It’s The SEC’s Job To Require Climate Disclosures


Washington DC, USA – October 12, 2018: US United States Securities and Exchange Commission SEC … [+] entrance architecture modern building closeup sign, logo, glass windows


Long-term investors save for important goals, such as their retirement or their children’s education, over years or decades. If you are putting a company’s stock in your retirement plan or your kid’s college fund, it is logical to try to understand the risks that a company faces and the impact those risks may have on your long-term value. As you make those decisions, wouldn’t you want to know about the risks posed by climate change, its expected impact on the company’s strategy and profit, and how it plans to adapt?

Regulators are beginning to agree. On Monday, the U.S. Securities and Exchange Commission proposed a new rule for climate disclosures for publicly traded companies. In summary, the rule would require periodic disclosure of climate-related information in its statements and reports (such as Form 10-K), including:

  • Climate-related risks and their actual or likely material impacts on the business, strategy, and outlook
  • Governance of climate-related risks and relevant risk management processes
  • Scope 1 and Scope 2 greenhouse gas (“GHG”) emissions, and, for some companies, Scope 3 estimates
  • The impact of severe weather events and related disclosures in notes to audited financial statements
  • Information about climate-related targets and goals, and transition plan, if any

The SEC is already getting pushback. Current and former SEC Commissioners are arguing that the SEC has exceeded its authority and that Congress should pass the appropriate climate legislation instead. However, long-term investors look to the SEC to protect investors and foster fair, orderly, and efficient markets. Taking on undisclosed risks neither protects investors nor provides for efficient markets. It is the SEC’s job to regulate the disclosure of material information, and climate risks are indeed material to long-term investors.

On the other hand, the SEC could have gone a lot farther. For example, private companies are not accounted for in the proposed rule – but emissions are equally damaging to the planet whether they come from a public or private company. Furthermore, the SEC does not address issues such as carbon markets, carbon taxes, or carbon capital gains taxes, rightly leaving them for legislative debate.

The SEC’s focus is on information that is material to investors. While accountants have different measures of materiality, for investors, material information is defined as “information with a substantial likelihood that a reasonable investor would consider it important in making an investment decision.” Reasonable investors are certainly taking climate risks into account. The recent proxy fight at ExxonMobil is just one example.

So, if climate risks are in fact material to investors, what other choices does the SEC have than to regulate their disclosure? Not many, and each has clear drawbacks.

One choice would be to maintain the status quo, with companies deciding for themselves what climate-related information to disclose. Today, disclosures vary from company to company with a pervasive lack of consistent, comparable and decision useful disclosures. Furthermore, since the advent of Regulation FD (“Fair Disclosure”), the SEC has worked hard to avoid “selective disclosure,” and it does not look kindly on companies who share material information with some and not others. Letting the companies decide what climate information they disclose to whom is untenable as climate change is increasingly material.

Another choice would be for the SEC to discourage companies from making projections or estimates around climate risk. Given that the effects of climate change are in some way contingent and certainly estimated, one could argue that they have no place in company disclosures. Having companies be silent on forward looking climate information may be fine for day-traders or very short-term holders, but it makes no sense for investors who plan to hold the stock for many years and will experience the effects of climate change and the company’s response to it. Sophisticated investors will find other means of projecting the impact of climate on particular companies, but this approach deprives retail investors of that information and means it is not subject to board discussion.

A third choice would be for the SEC to enact a policy more in line with the new International Sustainability Standards Board (ISSB) climate-related disclosures prototype. There is a strong argument for a global standard, but the SEC instead chose a more limited, investor materiality-focused approach that, like the ISSB, builds on the work of the Task Force on Climate-Related Financial Disclosures.

Investors make their decisions based on both company-disclosed information and on external data such as competitor information, market intelligence, or economic trends. And although projected future performance tends to drive stock prices, comparable company-disclosed historical data is critical for investors. They will continue to look for externally generated climate risk information – keeping an eye on the weather, so to speak. But, under the SEC’s proposed rule, they will also be able to base their engagement with investee companies on the companies’ own disclosures.

The bottom line is that climate risk is investment risk, and it is the SEC’s role to encourage disclosure of material investment risk. The specifics of the rule will be debated and determined over the next few months, but this is information that investors need to know now in order to make calculated decisions for the long term.

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