SEC takes ‘monumental' step on climate disclosure

More than a year in the works, the Securities and Exchange Commission unveiled its much-anticipated climate disclosure rule proposal this month, with major implications for the investor and business communities.

"It's a monumental rule-making initiative," said Erin E. Martin, a Washington-based partner with law firm Morgan, Lewis & Bockius LLP who previously worked in the SEC's division of corporation finance. "This has been a long time coming, it's been highly anticipated by the public, it's an area that's of interest to many stakeholders and so it may be something that's kind of a game-changer for a lot of public companies to the extent that these rules do actually move forward and are implemented as proposed."

The proposed rule amendments, which were approved March 21 in a 3-1 vote, with the commission's lone Republican, Hester M. Peirce, dissenting, would require public companies to disclose a host of climate-related information in their registration statements and periodic reports, including:

• The oversight and governance of climate-related risks by the registrant's board and management.
• 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.
• If the registrant has adopted a transition plan as part of its climate-related risk management strategy, a description of the plan, including the relevant metrics and targets used to identify and manage any physical and transition risks.

The proposal would also require companies to disclose the greenhouse gas emissions they generate, and the "indirect" emissions generated from a company's supply chain, if material, though smaller companies would be exempt from the latter requirement. "These proposals for GHG emissions disclosures would provide investors with decision-useful information to assess a registrant's exposure to, and management of, climate-related risks, and in particular transition risks," the SEC said in a news release.

Large companies would have to obtain an attestation report from an independent service provider verifying their direct greenhouse gas emissions disclosure.

If approved, the rule amendments would be phased in over multiple years; the largest companies would need start disclosing climate-related information in filings made in 2024 that reflect the fiscal year ended in 2023. The comment period will be open for 60 days following publication on the SEC's website or 30 days upon publication in the Federal Register, whichever period is longer.

Many public companies already disclose some climate-related information, SEC Chairman Gary Gensler noted at the March 21 SEC meeting. SEC staff, in reviewing nearly 7,000 annual reports submitted in 2019 and 2020, found that a third included some disclosure related to climate change, he added.

"Companies and investors alike would benefit from the clear rules of the road proposed in this release," Mr. Gensler said. "I believe the SEC has a role to play when there's this level of demand for consistent and comparable information that may affect financial performance."

The SEC began working on the proposal soon after the Biden administration took over last year. In March 2021, under Acting Chairwoman Allison Herren Lee, who is now once again solely a commissioner, the SEC put out a request for comment on climate disclosures and received more than 550 unique responses.

The Council of Institutional Investors, a non-partisan organization whose members have about $4 trillion in assets, is in favor of the proposal. "CII believes that the inadequacies of existing disclosures about climate-change risk by companies can lead to mispricing of assets and a misallocation of investment capital," said Jeff Mahoney, Washington-based general counsel at CII. "We welcome the SEC's proposed disclosure requirements because we generally believe that they would enhance investors' ability to make more informed investment and proxy voting decisions." The CII and Mr. Mahoney made a similar point in a comment letter to the SEC last year.

New York state Comptroller Thomas P. DiNapoli, sole trustee of the $279.9 billion New York State Common Retirement Fund, Albany, said in a statement that access to "consistent, comparable and reliable information, across the marketplace, will greatly improve the state pension fund's ability to assess and address risks and opportunities as we navigate our path to net-zero by 2040."

Mr. DiNapoli added, "We are all experiencing catastrophic and deadly weather events, droughts, rising sea levels and economic disruption due to climate change. It is time for U.S. companies to step up to the plate and develop, disclose and implement low carbon transition plans. It is our responsibility as investors to make sure the companies we invest in are prepared for the future, so they can be profitable and successful in the global marketplace. To do so requires us to have the information necessary to make informed investment decisions."

The proposal also has it detractors, including the U.S. Chamber of Commerce.

"The chamber is concerned that the prescriptive approach taken by the SEC will limit companies' ability to provide information that shareholders and stakeholders find meaningful while at the same time requiring that companies provide information in securities filings that are not material to investors," said Tom Quaadman, Washington-based executive vice president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, in a statement.

"The Supreme Court has been clear that any required disclosures under securities laws must meet the test of materiality, and we will advocate against provisions of this proposal that deviate from that standard or are unnecessarily broad," Mr. Quaadman added.

Ms. Peirce, who voted against the proposal, said if implemented, it would undermine the existing regulatory framework and hurt investors, the economy and the SEC itself. Among her concerns laid out at the SEC's meeting, Ms. Peirce said that while the existence of climate change itself is not particularly contentious, "how best to measure and solve the problem remains in dispute." She feared the SEC would be drawn into disputes as it reviews, for example, the climate models and assumptions underlying companies' metrics and disclosures about progress toward meeting climate targets. "This proposal could inspire future more socially and politically contentious disclosures, which would undermine the SEC's reputation as an independent regulator," she added. "Meanwhile, we have other important work to do, and the climate initiative distracts us from it."

Ms. Peirce also said the SEC lacks the authority to even issue such a proposal. Congress "did not give us plenary authority over the economy and did not authorize us to adopt rules that are not consistent with applicable constitutional limitations," she said.

Morgan Lewis' Ms. Martin said she wouldn't be surprised to see the proposal, if implemented, face legal challenges because it's a hot-button issue with broad impact.

Separately, Republicans on Capitol Hill have pushed back against regulators at the SEC and Department of Labor promulgating rules related to climate change and ESG investing. Sen. Pat Toomey, R-Pa., and ranking member on the Senate Banking Committee, said in a statement that the proposal "hijacks the democratic process and disrespects the limited scope of authority that Congress gave to the SEC. This is a thinly veiled effort to have unelected financial regulators set climate and energy policy for America. Forcing publicly traded companies to gather and report global warming data — almost none of which is material to the business's finances — extends far beyond the SEC's mission and expertise."