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The US Securities and Exchange Commission (SEC) should consider
requiring sector-specific climate disclosures from publicly traded
companies rather than a blanket requirement as it crafts a rule to
mandate such reporting, Commissioner Elad Roisman said.
"When we are thinking about these new disclosure requirements,
it's very important for us to consider differences amongst
industries. I think that would be a more prudent approach than
blanket requirements," Roisman told Net-Zero Business Daily in an
exclusive interview.
Roisman, a Republican, is one of five SEC commissioners who will
vote on the climate change disclosure proposal when it is presented
to the commission at the year's end.
Announcing the timing of the proposal's release, SEC Chairman
Gary Gensler in late July said the agency action responds
to investors clamoring for material information about the risk that
a changing climate poses to companies whose debt or stock they own
or wish to buy.
The SEC asked for public comment in
late March on how it can improve the current process of reporting
climate risks by public holding companies after investors
complained about the inconsistent nature of these largely voluntary
disclosures.
Climate poses material risk
In 2010, the regulator deemed climate impacts caused by
torrential rains, flooding, droughts, and wildfires to be a
"material" risk to investors and encouraged companies to report
them, but stopped short of mandating the reporting.
As the SEC embarks on the path to its rulemaking, Roisman said
the agency's staff should ensure that carbon-intensive companies,
such as oil and natural gas firms, have different reporting
requirements than say a "brick and mortar" retail store, or even a
software company.
"I think it makes a lot of sense to have sector-specific
reporting rather than requiring disclosure for all companies when
it comes to some of the potential environmental disclosures being
discussed,'" Roisman added.
In Roisman's opinion, the SEC staff need to be mindful that any
climate disclosure mandate they write should result in information
that is material to the investor, scaled to lighten the burden on
small companies, and phased in over time with an extended
implementation period.
"I can understand why investors may see greater risk associated
with climate change for an oil company than there is for a software
company, or a brick-and-mortar retail chain, but when we are
thinking about these new disclosure requirements, it's very
important for us to consider differences amongst industries," he
said.
"Intuitive sense"
Attorneys and financial experts well-versed in the SEC's way of
working agree in part with Roisman's push for a sector-specific
mandate. They note that Gensler already has asked the SEC staff that is
writing the rule to consider the reporting format as well as
separate metrics for specific industries, such as banking,
insurance, or transportation.
Elizabeth Dawson, counsel with Crowell & Moring's
environment and natural resources group, agrees with Roisman that a
sector-specific climate disclosure rule would make more "intuitive
sense," but she also agrees with others who say a sector-specific
rule would take too much time.
"My thinking there is it makes intuitive sense that the more
specific and targeted disclosure requirements are, the more likely
it is that the requirements will yield information allowing
investors to make meaningful comparisons in their analysis and
decision-making processes," Dawson told Net-Zero Business
Daily.
However, she added, "sector-specific rules may take more time to
promulgate than a general purpose rule and that could further delay
what investors have been requesting for some time, which is
systematic requirements for climate change disclosures."
Sector-specific disclosures not unique
Presently, the SEC has annual and quarterly filing requirements
that are standard for all reporting companies, but also has
specific guides based on various industry sectors. These filings
include audited financial statements, a listing of potential
material risks that companies face along with manager expectations
for the coming year.
Pursuing a sector-specific approach is not a novel concept for
the SEC, according to Dawson.
In December 2020, the SEC issued a resource-extraction industry
regulation, which required oil, gas, and mining companies to
disclose payments made to US and foreign governments.
Moreover, the Financial Standards Accounting Board, which the
SEC recognizes as the designated accounting standard setter for
public companies, already provides yearly updates on a sectoral
basis to help with financial disclosures, according to Steven
Rothstein, Ceres Accelerator for Sustainable Capital Markets
managing director.
As the SEC considers how it may proceed, Dawson said, it can
look to the two-pronged approach developed by the Task Force on
Climate-related Financial Disclosures (TCFD), which starts with
generally applicable recommendations that are supplemented by more
sector-specific guidance.
The TCFD approach, which is voluntary and unevenly subscribed to
by US companies, includes a reporting framework that allows for a
gradual, accretive approach in tracking, reporting, and managing
climate risk through GHG emissions accounting.
Gensler has acknowledged that the TCFD approach has found
near-universal support among the 500 unique responses the SEC
received, but said the agency would leverage this approach to write
a rule tailored to US requirements, an approach Roisman said he
supports.
Baseline for reporting
Tyler Gellasch, a former senior SEC attorney who now serves as a
fellow with the Duke Law Global Financial Markets Center, is of the
opinion the SEC can issue a general rule that establishes a
baseline of reporting requirements for all companies regardless of
industry.
Once that baseline of reporting requirements is established for
revenue, income, human capital, among others, "then the SEC can
drill down deeply for some industries where exposures may be more
significant," Gellasch told Net-Zero Business Daily.
Gellasch's call for a baseline of reporting requirements echoes
Sustainability Accounting Standards Board (SASB) recommendations to
the SEC to establish a baseline of consistent, comparable, and
reliable climate disclosure by requiring companies to make
qualitative and quantitative climate risk disclosures in a manner
that leverages existing voluntary disclosure frameworks and
standards.
SASB is a nonprofit that established industry-specific
disclosure standards for reporting on environment, social and
governance (ESG) issues to the SEC after its 2010 guidance was
issued.
Roisman emphasized that any rule the SEC staff writes should
require that climate disclosure reports be "furnished" or
submitted—and without any degree of precision as that would
open them up to strict liability—rather than be filed as part
of required annual or quarterly reports. Roisman also expressed
concerns about the lack of standardized metrics for reporting
climate risk, as there are differences of opinions on the reporting
methodology for GHG emissions.
Reliable and accurate disclosures
Although agreeing with Roisman on the need for a standardized
reporting format, Gellasch said the SEC needs to make these reports
mandatory.
"The point of making disclosures is having them be reliable and
accurate, and letting them be furnished as opposed to filed
directly undermines that goal," he said.
Climate change's impact is being felt by all businesses, and not
just because of how substantial their GHG emissions are, Ceres'
Rothstein said.
A retail store or a software company may not have as significant
an impact as an oil firm, but operations may be affected by
location, supply chain exposure, and where its customers are based,
he added.
The US National Oceanic and Atmospheric Administration on 13
August deemed July to be the hottest
month around the globe since recordkeeping began 142 years ago. "We
are having more floods, fires, and droughts," Rothstein said.
Climate impacts are a systemic risk
There is no question climate impacts are a systemic risk to the
global economy, much like the COVID-19 pandemic and cybersecurity,
"posing grave threats to investors, our capital markets, and our
country," Ceres, a nonprofit network of institutional investors
that has been pushing for mandatory climate disclosure, told the
SEC in 10 June comments.
"It is a priority to have a strong and bold corporate climate
disclosure rule in place as soon as possible," which accounts for
direct GHG emissions as well as those released across the value
chain, Rothstein said.
Underscoring his point, Rothstein drew attention to an 13 April SASB bulletin, which
said 68 out of 77 industry sectors are likely to be affected
significantly by climate risk. This equates to 89% of market
capitalization of the S&P Global 1200 or roughly $45.2
trillion.
"I think over time it would be a very good to have information
by industry sectors," but right now "we do not think the SEC should
wait or it should only have disclosures for the fossil fuel or
heavy industry," Rothstein said.
Posted 17 August 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst