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US Securities and Exchange Commission climate-risk disclosure rule: possible impact

31 March 2022 Kevin Adler

For the first time, the US Securities and Exchange Commission (SEC) would require public companies to provide information about their climate risk and GHG emissions, under a proposal announced on 21 March.

The far-reaching rule, Enhancement of and Standardization of Climate-Related Disclosures, places numerous new reporting and recordkeeping burdens on companies. An SEC registrant will have to explain the climate risks to which it is exposed and its methodology for making that determination. Companies that have set carbon reduction and net-zero goals will be required to provide details on their plans and progress, including the baseline year, unit of measurement, and plans to reach interim and final targets.

All registrants will have to disclose Scope 1 (direct) and 2 GHG (indirect, such as purchase of energy and heat) emissions, Scope 1 must be disclosed separately from Scope 2.

Scope 3 emissions—those up and down the value chain—must be disclosed if they are "material" to a company's financial performance or if an emissions target including Scope 3 has been set. This was criticized by the Sierra Club as a large "carve-out" that gives companies too much flexibility on disclosing those emissions, which can represent 70% or more of their carbon releases.

For the most part, investment groups said they support the proposal. Trillium Asset Management, a sustainability investment firm that manages more than $4 trillion, noted it "applauds the SEC for proposing standardized risk disclosure rules for public companies, but urges the full inclusion of Scope 3 emissions."

Corporations facing the disclosures had a mixed reaction. Many, such as Apple and Delta Airlines, had submitted comments to the SEC this summer to advocate for standardization of disclosures, as the agency is attempting to do.

The US Chamber of Commerce, however, said the rule goes beyond the SEC's mandate for requiring disclosure to investors of matters "material" to a company's performance. "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," said Chamber Executive Vice President Tom Quaadman in a statement on 21 March.


In thinking about the impact of the proposed regulation, it should be emphasized that although the SEC has set a goal of a rolling implementation beginning in FY2023 (with first required reporting in FY2024), this ambitious schedule is not likely to be met. Attorneys agree that the final rule will be litigated, and that will probably delay its implementation.

If the rule is enacted as drafted, discussions with S&P Global analysts, attorneys, climate advocates, and others yield the following key themes, including several potential unintended consequences:

  • New expectations. Experts say that even while the rules are finalized and litigated, the themes embedded in them will drive expectations and even demands by investors. Attorneys are advising corporations to "tighten up" their disclosures and explanations for them, too.

  • Scope 1 and 2 GHG emissions. These disclosures would be held to the same standard as financial disclosures of a third-party audit. "This means they are subject to litigation," one attorney said.

  • Scope 3 emissions. Climate and sustainable investing groups will push during the comment period to tighten Scope 3 rules to match those for Scopes 1 and 2.

  • Potential for double-counting. Many potential sources of double-counting of emissions could occur, and the proposed rule lacks clarity about these should be handled. To cite a simple example, a public company that rents space in a building owned by another public company could be required to report the emissions for its share of space, but the owner of the building would, presumably, report emissions for the entire building.

  • Carbon price. If a company uses an internal price of carbon, it must be disclosed, and information must be provided about how that price was determined. This could actually discourage use of an internal price of carbon that the company could use to help determine financing for its own energy transition plans, said one investment firm.

  • Attestation. The requirement that emissions claims be backed by third-party audits will lead to new demand for auditing services.

  • Frameworks. The SEC identified two major international climate risk frameworks as possibly acting as models for companies to meet the rules: the Task Force on Climate-Related Disclosures (TCFD) and the GHG Protocol. Both of these are voluntary programs, and TCFD said it has the support of more than 1,000 financial institutions with nearly $200 trillion in assets. But one investor pointed out that the TCFD's 2021 Status Report found fairly low participation by even supporting companies: Only 25% of TCFD participants responding to a survey said they meet all the plan's recommended board disclosures, and 18% provided TCFD-recommended management disclosures.

Who wins?

The question of who wins under the rules is hard to answer.

Obviously, companies using or producing fossil fuels will see the rule as a challenge, as their emissions will be under greater scrutiny. Companies using all or large shares of renewable energy will benefit for the same reason.

Also, analysts predict that larger firms, which have more resources to pay for audits and submit reports, will have an easier time complying with the rules.

But it's not clear whether a company that's already well down the decarbonization path will be helped by the rules, or if a laggard will be harmed. For one thing, an analyst pointed out that many investors already are incorporating climate risk and other environmental, social, and governance factors into their decisions. New disclosures might not change their analysis.

Others pointed out that when standardization is introduced into what has been a voluntary compliance market, it's possible that those at the leading edge will reduce their activities so that they meet the standard, but no more. One observer used the fast-growing bitcoin mining industry as an example. Some bitcoin miners have made it a point of differentiation to use only renewables for the energy-intensive process. They may be less inclined to do so under a different disclosure regime.

Posted 31 March 2022 by Kevin Adler, Chief Editor

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.



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