Earlier this week, SEC Chair Gary Gensler gave the keynote address for an investor briefing on the SEC Climate Disclosure Rule presented by nonprofit Ceres. In his remarks, entitled “Building Upon a Long Tradition,” Gensler vigorously pressed his case that the SEC’s new climate disclosure proposal (see this PubCo post, this PubCo post and this PubCo post) was comfortably part of the conventional tapestry of SEC rulemaking. Growing out of the core bargain of the 1930s that let investors “decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures,” Gensler observed, the SEC’s disclosure regime has continually expanded—adding disclosure requirements about financial performance, MD&A, management, executive comp and risk factors. Over the generations, the SEC has “stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions.” As has been the case historically, the SEC, he insisted, “has a role to play in terms of bringing some standardization to the conversation happening between issuers and investors, particularly when it comes to disclosures that are material to investors.” The proposed rules, he said, “would build on that long tradition.” But has everyone bought into that view?
In addition, Gensler continued, climate “disclosures are already happening,” and many of these disclosures are already aligned with the TCFD framework and the GHG Protocol, frameworks on which the proposal relies. The TCFD framework, he noted, was the work of “30-plus market folks (not government officials) who came together to create a climate disclosure reporting framework.” Currently,
“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….That information could influence shareholders’ evaluations, risk management, or investment decisions to buy or sell a security and how to vote on a merger or other proxy vote. Companies and investors alike would benefit from the clear rules of the road in the release, particularly as those rules reflect what is becoming widely accepted across the globe. It makes sense to build on what so many companies are already doing to enhance the consistency, comparability, and decision-usefulness of these disclosures for investors.”
Gensler next turned to some specifics about the proposal. Why did the SEC propose to include the disclosures in SEC filings where they would be treated as “filed”? Because, he said, that’s where “Investors look for relevant information…when assessing an investment decision.” Although he recognized that there were “some costs to this,” on balance, Gensler pointed to benefits for investors “because there are more controls around those disclosures,” with a framework required under SOX 302. In addition, that is the approach taken by some other rulemaking organizations, including the International Sustainability Standards Board, which has, since the issuance of the SEC’s proposal, proposed its own global climate-related disclosure requirements that would also include climate disclosures as a part of general purpose financial reporting.
With regard to components of the proposal, the “first is bringing consistency and comparability” to climate disclosures. Second, the proposal would require “disclosure for companies that set targets or use internally developed target plans, transition plans, scenario analyses, or carbon pricing as part of their risk management process….It’s up to a company to determine whether to have a target, transition plan, scenario analysis, or carbon pricing. If a company chose not to make those statements or use those tools, no disclosure would be required. The decision on whether to make these statements or use these tools, though, remains entirely up to you as the company.” Safe harbors would also be available for forward-looking statements. Thus, the reporting regime would be “disclosure based,” not “merit based,” and the “design of the proposal is consistent with those long traditions and the law; with concepts of investor decision-making and related materiality; and with what companies are already doing based on the TCFD and GHG Protocol frameworks.”
In addition to climate-related financial statement metrics, the proposal would mandate disclosure of certain GHG emissions data—Scope 1 and Scope 2 for all companies and Scope 3 for companies other than smaller reporting companies and only if those emissions were material or if the company had made a commitment that involved Scope 3 emissions. Because methodologies for Scope 3 data were not as well developed as for Scopes 1 and 2, Scope 3 disclosures would be phased in, smaller reporting companies would be exempt and a new liability safe harbor would be available for Scope 3 disclosures.