CalSTRS is pressing the SEC to go further with its climate risk disclosure plans by, among other things, throwing a wider net to take into account greenhouse gas (GHG) emissions across companies’ value chains.
The SEC in March proposed landmark rule changes that would require companies to disclose information about their governance of climate-related risks and how any climate-related risks have had or are likely to have a material impact on their business.
In addition, the changes would require companies to disclose information about their own GHG emissions (Scope 1) and indirect emissions from buying electricity (Scope 2). Companies would have to disclose GHG emissions from upstream and downstream activities in their value chains (Scope 3) – but only if material or if the company has set a GHG emissions target or goal that includes Scope 3 emissions.
In one of thousands of comment letters filed, CalSTRS welcomes the proposal, and says it draws on TCFD guidance and the requirement for Scope 1 and Scope 2 GHG disclosure, which it says ‘will generate the reliable and comparable data we need to replace the expensive estimates investors have been forced to rely on.’
But the teachers’ retirement system also outlines a blueprint for additions to the plan. Kirsty Jenkinson, investment director, and Aeisha Mastagni, portfolio manager, urge the commission to add Scope 3 to the GHG emissions reporting requirement for all registrants rather than just those that reference Scope 3 emissions in their targets or state that such emissions are financially material.
‘Scope 3 emissions give investors important signals about the decisions corporate managers make in day-to-day business,’ write Jenkinson and Mastagni. ‘These include use of sold products, indicating how a company develops its total addressable market or how a company’s product portfolio and design can meet customer demand and market expectations for low-carbon solutions – a material question in the company’s ability to capture long-term opportunities.
They continue: ‘We worry that if the rule is finalized as written, companies may retract their previously disclosed goals and guidance and the rule could have a chilling effect on any new companies disclosing Scope 3-related goals.’
The CalSTRS officials acknowledge there is ‘a great deal of estimation’ involved in calculating emissions from the use of a company’s products. But they add that ‘Scope 3 emissions disclosures would help investors (and corporate leaders) evaluate the management of a company’s decisions against a decarbonizing world.’
‘While the SEC’s proposed climate disclosure rules would provide more reliable, consistent and comparable information to investors, inclusion of all company emissions would provide a level playing field for investors to better understand how climate impacts risk and return across our global investment portfolio,’ Mastagni says in a separate statement.
CalSTRS would also like the SEC to extend attestation of GHG emissions requirements to smaller companies. ‘Attestation of emissions is relevant for large companies and small companies alike,’ write Jenkinson and Mastagni. ‘Attestation requirements should cover Scopes 1, 2 and 3. Companies and auditors tell us they are equipped to measure and assure Scope 3 emissions today. [GHG] emissions are the basic unit of input for all our individual company, industry and market climate risk assessments, and our decarbonization forecasts rely on this basic unit.
They add: ‘We need reliable numbers for small companies as well as for large companies; we have the same responsibility to vote proxies and monitor small companies as we do large companies. A phase-in schedule could provide more time for non-accelerated filers and smaller companies to reach limited assurance and later reasonable assurance than the one and two years, respectively, afforded to accelerated filers.’
CalSTRS’ other request is that the SEC, in addition to using TCFD guidance as part of its proposed requirements, consider requiring the use of the IFRS climate standard once it is released by the International Sustainability Standards Board (ISSB). ‘Use of the ISSB climate standard will provide decision-useful information about material environmental and social risks for global investors and reduce the reporting burden on companies registered for trade in multiple jurisdictions,’ write Jenkinson and Mastagni.
The IFRS Foundation announced the creation of the ISSB at COP26 last November, with the aim of developing a comprehensive global baseline of investor-focused sustainability disclosures for the capital markets. The foundation and GRI earlier this year said they will join each other’s consultative bodies on sustainability reporting activities.