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The acting head of the US Securities and Exchange Commission
(SEC) has ordered the agency to review how publicly traded
companies have been disclosing climate-related risks in their
filings.
In a 24 February statement, SEC Acting
Chairwoman Allison Herren Lee ordered the agency's corporation
finance division to "enhance its focus" on which companies are
complying with the 2010 guidance, which was the first time the SEC
acknowledged that climate-related impacts can have a material
effect on a company's bottom line.
"As part of its enhanced focus in this area, the staff will
review the extent to which public companies address the topics
identified in the 2010 guidance, assess compliance with disclosure
obligations under the federal securities laws, engage with public
companies on these issues, and absorb critical lessons on how the
market is currently managing climate-related risks," Lee said.
Although the decade-old guidance was seen at the time as a
significant action, it did not establish any metrics or standards
for reporting risk. This omission on SEC's part gave rise to a
variety of voluntary frameworks and standards that have since
resulted in a patchwork of climate risk reporting regimes and
incomplete and inadequate disclosures from companies.
The SEC isn't the only federal financial regulatory agency
that's taking on climate risk issues. On 28 January, the Office of
the Comptroller of the Currency (OCC) under Biden put on hold a
Fair Access Rule finalized a few months earlier by the Trump OCC,
which would have prohibited denial of credit services to certain
classes of customers, such as oil companies; the rule was seen as a
response to US banks saying they will not lend for Arctic oil
development.
Also, the Commodities Futures Trading Commission this week is
holding a meeting of its Climate-Related Market Risk Advisory
Committee and is expected to soon approve the first-ever report on
climate risk from that agency.
Acknowledging Climate Risk
Since 2010, the SEC has acknowledged that companies face
physical risks from the harmful effects of climate change that
manifest themselves in the form of the direct economic costs of
repairing facilities damaged by rising waters, hurricanes, and
wildfires, and indirect impacts such as increased insurance
premiums. The SEC also said companies face transitional risks such
as changing clean energy technology, changes in international,
national, and local climate policies, and related litigation, among
others.
The agency's acknowledgment, though, has never translated into
the quality of disclosures that investors such as BlackRock and
institutional investors have been demanding. Neither are the prior
disclosures sufficient for companies that are making their own
investment decisions for transitioning to a low carbon-future.
The SEC did not monitor the impact of its interpretive guidance
on company filings as part of its disclosure review program, as it
promised in 2010.
The agency remained on the sidelines until the election of
President Joe Biden in November 2020, who, unlike his predecessor,
pledged to take a government-wide approach to addressing the threat
of climate change.
Lee's order came less than a month after Biden's climate
blueprint highlighted the need for climate risk disclosures to
avoid what he called "the most catastrophic effects of that
crisis."
"The federal government must drive assessment, disclosure, and
mitigation of climate pollution and climate-related risks in every
sector of our economy, marshaling the creativity, courage, and
capital necessary to make our nation resilient in the face of this
threat," Biden's 27 January order addressing the
climate crisis said.
Updated guidance expected in Q3
IHS Markit Head of Americas Regulatory Affairs Salman Banaei was
not surprised by the substance or the timing of Lee's 24 February
order, as the acting chairwoman has made no bones about the need
and the urgency for improving climate risk disclosures.
Two days after the US presidential election, Lee told a group of
the nation's leading securities and corporate legal experts that
the SEC, as a key regulator, must understand, and where
appropriate, address systemic risks to our economy posed by climate
change."
To assess systemic risk, "we need complete, accurate, and
reliable information about those risks. That starts with public
company disclosure and financial firm reporting, and extends into
our oversight of various fiduciaries and others," she added.
Banaei said he expected the SEC would respond to the
presidential order by looking to do "something quick in the
interim," such as updating the decade-old guidance around the third
quarter of this year.
"The updated guidance will precede a more ambitious rulemaking
(proposal will likely be published by end of year) that is the
likely next step 'along the path to developing a more comprehensive
framework that produces consistent, comparable, and reliable
climate-related disclosures,'" Banaei said.
The new and improved guidance will almost certainly expand the
scope of disclosures by interpreting "materiality" to include
specific kinds of disclosures, he added.
The 2010 guidance currently covers climate risk disclosures
related to transition risk, which include the impact of legislation
and international agreements as well as physical risks. "I could
see the new guidance focus on concepts that have become more
refined over time, such as climate-related financial risks and,
very importantly, initiatives undertaken to mitigate climate risk
in its various forms," Banei said.
Banei said the ensuing rulemaking will most probably build on
the updated guidance and define specific disclosures in a manner
consistent with the widely used voluntary climate risk reporting
framework like the one developed by the Task Force for
Climate-Related Financial Disclosures, which require a reporting
format and cadence.
'Really important first step'
The SEC's action was seen as a welcome first step by the Center
for American Progress (CAP), which in a 19 February report, urged the
agency to mandate certain climate risk disclosures as a line item
in financial filings.
Under a voluntary system, CAP had concluded it is impossible to
assess risk across companies or ascertain systemic risk because the
disclosure is neither standardized nor mandatory.
Alexandra Thornton, CAP senior director on tax policy and
coauthor of the climate risk report, saw the SEC directive as a
"really, really important first step."
Since it issued its guidance a decade earlier, the SEC has not
reviewed how companies are disclosing climate related risks,
according to Thornton who said the agency could have done a lot
more.
"This is an appropriate time for the SEC to take stock of where
companies stand in terms of disclosing climate-related risks before
moving forward with any mandates," she said. "After years of
leaving companies and investors in the dark, this is a strong
signal that the Commission intends to move forward on enforcing
existing guidance with respect to climate-related risk
disclosures."
The nonprofit Environmental Defense Fund and New York University
School of Law's Institute for Policy Integrity also have called on
the SEC to mandate climate risk disclosure because they said data
shows companies are not reporting climate risk at the same level as
other types of risk they routinely report.
Posted 25 February 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst