August 5, 2021

More SEC Tea Leaves: Clues on Climate Risk Disclosure

Last week, SEC Chair Gary Gensler made remarks at the Principles for Responsible Investment “Climate and Global Financial Markets” Webinar which provide the most comprehensive look to date at what the SEC may be considering for its upcoming climate change disclosure rulemaking. Drawing an analogy to the quantitative and qualitative scoring system used in the Olympics, Gensler noted that public company disclosure evolves over time based on areas of interest to investors, and now investors want more disclosure about climate change. He noted that the disclosure should be “consistent and comparable” and “decision-useful,” i.e., not generic text. To this end, Gensler has explained the parameters of what such disclosure could look like:

Qualitative disclosures could answer key questions, such as how the company’s leadership manages climate-related risks and opportunities and how these factors feed into the company’s strategy.

Quantitative disclosures could include metrics related to greenhouse gas emissions, financial impacts of climate change, and progress towards climate-related goals.

For example, some companies currently provide voluntary disclosures related to what’s called Scope 1 and Scope 2 greenhouse gas emissions. These refer, respectively, to the emissions from a company’s operations and use of electricity and similar resources.

Many investors, though, are looking for information beyond Scope 1 and Scope 2, to Scope 3, which measures the greenhouse gas emissions of other companies in an issuer’s value chain.

Thus, I’ve asked staff to make recommendations about how companies might disclose their Scope 1 and Scope 2 emissions, along with whether to disclose Scope 3 emissions — and if so, how and under what circumstances.

I’ve also asked staff to consider whether there should be certain metrics for specific industries, such as banking, insurance, or transportation.

Another question is whether companies might provide scenario analyses on how a business might adapt to the range of possible physical, legal, market, and economic changes that it might contend with in the future. That could mean the physical risks associated with climate change. It also could refer to transition risks associated with stated commitments by companies or requirements from jurisdictions.

In fact, many companies have announced their intentions to reduce their greenhouse gas emissions by a certain date, making “net zero” commitments or other climate pledges. 92 percent of companies in the S&P 100 plan to set emission reduction goals.

Today, though, companies could announce plans to be “net zero” but not provide any information that stands behind that claim. For example, do they mean net zero with respect to Scope 1, Scope 2, or Scope 3 emissions?

Even if they haven’t made such statements themselves, companies often operate in jurisdictions that have made commitments, such as to the Paris Agreement, that could lead to regulatory or economic changes within those locations. I’ve asked staff to consider which data or metrics those companies might use to inform investors about how they are meeting those requirements.

With regard to applicable standards for disclosure, Gensler noted that many commenters referred to the Task Force on Climate-related Financial Disclosures (TCFD) framework, and he has “asked staff to learn from and be inspired by these external standard-setters.”

Gensler went on to address disclosure by funds that market themselves as “green,” “sustainable,” “low-carbon.”

While Gensler did not address the timing for climate risk disclosure proposals, all of the tea leaves point to proposed rules being considered before the end of 2021.

Dave Lynn