SEC Releases Climate Disclosure Proposal

Shareholders and fund managers are requesting more information about companies’ sustainability and their environmental impact. They are concerned that climate change is a threat to their investments and should be considered as part of growth strategies.

Many companies already supply some information to investors about climate impacts but there is little consistency in what is reported, SEC Chairman Gary Gensler said in a statement.

“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,” Gensler said. 

“Companies and investors alike would benefit from the clear rules of the road proposed in this release,” he 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. Today’s proposal thus is driven by the needs of investors and issuers.”

The proposal received mixed reactions. Conservatives and energy companies object to the SEC taking a role in efforts to limit climate change. The attorney general of West Virginia threatened a lawsuit, and the Western Energy Alliance – an oil industry lobbying group – is condemning the SEC’s mandate to enforce the regulation. This view was also expressed by one SEC commissioner, Hester Peirce, a Trump appointee.

“This proposal steps outside our statutory limits by using the disclosure framework to achieve objectives that are not ours to pursue and by pursuing those objectives by means of disclosure mandates that may not comport with First Amendment limitations on compelled speech,” Peirce wrote in a dissent statement.

Meanwhile, some environmentalists say the proposal is a move in the right direction toward corporate accountability for climate impact. Others, including investment company Trillium Asset Management, say the proposal should be stronger on disclosing Scope 3 emissions – those generated by supply chains and customers when using the company’s product or service.

Scope 3 emissions can be the biggest part of a company’s emissions profile but are also the hardest to calculate. The Greenhouse Gas Protocol sets out 15 categories for Scope 3, which depending on the company can include goods, waste, logistics, product use and disposal. For a lubricant producer, gathering this detail can be daunting.

If approved, the rules in the SEC’s climate disclosure proposal will be rolled out over a number of years. Larger corporations will be required to disclose climate risks in 2023 and smaller companies the following year. Scope 3 emissions will be required after that.

The proposed rule follows standards set out by the Task Force on Climate-Related Financial Disclosures, a group established in 2015 by then-Mayor Mike Bloomberg of New York to advocate for greater disclosure of climate-related risks to investors and insurers.

>Read more about the Task Force on Climate-Related Financial Disclosures.

All firms would be required to report the emissions they generate at their own facilities, and larger businesses would need to have these numbers vetted by an independent auditing firm, the SEC said. If the indirect emissions produced by a company’s suppliers and customers are “material” to investors or included in the company’s climate targets, the SEC said, those emissions must be disclosed as well.

The SEC’s factsheet outlining what companies can expect from the new proposals can be downloaded here.