, the SEC announced that the public comment period of the proposed rules was extended to June 17, 2022, It’s important to recognize that, due to significant pushback from Congress and Republican lawmakers, a conservative-leaning Supreme Court, and the challenges levied by States Attorneys General, the SEC’s proposed climate-change disclosure rules might never be enacted.
Regardless of whether the rules are adopted, their mere proposal represents a significant shift in business and financial communities around the world. ESG investing and responsible investing are being embraced by the global community, and it’s becoming less and less possible to ignore the threat that climate change poses to people and the planet.