U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler confirmed that the commission is considering some adjustments to its long-anticipated upcoming climate risk disclosure rules for public companies, in an interview on CNBC.
In the interview, Gensler stressed the importance of the new rules in order to help protect investors, who he said are already making investments based on climate disclosures.
“It’s about bringing consistency and comparability to disclosures that are already being made about climate risk, and investors today seem to be making decisions about these disclosures.”
The SEC released its proposed climate disclosure rules in March 2022, which would 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’ operational climate footprint, and in some cases emissions emanating across their value chains. The updated rules are expected to be released in April.
The proposals have generated a significant amount of feedback, with Gensler noting nearly 15,000 comments the commission has received.
Commenting on a question regarding a recent Wall Street Journal article reporting that the SEC is considering easing the climate disclosure rules following the feedback, Gensler said:
“In each of our rulemakings we review all that (the public comments), think through the economics, the legal authorities that commenters have raised, and its quite customary to make adjustments.”
Two of the primary issues from the proposals that appear to have drawn significant attention in the feedback received by the SEC include a rule requiring climate costs to be reported if they represent more than 1% of a financial statement line item, and the requirement in some cases to report on emissions in company value chains beyond the company’s direct control, or Scope 3 emissions. Criticisms about these requirements include the high cost of providing these disclosures, suggestions of immateriality in some cases, and concerns about the ability to provide accurate information.
In a speech in late December, SEC Commissioner Hester M. Peirce, a critic of the rules, said:
“I understand why commenters would focus on Scope 3 disclosures and the one-percent financial statement metrics, given the anticipated expense and, in some cases, the impossibility of producing disclosures that are anything better than best guesses. That prospect casts fear into the hearts of people committed to producing high-quality disclosures for investors.”
Investors have made similar arguments. BlackRock for example, a long-time proponent of improved climate disclosures, has published comments on the proposals indicating that requirements that require detailed financial disclosures beyond those recommended by the TCFD would increase the cost to companies of complying with the new rules, and would decrease comparability across companies and regions, and also recommending a more flexible approach on Scope 3 in order to give companies a chance to develop Scope 3 resources and reporting capabilities.
Even if the SEC eases up on the rules in its proposals, however, many companies may find themselves required to provide Scope 3 details under other emerging disclosure regimes. The EU’s Corporate Sustainability Reporting Directive (CSRD), for example extends the reporting requirements to non-European companies that generate over €150 million in the EU, and a recent bill proposed in California would, if adopted, require companies with revenues greater than $1 billion who do business in the state to report annually on their emissions from all scopes, including across their value chains.
Asked if the investor reaction to the SEC proposals was being driven by political pressure, citing as an example the commentary from Republican Patrick McHenry, Chairman of the House Financial Services Committee in Congress when launching last week a working group on ESG “to combat the threat to our capital markets posed by those on the far-left pushing environmental, social, and governance (ESG) proposals,” Gensler said that the SEC’s actions focus only on protecting investors:
“We’re merit neutral, whether it’s crypto risk or climate risk, but we’re not investor protection-neutral or capital formation-neutral.”
“It’s not to us about anything achieving anything else but consistency and comparability in disclosures.”