What the SEC’s proposed disclosure rule means for registrants
On March 21, the US Securities and Exchange Commission (SEC) proposed a new rule that would, for the first time, require SEC registrants to disclose detailed information about their greenhouse gas emissions and exposure to climate change-related risks. While the rule has not yet passed, it could signal a major shift for US businesses, which have until now reported these metrics on a purely voluntary basis. Here are three important takeaways for businesses in the United States.
The directive of the SEC is to protect investors. With this proposed rule, it is making a clear statement that climate change poses a risk to companies and therefore to investors in those companies. This echoes a 2020 letter from BlackRock CEO Larry Fink to fellow CEOs, which asserted that “climate risk is investment risk.”
Still, Hester Peirce, one of the four sitting members of the SEC, voted against the proposal.
Peirce characterized the proposed rule as overreach, asserting that it “steps outside [the SEC’s] statutory limits.”
The SEC is accepting public comments on the proposal through May 20. If it passes, it will take effect in 2022 and require disclosures from businesses starting in 2023.2. Regardless of the rule’s passage, it sends an important signal
While we currently believe it is likely that the rule will pass, the nature of the proposal sends an important message for US businesses either way.
Specifically, the proposed rule signals that demand for climate-related disclosure from stakeholders including investors, shareholders, and consumers is significant enough that it is starting to touch regulatory action.
Currently, because such disclosures are purely voluntary, they are not necessarily standardized. This makes it difficult for investors to efficiently compare the climate change-related risk exposure of two otherwise similar companies.
In the absence of standardized disclosures to guide investment decisions, some grassroots movements in the United States have successfully pressured institutional investors (including Harvard University and Milwaukee’s Marquette University) to completely divest from fossil fuels. The City of Chicago and New York City’s pension funds have also voted to divest from fossil fuels.
Should the SEC’s proposed rule pass, all stakeholders would have more robust resources to gauge risk and guide their investment decisions in a more nuanced way.3. Now is the time to consult an advisor
Should the rule pass, all SEC registrants will be required to take action and adapt their filings to incorporate the climate-based risk factors the rule introduces.
Those that already engage in voluntary reporting on greenhouse gas emissions and risks tied to climate change will have to adjust their current reporting to meet the rule’s requirements.
Those that have not yet implemented any such reporting will have more work to do: tracking emissions, having their analyses audited, and familiarizing themselves with strategies for reducing climate change-related risks.
That last item is perhaps most significant: once corporates are required to disclose climate risks, they will have to take steps to mitigate those risks. That will involve more than reducing emissions with offsets and carbon credits, though both may be part of corporates’ overall response.
Reducing exposure to climate-related risks will require investments in technology, infrastructure, and operations, all of which are complex long-term undertakings.Regardless of the SEC ruling, ACT can provide valuable guidance on managing climate change-related risks
While the SEC’s ruling will determine whether and how businesses must report their greenhouse gas emissions and climate change-related risks, it will not affect the reality that climate change poses a risk to all businesses.
ACT has been helping organizations achieve their sustainability goals since 2009, primarily through market-based solutions. We have offices in Europe, the US, and Asia to serve the varied needs, both regulatory and voluntary, of organizations around the world.
To learn how we can help you achieve your organization’s sustainability goals, get in touch.