For Investors With Net Zero Commitments, the SEC's Proposed Mandatory Climate Disclosure Rule Is Crucial

Apr 8, 2022 4:00 PM ET
Blog

By Rev. Kirsten Snow Spalding, Senior Program Director, Investor Network

With its landmark new draft rule, the U.S. Securities and Exchange Commission has taken a critical step in making our markets more secure and reducing financial risks by proposing that climate risk disclosure be mandatory for all publicly traded companies.

The SEC’s proposed Enhancement and Standardization of Climate-Related Disclosures for Investors comes at a time when investors are clamoring for disclosure of corporate climate risk by filing a record 209 shareholder resolutions on climate-related matters and engaging with companies like never before to accelerate the transition to a net zero emissions, clean energy economy.

For investors who have committed to supporting the goal of net zero emissions by 2050 or sooner by joining the Net Zero Asset Managers Initiative, the Paris-aligned Investor Asset Owner Commitment and the Net Zero Asset Owners Alliance, this draft rule is absolutely critical. Without clear and comparable climate disclosures from companies, investors cannot evaluate climate risks for individual holdings or make plans to address the systemic risks of climate change across their portfolios and the real economy.

Investors are making net zero commitments for themselves and demanding that companies issue greenhouse gas reduction targets and transition plans for meeting those targets. Investors want corporate climate risk disclosure because they recognize that the material financial risks and actual financial losses related to the climate crisis are a reality for companies across nearly every industry. They want to protect their investments by knowing the risks they face.

The draft SEC rule recognizes that these risks are material to financial well-being and should be disclosed as part of companies’ 10-K financial filings to the SEC to keep investors informed and equipped to make sound investment decisions.

Making climate risk disclosures part of required financial filings will dramatically improve the quality of data for investors and allow them to create scenario analyses for their portfolios, address risks across critical sectors, and develop their own Investor Climate Action Plans (ICAPs) for transitioning their portfolios and investment strategies without the uncertainty and expense of risk models that are based on incomplete and unverified data.

Investors can provide supportive comments to the SEC during the comment period, which will run to May 20, to ensure that the final rule reflects investors’ priorities. For net zero pledging investors, these comments are critical to the investors’ success in meeting their own targets and long-term goals. For more information and to find out how investors and other stakeholders can share their opinions, go to ceres.org/sec.

Some important areas investors should pay attention to and may want to comment on include:

  1. The proposed rule’s foundation. The proposal is based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which was developed by the private sector and has been endorsed by more than 3,000 companies and investors globally.
  2. The proposed rule’s usefulness. The proposed disclosures would provide insights into companies’ climate risk exposure and risk management strategies—by requiring both greenhouse gas emissions disclosures and forward-looking disclosures (such as targets, transition plans, and scenario analysis, if they exist). Investors should comment on their need to manage existing climate risks and align their corporate engagement and portfolio construction strategies to create long-term value across their portfolios.
  3. What the proposed rule standardizes. The proposal standardizes disclosure of targets, transition plans, scenario analysis and internal carbon pricing, if these are tools used by issuers.
  4. How the proposed rule approaches scope 1, 2, and 3 emissions. The proposed rule includes scope 1, 2, and 3 greenhouse gas emissions with a phase-in of compliance requirements to allow issuers time to prepare and to provide information that investors need to assess the full range of climate financial risks facing companies. Scope 3 requirements are limited to certain filers, who disclose only if scope 3 is material or if it is included in a target, and these disclosures do not have to be assured. These accommodations respond directly to issuer concerns, but investors should comment on whether they lead to sufficient disclosures.
  5. The proposed rule and board governance. The proposed rule requires disclosure of corporate governance of climate risk, including board and management oversight, links to enterprise risk management, and progress towards targets or goals. It also includes disclosure of how the board and management interact to oversee climate risk. These disclosures will be critical for investors as they explore how climate risks and corporate transition plans will be managed and measured at the highest levels of the company. Investors should evaluate the governance disclosure requirements and comment if they find gaps that could be strengthened.
  6. The proposed rule’s specific reporting requirements. The proposed rule includes disclosure of the impact of climate risk on financial statement metrics, including financial impact, expenditure, and financial estimates and assumptions. This is included in a note to the financial statements that will be audited with the rest of the financial statement. This part of the proposal is crucial to ensure investors can see how climate risks are fully assessed for how they pose financial risks and cause financial impacts.

The proposed rule does not include all the disclosures that investors making net zero commitments will need to achieve their portfolio alignment goals. But it significantly improves upon existing SEC guidance for climate risk disclosure and reduces investor costs in developing climate risk models. It also brings the U.S. corporate disclosure regulations into closer alignment with the climate risk disclosure requirements in Europe, Canada, and elsewhere around the world and largely aligns with the draft climate standard of the IFRS’ International Sustainability Standards Board (ISSB).

The latest Intergovernmental Panel on Climate Change (IPCC) reports that came out in February and this month are the starkest warnings yet: climate change is a threat multiplier that exacerbates risks to ecosystems, biodiversity, economies, and society. The reports affirm that the global climate crisis is worsening, and mitigation steps must be scaled up now by world governments, businesses, investors and individuals to accelerate real progress. Given that U.S. economy suffered $145 billion in climate-related extreme weather disasters last year, investors must both make their own net zero commitments and actively participate in the SEC rulemaking process, which will help them achieve these goals.

For more details and analysis of the proposed SEC rule, investors are invited to join a public briefing on the draft with SEC Chair Gensler and a respondent panel of investors and companies at 2 pm ET Tuesday, April 12. Register here.