March 22, 2022 | Ali Abbas

SEC climate-related disclosure rules: how can firms prepare?

It’s been a long time in the making, but the Securities and Exchange Commission (SEC) has published proposed rules that would compel financial institutions to disclose climate related information to investors.

Under the SEC’s climate-related disclosure rules, registrant businesses would be obliged to disclose certain climate-related information in their registration statements and periodic reports. This information would include data around climate-related risks that are likely to have a material impact on their business (either operationally or financially), as well as climate-related metrics as an addendum to existing financial statements.

Endorsing the new rules was the SEC’s Chair, Gary Gensler, who has been proactive in his tenure to tackle climate change and the associated risks. He commented:

“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.”

As alluded to by Gensler, the new rules have primarily been driven by investor behaviour and an increasing demand to know more about the climate-related resilience and management of companies. Gensler added:

“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.”

In particular, the proposed rules would require disclosures in 4 key areas:

1. How businesses are tackling climate-related risks in their governance and risk-management processes
2. How any identified climate-change risks have had, or will likely have, a material impact on a company’s business and consolidated financial statements
3. How those identified climate-related risks have affected business strategy, model, and outlook
4. The inclusion of information about the impact of climate-related events and transition activities on the line items of a businesses’ financial statements, as well as in financial estimates.

Managing a lack of standards for climate-related disclosures

The current disclosure regime in the US is fragmented. Some firms disclose more information than others and a lack of regulatory formality allows firms to pick and choose their disclosures. The proposed rules would look to standardise this process and set a level playing field. It would require registrants to disclose:

1. Information about its direct greenhouse gas emissions
2. Information about indirect emissions through purchased energy or other forms of energy
3. Information about emissions from upstream and downstream activities in its value chain

Point 3, however, would only apply where such information was ‘material’ or where the registrant has set up a greenhouse gas emission target or goal that includes point 3 emissions. Smaller companies, therefore, would likely not have to disclosure the information in point 3.

Under the current disclosure regime firms can pick and choose options 1, 2 or 3. So, while some firms will disclose both their greenhouse gas emissions and those from their suppliers, others will only disclose information about one or the other (usually the former). This lack of standardisation means that some firms may appear more sustainable or environmentally friendly than they are, a loophole that leaves investors open to greenwashing practices.

When will the SEC’s climate-related disclosure rules take effect?

The new rules will now enter a period of public comment, but it is likely that the implementation of these rules will not be plain sailing. As we have seen previously, the SEC struggles to meet consensus around climate-disclosure rules and that looks set to continue.

Commenting on the proposals, SEC commissioner Hester Peirce said, “This proposal steps outside our statutory limits by using the disclosure framework to achieve objectives that are not ours to pursue”. She raised concerns that the rules do not fall within the SEC’s scope of financial return, and instead are motivated by “deep concerns about the climate or sometimes superficial concerns to garner goodwill”. While Commissioner Peirce was the only commissioner to oppose the proposal, the implementation of disclosure rules will likely face hurdles before coming into force.

If the proposals are successful, they would include a phase-in period for all registrants, with compliance dates to vary depending on the registrants ‘filer status’.

CUBE comment

Is the US making up for lost time?

The US has often been lauded for falling behind in its management of climate change, especially in financial services. For a long time this was true – especially under a Trump administration. However, as our recent Report uncovered, the US is quickly making up for lost time.

Risks can only be managed when they are measured – so collecting disclosure information is the first rung in a ladder that looks to set climate-related goals and take action to decarbonise financial services and the economy.

The SEC’s climate-related disclosure rules will be welcomed by many, especially by investors who have long been calling for greater transparency around climate-related risks. Over the past few years, there has been a gradual reckoning as those in financial services realise that the way in which a firm manages climate risk is imperative to its longevity. If a firm looks to be profitable in the long run, they need to be taking steps to manage climate risks now – and future proof their business.

How can firms prepare for emerging disclosure rules?

For many, new disclosure rules pose yet another regulatory burden. For businesses who have previously shied away from climate-related disclosures, there’s only so much longer they can hide at the back.

For compliance teams, new rules mean more work. This is especially true when considered alongside the emerging landscape for crypto regulation, the move towards diversity and inclusion disclosures, and recently mooted cyber disclosure rules – firms will start to see a heady mix of regulatory obligations over the next few years. The sheer volume and pace of regulatory change is a challenge in itself. Firms need to future proof for climate, crypto and cyber – but must also be future proofing their regulatory compliance systems. If they can’t keep up with regulatory change, they risk regulatory action and reputational damage – and when it comes to climate change, people are not as forgiving.

If emerging disclosure rules are giving you a headache, speak to CUBE.