It’s out. Across 510 pages regulators detail the new mandatory climate-risk reporting obligations for US companies. In the face of heavy opposition, but also widespread support from investors and big-name brands, the proposals ask companies to disclose in detail the threats they face from climate change and what they do about it.
The proposals, from the Securities and Exchange Commission (SEC), mark a turning point in US corporate attitudes to climate change and sees rule makers take strides to match reporting obligations already used in other jurisdictions around the world, including the UK and European Union.
According to Gary Gensler, chair of the SEC, the proposals will serve investors and their need for “reliable information about climate risks to make informed decisions”.
In reference to the historic relationship between investors and boards, Gensler says the measures will help ensure companies meet investor calls for more climate-related information. “Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures.”
Fellow SEC commissioner, Caroline Crenshaw, writes that an uptick in net-zero pledges from US companies means investors need “more specific, standardized, and reliable disclosures“.
US companies now face disclosing how their climate risk management processes work; whether climate will have a material impact on business models and strategies; how it will affect financial statements; and the impact of “severe weather events” on line items in financial statements.
Companies will need to come clean on their direct greenhouse gas emissions (scope 1) plus the energy it uses and emissions in their supply chains (scope 2 and 3). There is a safe harbour from liability for scope 3 emissions and also an exemption for smaller companies.
‘A careful, measured approach’
A warm welcome has been expressed for the proposals in many quarters. Nell Minow, vice chair of ValueEdge Advisors, a governance advisory firm, says: “Consistent, clear information on climate impact is essential for evaluating investment risk. This is just the beginning of an evolving understanding of what that means.”
She adds the SEC is “taking a careful, measured, inarguably supportable approach to the development of these disclosures.”
Richard Leblanc, an SEC watcher and professor of governance at York University in Canada, says the proposals are “good news and timely”.
“By disclosing greenhouse gas risks and strategic and financial impact, investors can avoid companies that do not have a path to net zero, or invest and assume the risk,” he says.
Opposition is expected. The fossil fuel industry and some companies will “do their best” to derail the process, as will “free market” politicians and climate-change deniers. “But the careful statements by the [SEC] commissioners show that they are more than ready for any challenges,” says Minow.
The US Chamber of Commerce has already voiced some concern. Tom Quaadman, executive vice president, says the state of voluntary ESG reporting in the US is already “strong”. “The Supreme Court has been clear that any required disclosures under securities laws must meet the test of materiality, and we will advocate against provisions of this proposal that deviate from that standard or are unnecessarily broad,” he says. Elsewhere some investors describe current climate reporting as a “mixed bag”.
The SEC’s climate reporting plan is, in part, based on those of the Task Force on Climate-related Financial Disclosures (TCFD), which are in the process of becoming mandatory in the UK.
The European Union has already introduced a set of reporting rules, the Non-Financial Reporting Directive, but that is in the process of being updated with the Corporate Sustainability Reporting Directive. Elsewhere, the EU is pushing through a new human rights due diligence law.
It was not only investors that threw their weight behind new reporting rules. In submissions to the SEC companies as diverse as Apple, the tech giant, and BlackRock, the fund manager, advocated for new reporting standards based on TCFD. Arvin Ganesan, head of environmental policy at Apple, wrote in the company’s submission: “Ultimately, climate change is a global issue and a harmonised approach is necessary to meet global emissions reduction targets.”
There will be opposition to climate reporting in the US. They may win some concessions but the project is unlikely to be knocked off course. US companies can at last begin to catch up with their counterparts in Europe and elsewhere.