The SEC's Climate Rule Background
Pulling It All Together
The proposed Climate-Related Disclosures Rule from the United States SEC (Securities and Exchange Commission) has been under development for many years. In March of this year the agency released their proposed rule to do with climate-related disclosures.
The document is daunting — it is 490 pages long, and it references other standards that are almost as lengthy and as dense. The rule also references similar rules from other nations, including the U.K. and the European Union. This means that one of the most important functions of the SEC rule is to knit many of these different standards into one publication. Because the SEC rule has to be followed — it will be a legal requirement — it is likely that it will become a standard and that it will be used in situations where the SEC has no actual authority.
In previous posts we have reviewed the Introduction to the proposed rule. We are up to page 45. At this point the proposal references other sources of information, and standards prepared by other organizations just discussed. These references are important. Therefore, this week’s posts discusses some of these outside organizations and describes how their work fits into the SEC’s proposed rule. Further detail to do with some of these organizations will be provided in future posts.
IPCC (Intergovernmental Panel on Climate Change)
The IPCC provides detailed technical reports and forecasts to do with the causes and impacts of climate change. Its latest reports are part of its Sixth Assessment series. The IPCC’s findings provide a basis and justification for agencies such as the SEC who are making rules to do with climate change.
The following links provide further information to do with the IPCC.
Greenhouse Gas Protocol
FSOC (Financial Stability Oversight Council)
This Council is a part of the U.S. Department of the Treasury. It issued the following statement as part of a its Report on Climate-Related Financial Risk (2021) on October 21, 2021.
The Financial Stability Oversight Council (FSOC) has released a new report in response to President Biden’s Executive Order 14030, Climate-related Financial Risk. For the first time, FSOC has identified climate change as an emerging and increasing threat to U.S. financial stability.
TCFD (Task Force on Climate-related Financial Disclosures)
The Task Force on Climate-Related Financial Disclosures was established in December 2015 with the goal of developing a set of voluntary climate-related financial risk disclosures. These disclosures would ideally be adopted by companies which would help inform investors and other members of the public about the risks they face with regard to climate change.
The TCFD was formed by the Financial Stability Board (FSB) as a means of coordinating disclosures among companies impacted by climate change. Disclosure recommendations are structured around four thematic areas that represent core elements of how organizations operate: governance, strategy, risk management, and metrics and targets.
The following quotation is from the ‘About’ page of the TCFD web site.
One of the essential functions of financial markets is to price risk to support informed, efficient capital-allocation decisions. To carry out this function, financial markets need accurate and timely disclosure from companies. Without the right information, investors and others may incorrectly price or value assets, leading to a misallocation of capital.
The Financial Stability Board (FSB) created the TCFD to develop recommendations on the types of information that companies should disclose to support investors, lenders, and insurance underwriters in appropriately assessing and pricing a specific set of risks—risks related to climate change.
The work of this important organization will be described in more detail in future posts.
ISSB (International Sustainability Standards Board)
The ISSB is part of the IFRS Foundation — a not-for-profit international organisation responsible for developing a single set of high-quality global accounting and sustainability disclosure standards, known as IFRS Standards.
The intention is for the ISSB to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.
Other Reference Sources
The SEC cites many other information sources, as shown in the following quotation taken from the proposed rule.
. . . a diverse group of third parties has developed climate-related reporting frameworks seeking to meet investors’ informational demands. These include the Global CDP (formerly the Carbon Disclosure Project), Climate Disclosure Standards Board (“CDSB”), Value Reporting Foundation (formed through a merger of the Sustainability Accounting Standards Board (“SASB”) and the International Integrated Reporting Council (“IIRC”).
Few Technical Sources
The SEC says of itself that it is an,
. . . oversight agency responsible for regulating the securities markets and protecting investors.
Hence, most of the organizations just described are to do with financial reporting. The SEC provides relatively information on technical issues. So, for example, the agency does not weigh in on issues such as hydrogen versus batteries as a source of power for automobiles. Nor does the agency get involved in the debates to do with the use of nuclear power.
Yet, reporting climate-related information is only a beginning. Once a company has described where it stands with regards to greenhouse gas emissions it then needs to tell investors what it intends to do to reduce those emissions. In the limit, the company needs to develop a program for reaching Net Zero emissions by a specific date, such as the year 2050. Meeting the SEC’s requirements is only the first step on an emissions-reduction journey.