The framework has been welcomed by investors, though Commissioner Hester Peirce warned it will undermine the existing regulatory framework.
The US Securities and Exchange Commission’s (SEC) long-awaited climate-related financial disclosure framework has been welcomed by investors as providing much-needed “consistency and rigour”.
The draft will now be open to public comment for 30 days, and is expected to be finalised later this year.
“The SEC proposal strikes a good balance between the needs of issuers and investors,” Tim Mohin, Chief Sustainability Officer at climate technology company Persefoni, told ESG Investor.
Under the new framework, companies will be asked to disclose the material impacts of climate-related risks on their business operations in their registration statements and periodic reports. This includes physical risks, like wildfires and flooding, but also existing and future regulations like carbon tax.
Further, if companies have already set decarbonisation targets, they will be expected to disclose how these transition plans work in practice.
The SEC first consulted on its prospective climate-related financial disclosure framework during H1 2021. Release of the proposals has been pushed back several times, partly reflecting tensions between the priorities of issuers and investors.
During the open meeting launching the framework on Monday, US SEC Chair Gary Gensler cited the support of investor signatories of the UN-convened Principles for Responsible Investment (PRI) as a clear signal of investor demand for such a framework.
“Companies and investors alike would benefit from the clear rules of the road proposed in this release,” he said. “The SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance. Today’s proposal thus is driven by the needs of investors and issuers.”
The draft provides “structure” for US companies already reporting climate-related information to investors, said Lisa Woll, CEO of the US Sustainable Investment Forum (US SIF).
The proposed reporting requirements will give investors “robust, reliable and comparable information that will help inform their decisions” and “stem the worst effects of climate change”, said Kristina Wyatt, Persefoni’s Deputy General Counsel and Senior Vice President of Global Regulatory Climate Disclosure.
“Investors have made it very clear that climate risks are material, and after two decades of relying on voluntary reporting regimes to assess risks stemming from climate change, the consistency and oversight rigour offered by the rule is welcome,” added Christina Herman, Programme Director for Climate and Environmental Justice at the Interfaith Center on Corporate Responsibility (ICCR).
The ICCR is a coalition of over 300 faith and values-based institutional investors representing more than USD 4 trillion in assets under management.
Last year, the SEC prepared the ground for increased reporting on climate risks, with its Division of Corporation Finance sending letters to public companies failing to satisfactorily disclose in line with its 2010 Climate Change Guidance.
Wide, aligned scope
The draft framework proposes that companies disclose their Scopes 1 and 2 greenhouse gas (GHG) emissions. But they will only be expected to disclose Scope 3 emissions – those for which they are indirectly responsible along their supply chains – that are considered material, with a liability safe harbour softening this particular requirement.
Scope 3 has presented “vexing issues” for all policymakers, Mohin noted, as firms can have relatively poor visibility on these emissions, even when they account for the majority of their carbon footprint.
“The safe harbour is an attempt to address corporate concerns about Scope 3 and their ability to get data from their entire value chains,” Fran Seegull, President of the US Impact Investing Alliance, told ESG Investor.
Citing the underdeveloped climate data landscape, companies have argued that they should not be subject to legal repercussions if their reporting fails to fulfil all disclosure requirements.
The current parameters for Scope 3 don’t go as far as many investors may want, Persefoni’s Wyatt acknowledged, but she said these disclosures will become easier to provide as more companies report their Scopes 1 and 2.
“One company’s Scope 1 emissions are another company’s Scope 3 emissions,” she said.
All emissions disclosures would be phased in between 2023-2026.
The SEC’s proposed reporting requirements are keeping in line with other international standards and frameworks, such as the Taskforce on Climate-related Financial Disclosure (TCFD) and the IFRS Foundation’s International Sustainability Standards Board (ISSB), said Seegull, adding that her organisation will be asking the SEC to continue to ensure alignment throughout the finalisation process.
“The SEC was wise to base their proposal on existing authoritative frameworks,” Persefoni’s Mohin agreed.
Up for debate
Despite support from the investor community, the SEC still faces opposition, including from within the agency.
“The proposal will not bring consistency, comparability, and reliability to company climate disclosures,” SEC Commissioner Hester Peirce said. Instead, she warned it will “undermine the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures”.
To reduce her carbon footprint, Peirce elected to turn off her video feed during the open meeting on Monday, noting that “by some estimates it will reduce the carbon footprint by 96%”.
The Chamber of Commerce, the largest US business lobby, has also called the proposal too “prescriptive”.
It is also likely some companies will push back against the framework, experts warned ESG Investor, due to the resources required to fulfil disclosure requirements.
Independent sustainability research firm Verdantix has estimated that the SEC’s proposal for climate disclosures by publicly-listed companies will result in US$6.7 billion of spending over the next three years on consulting, legal, assurance and digital solutions.
“We will likely see some push back from states and parties that aren’t onboard with these measures (through the regulatory comments process or potentially lawsuits), quite possibly focused on the fact that Scope 3 emissions are difficult to measure accurately and reliably,” said Menaka Nayar, Senior US Associate at law firm Linklaters.
The proposed rule was nonetheless advanced by a Commissioner vote of 3-1.
Read more articles like this on Regulation Asia’s sister publication, ESG Investor.