SEC Considers Climate Disclosure Rule

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The Securities and Exchange Commission said for the first time that public companies must tell their shareholders and the federal government how they affect the climate, a sweeping proposition long demanded by environmental advocates.

The country’s top financial regulator gave initial approval to the much-awaited climate disclosure rule at a meeting on Monday, moving forward with a measure that would bolster the Biden administration’s stalled environmental agenda.

The proposed rule – approved by a 3-1 vote – was a major step towards holding companies accountable for their role in climate change and giving investors more leverage to force changes to business practices that have contributed to the rise. global temperatures.

Ben Cushing, who leads the Sierra Club’s efforts for tougher climate disclosures, applauded what he called a “long overdue step” and urged the commission to quickly finalize “the toughest rule possible”. .

“Investors and the public deserve to know what climate-related risks companies face and how they are being addressed,” he said in a statement. “This is particularly important given the number of companies that have pledged to address their climate impact without disclosing the full extent of their emissions, the risks their own businesses face from climate change or the relevant business plans to meet their climate commitments.”

The public will have up to 60 days to comment on the plan. If passed, it will put in place a reporting framework requiring companies to start disclosing information about the climate impact of their activities in their annual reports and share registration statements.

But the proposal has already provoked opposition from some trade groups and could be challenged in court, potentially delaying its effective date.

Regulators said the rule builds on guidance issued by the SEC in 2010 for companies to disclose information about climate change – information the commission considers “material” to investors. meaning they need it to make an informed decision about buying or selling a Stock. The SEC took this step around the same time the Environmental Protection Agency began requiring certain large companies to compile data on greenhouse gas emissions.

“Over generations, the SEC has stepped in when there is a significant need for disclosure of information relevant to investor decisions,” committee chairman Gary Gensler said in a statement accompanying the announcement. the new rule.

The relevance of climate-related information will likely be a point of contention in the months to come.

The U.S. Chamber of Commerce, a business lobby group, said it broadly supports the goal of corporate climate disclosure, but wants a more “clear and practical” rule. Tom Quaadman, executive vice president of the chamber’s Center for Capital Markets Competitiveness, said the group is concerned that companies will be forced to disclose information that is not material to investors.

“We will argue against provisions in this proposal that deviate from that standard or are unnecessarily broad,” Quaadman said.

In a discussion with investors after the committee vote, Gensler said the SEC would seriously consider feedback from companies, investors and the legal community before adopting a final disclosure rule. “We look forward to public feedback,” he said.

Many companies have already started publishing information on their greenhouse gas emissions. The SEC estimates that a third of the 7,000 corporate annual reports it reviewed in 2019 and 2020 included information about climate impact.

Some companies – including Apple, Facebook and Microsoft – are reporting detailed data and have set deadlines by which they hope to have zero carbon emissions overall.

But the proposed rule, which spans more than 500 pages, would formalize the reporting process. Companies would be required to carry out three levels of analysis of their climate impact, an analysis consistent with the way members of the scientific community view the environmental impact of business activity.

In the first two stages, companies should disclose annually the direct impact of their operations on climate change in terms of the products they manufacture and any indirect environmental effects related to the use of electricity, trucks or other vehicles.

The third phase of the analysis is more in-depth and involves assessing what is known as the carbon footprint of suppliers, business travel and the assets that a company leases. The SEC’s proposal would require only the largest companies to report that level of climate impact – known as Scope 3 emissions – and leave it up to individual companies to decide whether the disclosures would be material to investors. .

Disclosure of Scope 3 emissions, which primarily include gases created by suppliers to companies or more ancillary operations, often overshadows the other two types. The requirement would not apply to large companies for at least two years in most cases.

And large companies reporting Scope 3 emissions would initially get a so-called “safe harbor” provision in the event of litigation by investors who believe the companies’ analysis was flawed. The SEC opted for a safe harbor clause because Scope 3 broadcasts can be more complicated to analyze and compile.

Todd Phillips, director of financial regulation and corporate governance at the Center for American Progress, said he still had questions about how the rule would deal with Scope 3 emissions. But he added that the proposed rule gave investors “access to the material information they need to make informed investment decisions”.

A growing share of investors – especially those in large mutual funds – are pushing companies to disclose more information about the effect of their activities on the climate. “Investors with $130 trillion in assets under management have asked companies to disclose their climate risks,” Gensler said in his statement.

Many investors and business executives will likely welcome the proposed rule because they believe standardized climate information will make it easier to compare companies’ environmental efforts. Microsoft wrote a letter supporting the commission’s climate campaign.

Big tech companies have presented themselves as leaders in moving away from fossil fuels, but they also face headwinds. Microsoft, which aims to be “carbon negative” by 2030, recently reported an increase in emissions.

Proponents of a climate disclosure rule have argued that it would better protect investors against the risk of a sudden drop in a company’s value, either due to changes in government environmental policies or because consumers are turning away from products that contribute to global warming.

But the push for stricter disclosure requirements reflects more than just concern for investors. Environmental advocates hope that rules requiring companies to measure and publish their greenhouse gas emissions will encourage companies to take more aggressive action to minimize their effect on the climate.

The SEC rule came as the Biden administration struggled to implement its broader climate agenda. The limited progress it has made with emissions-focused legislation has made financial regulation one of the main tools it has to change corporate behavior as climate change worsens.

Last week, one of the Biden administration’s nominees to serve on the Federal Reserve, Sarah Bloom Raskin, stepped down due to opposition from business groups and Republicans to some of her writings that supported that financial regulators need to focus more on how companies affect the climate. . She withdrew her name after Sen. Joe Manchin III, Democrat of West Virginia, said he would not vote to confirm her.

Christophe Flavelle contributed report.

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