SEC chair Gary Gensler has given issuers a heads up on when they can expect to see the agency’s plans for requiring companies to report on climate risk and what that may entail.
In remarks to the Principles for Responsible Investment last week, Gensler said he has asked the SEC staff to develop a mandatory climate risk disclosure rule proposal by the end of the year.
He outlined elements he wishes to see in such disclosures, including that they are consistent and comparable. ‘It’s sort of like the Olympics,’ Gensler said. ‘Fans can compare athletes across heats, countries and generations. It’s not like some sprinters run a 100-meter dash and others run 90 meters. Investors today are asking for that ability to compare companies with each other… When disclosures remain voluntary, it can lead to a wide range of inconsistent disclosures.’
Gensler said investors benefit most when disclosures are ‘decision-useful’ in that they have sufficient detail to convey helpful information rather than being generic text. With that in mind, he has asked SEC officials preparing the draft rule to consider whether climate-related disclosures should be filed in the Form 10K, where he said they would reside with other information used to make investment decisions.
Along the same lines, he has asked the staff to consider various qualitative and quantitative information about climate risk that investors either already rely on or think would help them make investment decisions in the future.
‘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,’ Gensler explained. ‘Quantitative disclosures could include metrics related to greenhouse gas [GHG] emissions, financial impacts of climate change, and progress towards climate-related goals.’
He noted that some companies voluntarily disclose around Scope 1 and Scope 2 GHG emissions – those from a company’s own operations – but that investors are seeking information on Scope 3 emissions, those of other companies in an issuer’s value chain.
General Electric (GE) recently announced, for example, a commitment to be responsible for net-zero emissions of GHG by 2050 – including Scope 3 emissions. The announcement came a few months after an overwhelming percentage of GE shareholders, with the backing of the company’s board, voted to approve a proposal seeking a report on its efforts to achieve net-zero GHG emissions.
Gensler said he has asked SEC officials 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.’ He has also asked those preparing the rule proposal 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,’ Gensler said. ‘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.’
He noted that many companies have announced their intentions to reduce their GHG emissions by a certain date, including making net-zero pledges, but that at present they could announce such plans without providing information to back up the claims. ‘For example, do they mean net zero with respect to Scope 1, Scope 2 or Scope 3 emissions?’ he said.
GE is among those to provide details. Announcing its net-zero commitment in the company’s sustainability report, CEO and board chair Lawrence Culp wrote: ‘These pages show the investments we are making in both our current products and breakthrough technologies. We also recognize the importance of measurement and target-setting to drive progress in reducing emissions over a shorter time horizon. We plan to continue developing and to communicate details about more specific, nearer-term GE [GHG] reduction metrics and targets that include Scope 3 emissions.’
Commissioner Allison Herren Lee in March asked for feedback on climate disclosures, and Gensler noted that of the 550 unique comment letters submitted, three quarters supported mandatory rules.
‘Among other frameworks and standards, many commenters referred to the [TCFD] framework, which was recently endorsed by the Group of Seven,’ Gensler said. ‘I’ve asked [the] staff to learn from and be inspired by these external standard-setters. I believe, though, we should move forward to write rules and establish the appropriate climate risk disclosure regime for our markets, as we have in prior generations for other disclosure regimes.’