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The US Securities and Exchange Commission (SEC) is asking for comment on how it can obtain
reliable and consistent reporting on risks posed by climate and
environmental impacts, as it embarks on an effort to set up a
comprehensive reporting regime for these risks.
The risks posed by climate as well as environmental, social and
governance (ESG) factors that companies have been reporting have
not been up to par, according to SEC Acting Chairwoman Allison
Herren Lee, who discussed the request during a
15 March discussion on "Meeting Investor Demand for ESG
Information," convened by the Center for American Progress.
Investors need climate risk reports that are consistent,
comparable, and reliable so they can use them to price risk and
allocate capital, Lee said.
Lawyers and analysts tracking the SEC developments say the
agency is not waiting for the incoming nominee for chairman, Gary
Gensler, to be confirmed before proceeding with President Joe
Biden's government-wide approach to tackling the climate crisis.
They also agree that the agency's request for comment won't cause
companies to take any further action other than being vigilant.
"Not a week seems to go by without another major announcement,"
IHS Markit Head of Americas Regulatory Affairs Salman Banaei said
15 March. He added that the SEC actions indicate the importance the
Biden administration has placed on "improving climate risk and ESG
factor disclosure."
Ronald Mueller, partner with the Washington office of Gibson,
Dunn & Crutcher, who advises public companies on a broad range
of SEC disclosure and regulatory matters, said the agency's direct
announcement will not require companies to take any action.
Rather, "it adds to the drum beat of SEC statements that should
already have companies evaluating what they are saying in climate
disclosures," said Mueller, who is a member of the company's ESG
practice.
'Jump-starting' the rulemaking
Investor demand for greater corporate disclosure about "climate
change risks, impacts, and opportunities has grown dramatically
over the past decade," Lee said. The SEC first identified climate
impacts as a material risk affecting a company's investments in
2010 guidance, but at that time it did not establish any metrics or
standards for reporting risk.
The SEC said it would accept comments for 90 days, or by 13
June, 2021, on its request that contains more than half a dozen
questions that try to tease out the approaches the agency could
take to improve disclosures.
Mueller characterized the SEC's action as "jumpstarting" the
rulemaking process. "This is the type of questioning the SEC will
often put out in advance of a rulemaking," Mueller told IHS Markit
in a 15 March interview.
These include questions about the metrics that companies
currently use to report Scope 1, or direct, greenhouse gas
emissions from the source; Scope 2, or indirect, emissions
generated as a result of transporting that product; and Scope 3
emissions, or the emissions resulting from the use of the end
product.
IHS Markit's Banaei highlighted the following questions in a 15
March note to clients: "What quantified and measured information or
metrics should be disclosed because it may be material to an
investment or voting decision? Should disclosures be tiered or
scaled based on the size and/or type of registrant? If so, how?
Should disclosures be phased in over time? If so, how?"
Responses that the SEC receives on its request will inform
Gensler and his staff's thinking on what to propose in terms of new
rules, Banaei said.
Lee's announcement is the latest example of the Biden
administration's more rigorous approach to corporate risk
disclosure. It follows on the heels of a 10 March announcement by the US
Department of Labor that it will
not enforce two rules written under the Trump administration
that would have discouraged investment advisors from using
corporate ESG factors as part of their risk assessments.
SEC and climate risk
While the SEC first tackled this issue with the guidance in
2010, the lack of metrics on the agency's part gave rise to a
variety of voluntary frameworks and standards that have since
resulted in a patchwork of climate risk reporting regimes as well
as what Lee termed "incomplete and inadequate" disclosures from
companies.
A decade ago, the SEC was more focused on the nation's recovery
from the subprime mortgage financial crisis, according to Mueller.
At the time, there were fewer companies reporting climate risks,
and there was less awareness about the science behind climate
impacts.
At the time, the SEC said it would revisit the guidance with
feedback from companies and stakeholders, and that seems to be
happening in earnest now under the Biden administration. Lee said
the SEC is responding to investors' demand for transparency.
"It's time to move from the question of 'if' to the more
difficult question of 'how' we obtain disclosure on climate," Lee
said, noting that the current voluntary framework is resulting in
gaps in critical information.
She said the SEC needs to hear from investors, shareholders, and
all interested parties about what data and metrics would be most
useful to companies across industries, and to what extent should
there be an industry-specific approach. She also asked what the SEC
could learn from the existing voluntary frameworks to devise a
climate disclosure regime that is sufficiently flexible to respond
to market and scientific developments.
