As discussed in prior blog post series on climate risks, where we noted the US Securities and Exchange Commission’s (SEC) pursuit of climate disclosures, we continue to see concerted efforts toward making these disclosures mandatory. SEC Chairman Gary Gensler provided remarks before the Principles for Responsible Investment on July 28, 2021. The chairman took a stroll down memory lane, noting the progression of disclosure requirements since the Great Depression, from financial performance to executive and stock compensation.
Decision-Useful Climate Disclosure
Today, the conversation is taking a greener turn. Investors want to understand the climate risks of companies before they invest, sell, or make voting decisions. Gensler noted that “investors are looking for consistent, comparable, and decision-useful disclosures so they can put their money in companies that fit their needs.” For Gensler, decision-useful disclosures should contain sufficient details to enable investors to make informed investment decisions.
According to Gensler, 75 percent of the 550 unique comment letters submitted by the public in response to then Acting Chair Allison Herren Lee’s March 2021 statement on climate disclosures supported mandatory climate disclosure rules. Although some companies have made notable efforts in trying to meet the demand for information related to climate risks, the information is not always decision-useful because they often fail to quantify risks and often use boilerplate language.
“Clear Rules of the Road”
Gensler called on his staff to develop a mandatory climate risk disclosure rule proposal for the commission’s consideration by year-end. For public companies, the rule proposal should consider:
Whether the disclosures should be filed in the Form 10-K.
Qualitative and quantitative climate risk information that investors can rely on for investment decisions.
Recommendations for how companies should disclose Scope 1 and Scope 2 greenhouse gas emissions, and under which conditions they should disclose Scope 3 emissions.
Possible industry-specific metrics, such as for the banking, insurance, or transportation industries.
Whether companies should provide scenario analyses for how they would adapt to physical, legal, market, and economic changes, including physical and transition risks.
Whether companies claiming to be “net zero” should provide supporting metrics.
The Task Force on Climate-Related Financial Disclosures Framework (TCFD).
Regarding funds, Gensler asked his staff to consider:
Whether fund managers claiming to be “green” or “sustainable” should disclose the criteria and data behind those claims.
A holistic look at the Names Rule, which restricts funds from using potentially misleading and deceptive names.
Investors have clearly indicated that greater transparency regarding environmental, social, and governance (ESG), and climate risks and opportunities, will facilitate better decision-making, and the SEC in turn remains committed to protecting investors through mandatory disclosures. To prepare, public companies should refer to the TCFD’s recommendations, which are structured around governance, strategy, risk management, and metrics and targets, and fund managers should revisit the Names Rule to ensure their names are consistent with their actual business investments.