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US Securities and Exchange Commission (SEC) Chairman Gary
Gensler invoked two US Supreme Court opinions and the agency's
long-standing tradition of providing "material" information to
investors to defend its climate disclosure proposal in a rebuttal
of critics who argue the agency overstepped its authority.
In a 12 April webinar briefing organized by sustainable investor
group Ceres, Gensler said he was guided by the concept of
"materiality."
As the Supreme Court held in the 1988 Basic Inc. v.
Levinson ruling that in turn cited a 1977 opinion, Gensler
said "information is material if 'there is a substantial likelihood
that a reasonable shareholder would consider it important' in
making an investment or voting decision, or if it would have
'significantly altered the total mix of information made
available.'"
In response to burgeoning demand from global investors and
companies, the SEC released the climate disclosure proposal on
21 March, which for the first time would require publicly traded
companies to disclose their strategy, governance, and risk
management with respect to climate-related risks. It closely tracks
the 2017 reporting framework developed by the Task Force on
Climate-Related Disclosures (TCFD).
Overstepping authority
Since the proposal's release, the SEC has been barraged with
criticism about overstepping its legal authority from mostly
conservative business circles and Republican lawmakers critical of
the Biden administration's all-of-government approach for tackling
climate change.
In an April 5 letter, a group of
Republican lawmakers observed it was "unclear" to them "where the
SEC has derived this drastic change in authority," noting that the
commission is not tasked with environmental regulation, "nor has
Congress amended the SEC's regulatory authority to pursue the
proposed climate disclosure."
The US Chamber of Commerce too voiced concerns, saying the rule goes beyond the
SEC's mandate for requiring disclosure to investors of matters
"material" to a company's performance.
During the Ceres webinar, Gensler attempted to counter those
objections and place the need for disclosure in the context of the
SEC's long-standing tradition.
"The 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," he
said.
In the proposal, SEC staff used the
1988 Supreme Court ruling to buttress that argument, saying that
"the materiality determination with regard to potential future
events requires an assessment of both the probability of the event
occurring and its potential magnitude, or significance to the
registrant [company]."
Gensler said the SEC has a role to play in bringing some
uniformity to the exchange of information happening between the
companies and the investors, "particularly when it comes to
disclosures that are material to investors."
The SEC chief also attempted to respond to US Senator Joe
Manchin, Democrat-West Virginia, who in a 4 April letter questioned the
agency's need to duplicate GHG emissions data collection requests
from the industry, especially the fossil fuel companies when the US
Environmental Protection Agency (EPA) already is reporting on this
data.
The EPA produces an annual inventory of the nation's GHG data
from all sectors, but that information is year-old data. For
instance, EPA's most recent inventory, released in the fall of
2021, described all sector emissions for 2020.
Like Manchin, West Virginia Attorney General Patrick Morrisey
also sees Biden's decarbonization push as an attack on the fossil
fuel industry, and on his state, which is heavily
dependent on it for revenues.
In a 13 April statement to Net-Zero Business Daily by
S&P Global Commodity Insights, Morrisey said the state
would not shy away from filing comments on the proposal, which if
finalized, "would provide for coordinated discrimination against
areas of the country like West Virginia that depend most heavily on
fossil fuels for energy."
Rest assured, Morrisey added, "West Virginia and other States
will vigorously participate in the rulemaking process, and, if
necessary, go to court to defend against any regulatory overreach
by the SEC in the name of climate disclosures."
Standardized reporting in one place
Gensler emphasized that investors need to find the relevant
information reported in a standardized format that they understand,
and to find it in a single place.
"It is important that investors be able to find consistent,
comparable, and decision-useful information in one place rather
than having to piece together information from different locations
that might, in turn, differ from one issuer to another," he
said.
When assessing an investment, investors usually look for
relevant information in filings like the 10-K, an annual financial
performance report the SEC requires from each publicly traded
company, he noted.
"That was true when I was on Wall Street. It's true of the
[Management, Discussion & Analysis] sections; it's true of the
risk factors; it's true of the environmental disclosures starting
in the 1970s. It's true for other key disclosures today," Gensler
added.
Need for disclosure
The SEC's proposed rule, which remains
open for public comment through 20 May, is in line with TCFD
recommendations. It requires companies to disclose Scope 1 GHG
emissions from their direct operations as well as Scope 2 emissions
from purchasing electricity for heating and cooling purposes. The
commission stopped short of mandating Scope 3 emissions disclosures
unless investors deem it "material" or companies themselves have
listed Scope 3 reduction targets in their transition plans.
Gensler acknowledged the methodology is not fully developed to
assess Scope 3 GHGs emitted across the value chain of a product or
service offered by a company, offering safe harbor protection
against liability for any disclosure pertaining to such
emissions.
Speaking after Gensler on the same webinar, Isabel Munilla, US
financial regulation director for Ceres' Accelerator for
Sustainable Capital Markets, stressed the importance of why
investors need GHG disclosures.
"They help investors understand the quality of a company's
earnings in the face of climate change during the energy
transition, and, both current and future GHG estimates can help
investors understand a company's liquidity and capital allocation
when faced with specific climate risks, and opportunities," Munilla
added.
However, some investment firms are a bit uncertain about how far
the SEC is going with its disclosure mandates for Scope 3
emissions.
"Will this make you hesitate to lean into establishing a Scope 3
[target] because you're going to now be required?" Cynthia Curtis
of investment giant Jones Lang LaSalle, said during the webinar.
"You just don't want that chilling effect."
Globally harmonized rule
Both Gensler and Munilla pointed out that the general and climate disclosure
proposals that the International Sustainability Standards Board
(ISSB) released 31 March, 10 days after the SEC proposal, also draw
heavily on the TCFD recommendations.
The ISSB was created in November at the UN
COP26 meeting in Glasgow, Scotland, as an offshoot of the
International Financial Reporting Standards Foundation and charged
with developing a comprehensive global baseline for sustainability
disclosure in the financial markets.
A Ceres analysis of public comments that the SEC sought a year
ago prior to crafting its 21 March proposal revealed that more than
70% of all investors called for an alignment with TCFD guidelines;
which Munilla said the SEC proposal does.
Among the investment management firms backing the SEC proposal
are Franklin Templeton, which is a steward of $1.3 trillion in
pensions, investments, and other savings, as well as global cloud
software firm SalesForce.
Tom Sanzillo, financial analysis director for the Institute of
Energy Economics and Financial Analysis, is among the critics who
would have liked the SEC to just use the ISSB proposal and tailor
it with some tweaks to the US market.
"What we need are globally harmonized standards, such as the
ISSB is proposing," Sanzillo told Net-Zero Business Daily.
Alluding to the SEC proposal, he said, "this is just typical
Washington behavior … of ineffectual power play and politics."
However, Munilla noted during the webinar that the SEC proposal,
as does the TCFD, requires companies to disclose their GHG
reduction targets across all scopes, if articulated on their
websites, and related scenario analysis, transition plans, and
carbon offset use for meeting those goals.
This is important because "these are key tools that companies
use to manage climate risk," she added.
Investors will find it valuable to know if companies that have
developed transition plans are using an internal carbon price, said
Renee Jones, director of the SEC's Division of Corporate
Compliance, who was present for the discussion.
Posted 13 April 2022 by Amena Saiyid, Senior Climate and Energy Research Analyst
This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.