Securities and Exchange Commission Chairman Gary Gensler testifies before Congress on July 19, 2023.
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Disclosure of climate data is not mandatory in the current system; Companies produce them voluntarily. They remain “unusual across all sectors,” according to S&P Global.
The largest companies must begin providing some climate disclosures as early as fiscal year 2025 and greenhouse gas emissions disclosures as early as fiscal year 2026.
“A sensible regulation to protect investors”
“Climate risk is financial risk,” Elizabeth Derbes, director of financial regulation and climate risk at the Natural Resources Defense Council, said in a written statement.
“This is a sensible regulation to protect investors: it gives them access to clear, comparable and relevant information about the actions companies are taking to address climate risks and opportunities,” said Derbes.
Overall, transparency around climate risk can be crucial for investors to assess whether a company’s stock is worth holding or whether the share price is appropriate, experts say – for example, whether to do so given the high Climate risk exposure too expensive or given that perhaps it is fairly valued is it well positioned?
According to the SEC, required disclosures include climate risks that have had or are likely to have a material impact on the company’s business strategy, operations or financial condition.
They also include a company’s climate-related goals, transition plans, and costs and losses associated with events such as hurricanes, tornadoes, floods, droughts, wildfires, extreme temperatures and sea level rise, the SEC said.
“Investors want to be able to accurately assess these risks and opportunities as they look at their investments over the medium and longer term,” particularly retirees whose timeline may be decades in the future, says Rachel Curley, director of policy and programs at US Sustainable Investment Forum, recently told CNBC.
The rule does not cover “Scope 3” disclosures
However, the rule has been weakened compared to its original version. Derbes and other observers say the dilution limits investors’ ability to accurately assess risk.
For example, the final regulation removed the obligation to disclose so-called Scope 3 greenhouse gas emissions. Such climate-damaging emissions arise along a company’s value chain, for example from raw material suppliers or from customers who use a company’s products.
Deloitte estimates that for many companies, Scope 3 emissions account for more than 70% of their carbon footprint.
“This is not the rule I would have written,” Crenshaw said, pointing to omissions such as Scope 3 reporting. “They are a bare minimum,” but ultimately better than no rule at all, she added.
Instead, the final rule requires companies to report their Scope 1 and Scope 2 emissions if they are deemed material to investors. These are direct emissions caused by the company’s operations and indirect emissions caused by the purchase of energy (e.g. from renewable sources or coal-fired power plants).
Only “large accelerated detectors” and “accelerated detectors” are required to disclose Scope 1 and Scope 2 emissions. These categories include companies with a total global market value of $700 million or more and $75 million or more, the SEC said.
There could be challenges ahead
The rule comes as the Biden administration has committed to cutting U.S. greenhouse gas emissions in half by 2030. In 2022, President Joe Biden signed the Inflation Reduction Act, the largest federal investment to combat climate change in U.S. history.
It also follows other U.S. and international climate disclosure regimes, such as those in the European Union and the rules recently adopted in California.
A congressional and legislative challenge to the rule is “likely,” Jaret Seiberg, financial services and housing policy analyst at TD Cowen, wrote in a research note last week.
While supporters say the SEC rule is well within its mission to protect investors, others say the agency has overstepped its authority.
The rule is “climate regulation promulgated under the Commission’s seal” and “hijacks” the agency to advance climate goals, SEC Commissioner Mark Uyeda said before Wednesday’s vote.
Last year, a group of House and Senate Republicans sent a letter to SEC Chairman Gary Gensler criticizing the proposal, saying it “exceeds the… [agency’s] Mission, expertise and authority.”
Gensler defended the rule as consistent with a “fundamental covenant” of U.S. securities laws.
“Investors can decide what risks they want to take as long as companies raising public money … provide ‘full and truthful disclosure,'” Gensler said in a written statement after the vote. “From time to time over the past 90 years, the SEC has updated the disclosure requirements underlying this fundamental agreement.”
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2024-03-06 20:06:35
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