"And," she asked, "how should we address the significant gap
with respect to disclosure presented by the increasingly
consequential private markets?"
Since the 2010 guidance, 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.
During 1 March remarks at a CERAWeek by IHS
Markit 2021 conference, Lee said she believed the SEC should work
with international partners to create a harmonized set of
principles to measure those types of risks.
Global demand for addressing risk from climate impacts is
something Lee said the SEC can no longer ignore. Investment fund
managers, such as BlackRock, are pressing companies to be more
transparent about their interests in fossil fuels, and to disclose
climate and ESG risks.
In its request for input, the SEC asked 15 broad questions. One
was whether it should develop "a dedicated standard setter for ESG"
(similar to the voluntary reporting framework established by the
Financial Accounting Standards Board).
"What are the advantages and disadvantages of developing a
single set of global standards applicable to companies around the
world, including registrants under the commission's rules, versus
multiple standard setters and standards?" the SEC asked.
Enforcement of existing disclosures
Lee's remarks during the Center for American Progress webinar
made it clear that she is determined to improve the transparency
and accountability of climate risk going forward, while trying to
move quickly to improve the quality and reliability of climate and
ESG disclosures under existing voluntary programs.
On 4 March, the SEC set up an enforcement task
force that is charged with identifying "any material gaps or
misstatements in issuers' disclosure of climate risks under
existing rules."
For companies, that means they should double check and make sure
they preserve information that supports their statements, according
to Mueller, who doesn't see any of the SEC actions on climate risk
disclosure as warnings.
In a 15 March letter to the SEC, the
US Chamber of Commerce warned the SEC about its "enforcement-first
approach" to ESG and climate change even though the agency has yet
to complete its review and updates to the 2010 guidance, which it
said many see as a predicate to further guidance and
rulemaking.
Aside from the request for comment, Lee used the opportunity to
address a public forum to float a number of ideas about how to
improve disclosures, which included asking investors to comment on
the potential need to bring in external auditors to attest current
voluntary reports.
External auditing
She also asked whether the Public Company Accounting Oversight
Board (PCAOB) should be asked to set better standards or guidance
for how auditors are currently addressing climate- and ESG-related
financial disclosures. The PCAOB is a private sector, nonprofit
corporation created by the Sarbanes-Oxley Act of 2002 to oversee
the auditors of publicly traded companies and protect the interests
of investors by ensuring that audits are performed in a fair and
informative fashion.
Although acknowledging that the SEC does not regulate credit
rating agencies, which say that they consider ESG in their
assessments of companies' risks, Lee asked how the SEC could
encourage "enhanced transparency" by those rating agencies.
Lee also said the SEC may revisit rules to make sure that
smaller shareholders would get some consideration when voting on
ESG and climate matters. "They have a right to know where their
money is being invested," she said.
Lee acknowledged that the SEC's list is "by no means
exhaustive," as the risks and opportunities related to climate and
ESG cut across all manner of boundaries.
But, she added, the SEC must do its part in partnership with
market participants and regulators around the globe to address
these issues, otherwise "the lack of common benchmarks and
standardized language will continue to inhibit to some degree
competitive dynamics around managing climate and other ESG
risks."
What is 'Materiality'
When Andres Vinelli, vice president for economic policy for the
Center for American Progress, asked how the SEC plans to define
"materiality" of climate risk, Lee said she would defer to the
investors who are demanding this information.
The chamber, however, cautioned the SEC against using climate
risk disclosures "as a means to achieve policy goals outside the
scope of the federal securities laws."
While disclosures may be a part of an all-of-government,
comprehensive policy to combat climate change, disclosures should
be used to protect investors and be rooted in the well-established
US Supreme Court definition of materiality, Tom Quaadman, vice
president of the chamber's Center for Capital Markets
Competitiveness, wrote in the 15 March missive.
"We believe all disclosures should provide decision-useful
information to investors and be workable for companies of different
sizes and industries," Quaadman added.
According to Mueller, Lee's speech has made it clear that the
SEC has a variety of possible options and approaches it can take to
improve climate disclosure. She indicated "what the SEC might do
rather than what they will do. And what they do, it all remains to
be seen," he said.
Posted 16 March 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst