BlackRock, the world’s largest asset manager, published a series of suggested changes to the U.S. Securities and Exchange Commission’s (SEC) proposed climate-related disclosure rules, including recommendations for a different approach in areas including Scope 3 emissions reporting and materiality considerations.
The SEC unveiled its proposed climate related disclosure rules in March of this year, which would for the first time require U.S. companies to provide information on climate risks facing their businesses, and plans to address those risks, along with metrics detailing the companies’ climate footprint including Scope 1, 2 and in some cases Scope 3 GHG emissions.
The proposals were initially opened to a 60-day comment period, which was later extended until June 17.
BlackRock has been a leading advocate in the investment industry over the past several years for improved and standardized climate-related reporting. The firm was a founding member of Task Force on Climate-Related Financial Disclosures (TCFD), whose recommendations form the foundation of most of the emerging climate disclosure regulations and standards. BlackRock CEO Larry Fink’s high-profile annual letters to CEOs have repeatedly asked corporate leaders to provide TCFD-aligned reporting, and the firm’s investment stewardship practice has set climate reporting as a key engagement priority.
In its comment letter to the SEC, and an accompanying white paper published on its website, BlackRock stated that its “views on corporate climate disclosure are broadly aligned with the SEC’s proposal,” but highlighted several areas in which it suggests the SEC “adopt a different approach.”
One of the key recommendations made by BlackRock is for greater alignment of SEC rules with the TCFD framework, noting that the SEC proposals in some areas require detailed financial disclosures beyond those recommended by the TCFD. According to the letter, the SEC requirements would increase the cost to companies of complying with the new rules, and would decrease comparability across companies and regions. BlackRock also recommends limiting companies’ liability, particularly in disclosure areas where methodologies are still evolving.
Another significant point of differentiation is the SEC’s requirements for reporting on Scope 3 emissions, or those beyond a company’s direct control, such as emissions across the supply chain or from use of products. These emissions very often account for the bulk of many companies’ carbon footprint. While the SEC’s Scope 3 requirements are less prescriptive than some other emerging disclosure systems, BlackRock advocates for a “flexible approach to rulemaking based on “comply or explain,” rather than mandating complete Scope 3 disclosures in annual and quarterly reports,” in order to give companies a chance to develop Scope 3 resources and reporting capabilities.
In its white paper accompanying its SEC comment letter, BlackRock explained its position on Scope 3 reporting, noting that the methodological complexity involved in tracking the emissions and the lack of direct company control impact the usefulness of Scope 3 disclosure, and recommending that regulators adopt a disclosure framework that accounts for the significant variation in Scope 3 materiality across categories and industries.
In its comment letter, BlackRock said:
“This disagreement is not to minimize Scope 3 emissions. As investors, we believe it is important to be able to evaluate companies’ assessments of their emissions across their value chain, or Scope 3 emissions, as such emissions could affect the economic viability of issuers’ business models. Climate risk and the economic opportunities from the transition are a top concern for our clients and a rapidly growing share of them have already committed to net-zero aligned portfolios. As investors, we use Scope 3 emissions as a proxy metric (among others) for the degree of exposure companies have to carbon-intensive business models and technologies. However, we do not believe the purpose of Scope 3 disclosure requirements should be to push publicly traded companies into the role of enforcing emission reduction targets outside of their control.”
BlackRock also suggests that the SEC’s proposals to require companies to report on certain issues such as internal carbon price, scenario analysis, transition plans targets and goal if the companies have adopted these measures be changed in order to not inadvertently dis-incentivize transparency on how companies are managing climate risk.