The new rule could turn the SEC into one of the nation’s primary enforcers of climate-related disclosures, a role in which some critics say the Wall Street regulator lacks expertise and authority.
SOE shareholders are increasingly demanding information about the risks climate change could pose to their investments, arguing that worsening weather disasters and environmental regulations could limit the growth of companies that don’t. not prepare.
Climate change is already threatening infrastructure in the rapidly warming Arctic, where melting permafrost is endangering major pipelines and roads. Rising global temperatures have also increased the frequency of fires, floods, hurricanes and other weather disasters, which cost more than $145 billion in 2021, according to the National Oceanic and Atmospheric Administration.
At the same time, environmentalists say the shift to a low-carbon economy poses “transition risks” for businesses dependent on fossil fuels. As governments around the world adopt policies aimed at reducing carbon emissions and boosting renewable energy, companies with significant investments in fossil fuels could find themselves with stranded assets.
“These disclosure rules are essential to ensure that Wall Street cannot continue to make investments that exacerbate the climate crisis,” Sen. Elizabeth Warren (D-Mass.) said in an emailed statement. “The American people and financial investors have a right to know the risks of these investments, and it has taken far too long for the SEC to act.”
While many companies already voluntarily share some details about their environmental impact, there are sometimes big discrepancies in how companies calculate carbon emissions, said Danielle Fugere, president and chief counsel of shareholder advocacy group As You Sow.
For example, Coca-Cola accounts for the total emissions generated by its facilities, suppliers and customers during the manufacture and consumption of its products. Tesla, which touts its zero-emission electric vehicles, only shares the emissions generated when creating a single line of cars, the Model 3, explaining in its latest impact report that it is “a a good indicator for understanding the impact of emissions from our business vehicle.”
A Coca-Cola spokesperson declined to comment. Tesla did not respond to requests for comment.
Led by SEC Chairman Gary Gensler, the commission debated whether to require companies to follow Coca-Cola’s guidelines. example by disclosing all programs produced by their suppliers and customers, according to those briefed on the discussions.
But because this broader set of data can be much more difficult to calculate, the commissioners considered phasing in this requirement in the future and possibly limiting it to only the largest companies, one of the people said. Gensler acknowledged that possibility during his testimony before the House Financial Services Committee in October.
Business groups have opposed the federal government mandating environmental disclosure. The U.S. Chamber of Commerce, the nation’s largest business lobby group, has argued that because environmental data is “inherently uncertain,” companies shouldn’t be forced to include it in their updates. annual day to investors – for which they can be held legally responsible.
“If that information is filed with the SEC, that’s where companies can be sued,” said Tom Quaadman, executive vice president of the chamber’s Center for Capital Markets Competitiveness.
Some Republicans, meanwhile, have urged the Biden administration to suspend work on climate-related financial regulation amid the energy crisis sparked by Russia’s invasion of Ukraine. In a recent letter to Treasury Secretary Janet L. Yellen, Republicans on the Senate Banking Committee wrote that the SEC and other federal financial regulators should refrain from issuing rules that “could discourage the production of future energy”.
Setting and enforcing climate change disclosure rules could pose challenges for the SEC, which has little experience on environmental issues, said Keith F. Higgins, a former director of the SEC’s division. oversees corporate disclosures.
“When you go into a lot of detail about greenhouse gas emissions and the types of disclosures important to investors, I’m not convinced the SEC is where that expertise resides,” Higgins said, who has been the head of the regulatory society. finance department from 2013 to 2017.
The SEC’s proposed rule will go through a public comment period before a final rule is voted on by the agency’s four commissioners — three Democrats and one Republican. The settlement is likely to face legal challenges depending on whether the commission has the power to tackle climate issues, said Kathleen Sgamma, head of oil and gas industry group Western Energy Alliance.
A year ago, West Virginia Attorney General Patrick Morrisey threatened to sue the agency if it compelled companies to disclose environmental data, arguing in a letter to the SEC that his proposal would not stand up to ” strict scrutiny test”, which states that laws and to be constitutional, regulations must meet a “compelling interest of the government”. In an emailed statement, Morrisey said his office remains “very concerned about this matter and we will carefully review the SEC’s proposal as we consider potential next steps.”
A spokesperson for the SEC declined to comment for this article.
The Biden administration has increasingly urged the private sector to address the risks of rising temperatures. The administration released a report last fall warning that climate change poses an emerging threat to the stability of the U.S. financial system and urging banking regulators to take action to mitigate that threat.
President Biden has also named Sarah Bloom Raskin, an outspoken climate risk advocate, to be the Federal Reserve’s top banking cop. But her nomination appears doomed after Sen. Joe Manchin III (DW.Va.) said this week he opposes her because of her stance on energy policy amid rising oil prices. ‘inflation.
The SEC addressed climate policy in 2010, when it formally issued guidance that companies should share climate change information when it poses a “significant” risk to their business. SOE shareholders have complained that companies interpret these guidelines very differently, with some publishing lengthy sustainability reports outlining their climate impacts and others ignoring the topic altogether.
When Gensler was sworn in as SEC chairman last year, he signaled he wanted the agency to bring more “consistency and comparability” to climate disclosures. In a request for public comment on a possible climate rule, Gensler said, the agency received more than 500 comments, three-quarters of which were in favor of some type of mandatory climate disclosure.
Among major companies, Delta and Walmart have voiced support for mandatory climate disclosures, with the airline saying it has already spent “thousands of hours” collecting data on “environmental, social and governance” criteria. for its annual report to shareholders.
“It’s not like it’s progressive organizations against the whole world. There are companies that understand this is something that is going to happen,” said Tracey Lewis, policy adviser for Public Citizen’s climate program.
Randy Hargrove, a spokesperson for Walmart, said the retailer was “supportive of stronger ESG disclosures”, although he added that the company is waiting to see the text of the proposed rule before taking a formal position. on this subject. Delta declined to comment.
The SEC rule will likely follow many of the standards already set by the Task Force on Climate-Related Financial Disclosures, according to one of the people briefed on the SEC’s discussions. The task force was created in 2015 to advocate for greater disclosure of climate-related risks to investors and insurers and is chaired by former New York City Mayor Mike Bloomberg.
The United States follows other countries that have already proposed climate disclosure mandates that meet the task force’s standards. Britain and Japan plan to require certain large companies to disclose their emissions from April, while the European Union is expected to require all large companies listed on the European stock exchange to report their emissions from 2024.
Some U.S. business groups have lobbied for the SEC rule to exclude “scope 3” emissions, those generated by suppliers and customers, such as drivers refueling. However, climate activists say the rule will lack teeth if it omits scope 3 emissions, which make up about 85% of ExxonMobil’s carbon footprint, according to Carbon Tracker Initiative, an environmental group that advises institutional investors.
“If the SEC makes the ill-advised decision not to include Scope 3, it would miss a huge opportunity to provide investors with the information they want and need,” said Lena Moffitt, director of campaigns at ‘Evergreen Action, a climate advocacy organization. group.
Major financial institutions such as BlackRock, the world’s largest asset manager, have asked the SEC to phase in reporting requirements for the Scope 3 issues they fund. The push comes after BlackRock chief executive Larry Fink warned in January that corporations are not “climate police.”
BlackRock declined to comment for this article.