Proposed SEC Rules to Enhance, Standardize Climate-Related Disclosures for Investors

The rules — which would require companies to include information about their GHG emissions and climate-related risks likely to have a material impact on their business, results of operations or financial condition — have garnered mixed reviews from stakeholders.

Published 2 years ago | About a 4 minute read

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On Monday, the Securities and Exchange Commission proposed rule changes that would require companies to include certain climate-related disclosures in their registration statements and periodic reports — including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition; and certain climate-related financial statement metrics. The required information about climate-related risks also would include disclosure of a company’s greenhouse gas emissions, which have become a commonly used metric to assess its exposure to such risks.

"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. "Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies; and investors need reliable information about climate risks to make informed investment decisions. Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do.”

The proposed rule changes would require a company to disclose information about:

its governance of climate-related risks and relevant risk management processes;
how any climate-related risks identified by the company have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short, medium or long term;
how any identified climate-related risks have affected or are likely to affect the company’s strategy, business model, and outlook; and
the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a company’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

For companies that already conduct scenario analysis, have developed transition plans or publicly set climate-related targets, the proposed amendments would require certain disclosures to enable investors to understand those aspects of the companies’ climate risk management.

The proposed rules also would require a company to disclose information about its Scope 1 and 2 emissions — as well as Scope 3, if material or if the company has set a GHG emissions target that includes Scope 3 emissions. The proposed disclosures are similar to those that many companies already provide, based on broadly accepted disclosure frameworks such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. The proposed rules would include a phase-in period for all companies, with the compliance date dependent on the company’s filer status and an additional phase-in period for Scope 3 emissions disclosure.

While the proposed rules are naturally garnering mixed reactions from stakeholders — including from within the SEC itself — Ceres is one of many organizations that commend the proposed rules.

"The SEC is finally heeding the calls from institutional investors, companies, regulators and the public," said Mindy S. Lubber, Ceres CEO and President and a former regional administrator for the Environmental Protection Agency. "The thoughtful climate disclosure proposal would allow investors and companies to better tackle climate-related financial risks across investment portfolios and global supply chains and seize the opportunities that come with acting on those risks."

Karen Alonardo, VP of ESG Solutions at NAVEX, says the industry has been waiting with bated breath for a proposed set of rules from the SEC on climate change.

“[The proposed rules] address the growing need for decision-useful climate-risk metrics that address key areas of ESG that companies have been addressing in disparate fashion with a patchwork of frameworks,” Alonardo said via email. “This is a giant step forward toward concrete rules [that] will motivate businesses and investors toward specific environmental and societal goals, and give much needed transparency and comparability into ESG metrics that matter. This will also address issues that arise from greenwashing, with enforced greenhouse gas emissions reporting standards.”

The comment period will remain open for 30 days after publication in the Federal Register — or 60 days after the date of issuance and publication on sec.gov, whichever period is longer.