SEC Climate-Related Disclosures Introduction: Part 1
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This post is the second in a series to do with the proposed rule from the United States Securities and Exchange Commission (SEC) to do with climate change disclosure. The first post in the series — SEC Climate-Related Disclosures for Investors — analyzed the press release that accompanied the release of the proposed rule. In this post we review the first part of the Introduction to the rule.
The rule is 460 pages long, so it is not realistic to reproduce its contents in their entirety in this blog series. Therefore, we show sections of the rule followed by a discussion as to their meaning and impact. The page numbers provided match those in the SEC’s document, located at https://www.sec.gov/rules/proposed/2022/33-11042.pdf.
We are proposing to require registrants to provide certain climate-related information in their registration statements and annual reports, including certain information about climate-related financial risks and climate-related financial metrics in their financial statements. The disclosure of this information would provide consistent, comparable, and reliable—and therefore decision-useful—information to investors to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.
The SEC is concerned with financial securities not with other climate issues such as flooding or refugee management. Hence this rule has a financial focus.
The SEC aims for comparable information. This is an important goal because it will allow investors to compare one company with another. But it will be a goal that is difficult to achieve. The complexity and subjectivity associated with Scope 3 emissions, for example, will make it difficult to create “apples-to-apples” comparisons.
We are concerned that the existing disclosures of climate-related risks do not adequately protect investors . . . registrants often provide information outside of Commission filings and provide different information, in varying degrees of completeness, and in different documents and formats— meaning that the same information may not be available to investors across different companies.
The material on this page of the proposed rule emphasizes the need for consistency of reporting.
. . . we understand investors often employ diversified strategies, and therefore do not necessarily consider risk and return of a particular security in isolation but also in terms of the security’s effect on the portfolio as a whole, which requires comparable data across registrants.
The SEC is alluding to systems issues here. Climate change is not a stand-alone topic — it is one that is linked in complex ways to many other issues such as oil depletion, biosphere destruction, and long-term drought.
Transitions to lower carbon products, practices, and services, triggered by changes in regulations, consumer preferences, availability of financing, technology and other market forces, can lead to changes in a company’s business model.
Once more, the SEC is talking about how changes in technology can affect a company’s financials and climate-related reporting. As with so many other aspects of this rule the discussion and analysis is complex. For example, a company may introduce a new “green” technology that allows it to manufacture its product with less pollution, thus minimizing the Scope 3 impacts of both its customers and suppliers. This many have the consequence of increasing the company’s overall greenhouse gas emissions.
This proposal builds on the Commission’s previous rules and guidance on climate-related disclosures, which date back to the 1970s . . . Since that time, as climate-related impacts have increasingly been well-documented . . .
The SEC has been working on this rule for 50 years.
The words “well-documented” can be backed up by the Sixth Assessment reports published by the IPCC (see The IPCC and Its Reports).
Other commenters, however, questioned whether climate change posed a risk to companies or their investors. These commenters stated their belief that the assumptions underlying the assessment of the impact of climate change were too uncertain to permit companies to ascertain the real risks to their operations and financial condition caused by climate change.
As already mentioned, reports from the IPCC and other authoritative bodies lay to rest the idea the climate change is not happening. The chart below is taken from the IPCC’s Sixth Assessment, Working Group I report The Physical Science Basis. It shows that without human emissions global temperatures would have held steady for the last 200 years. However, human emissions have raised temperatures quickly. We are already at 1.3°C above the pre-industrial baseline, and are on track to reach the 1.5°C threshold by the year 2040 or earlier.
The comment to do with uncertain impacts is, however, valid. To reiterate: climate change is not a discrete, stand-alone topic. It is part of complex systems that contain many feedback loops, most of which are not fully understood, and many of which are not even identified.
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