SEC proposes new rules for mandatory environmental disclosure

sec proposed new rules
For decades, the U.S. Securities and Exchange Commission has been debating whether to require companies to incorporate environmental risks and impacts into their mandatory disclosures. In some ways, that train has left the station and the SEC is the caboose.

In recent years, the European Union, the Singapore Monetary Authority (SAM), and others have adopted “report or explain” requirements. While there may be vigorous debate here in the U.S. about whether companies should be required to disclose their environmental performance and mitigation plans, in our global economy once a company has disclosed in one market, it has disclosed in all markets. The SEC proposes a phased approach to adopting environmental disclosure through Scope 3. This approach would bring the U.S. into better alignment and prevent a derailment of efforts to meet the global commitments of the Paris Agreement.

Why is the SEC the right agency to carry this effort forward? Financial risk forecasting and insurance models show that by mid-century, the world stands to lose approximately 10% of total economic value from climate change if temperature increases stay on their current trajectory.[i] These losses will be sustained not only through physical risks, such as property and infrastructure damage, but also in transition risks—the risks that are incurred when strategies rely on assumptions based in past rather than future environmental conditions. Transition risks include:

  • Costs of adopting more sustainable technologies (or the reputational penalty or operational risk of being the last to do so)
  • Disruptions to infrastructure and ecosystem services from continued extreme weather disruptions
  • Exposure to litigation related to environmental impacts

With a new global agreement at COP26 reaffirming commitments to contain global warming at 1.5 degrees Celsius, companies that enact tougher anti-pollution practices will not only get ahead of inevitable regulation but may gain competitive advantage as first movers also.

The SEC rules for mandatory climate-related disclosures, which are currently moving toward a 60-day review period, are just the most recent in a global trend toward accounting for the material financial risks that result from climate change and extreme weather events. The SEC’s proposed rule amendments would require a domestic or foreign companies issuing securities in U.S. financial markets to include in their Form 10-K and other disclosures information including:

  • Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy, and outlook;
  • The registrant’s governance of climate-related risks and relevant risk management processes;
  • The registrant’s greenhouse gas (GHG) emissions, which, for accelerated and large accelerated filers and with respect to certain emissions, would be subject to assurance;
  • Certain climate-related financial statement metrics and related disclosures in a note to its audited financial statements; and
  • Information about climate-related targets and goals, and transition plan, if any.

The proposed disclosures are similar to those that many companies already provide based on broadly accepted disclosure frameworks[ii], such as the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol (GGP).[iii]

Having standardized metrics for climate reporting presents positive implications for financial markets by providing investors more complete and accurate information by which to evaluate form performance. I discussed this topic with a panel of experts at last week’s the virtual International Corporate Citizenship Conference, in a session called Signal from the noise: The role of corporate citizenship in financial markets. We touched on the realities of climate change, its risks to business, and the complexities of climate-related reporting.

“If our environment and ecosystems don't survive, we won't be around either. Greenhouse gases are quantifiable. According to the SEC, they are also material—and material risks must be disclosed,” said R. Paul Herman, CEO of HIP Investor. “…All of these factors are knowable, yet many of them are not on the financial statements. We need science-based targets for climate action.”

“In an unregulated environment, we cannot be sure companies are reporting all environmental metrics. Without any standard disclosure, you can't put two investors together who look at the same set of metrics.” added Evan Harvey, global head of sustainability at Nasdaq. “In an unregulated environment, we cannot be sure companies are reporting all environmental metrics. Without any standard disclosure, you can't put two investors together who look at the same set of metrics.”

“Metrics need to be well-defined, so investors and other stakeholders can compare in different contexts, sectors, and industries. It is a challenge to compare when we have too many indicators that can be reported—or not—by choice,” concluded Nelmara Arbex, partner, KPMG Brazil. “We have never been so close to having mandatory disclosure regulations as we are today. I hope that will lead us to a more clear and global standard, so that companies will really know what to report.”

Now that the process has been set in motion for required and consistent disclosure of climate-related metrics in the U.S., what’s next for companies headquartered there—and the rest of the world? We will continue this conversation and many others next month in Boston at the in-person International Corporate Citizenship Conference on April 24-26. There’s still time to register to join us.

[i] Swiss Re. (2021, April 22). The economics of climate change.