SEC Wants Transparency On Greenhouse Gas Emissions
Oil and gas companies have suppressed information about health and environmental impacts of the fossil fuel industry for decades. Even the Environmental Protection Agency has lied about many risks associated with industrial activity. Now, the Security And Exchange Commission (SEC) wants to help investors get the information they need to evaluate environmental risks.
The proposed rule changes require registered companies to include climate-related data in their public statements, including information about climate-related risks that are likely to have a material impact on their business, results of operations, or financial condition. They must disclose the company’s greenhouse gas emissions. Companies that have set emissions goals or announced other plans to transition away from fossil fuels must provide action plans.
Companies must disclose greenhouse gases generated by suppliers and partners, known as Scope 3 emissions, if they are material or included in any emissions targets the company has set. Progressives and activist investors have pushed for the SEC to require Scope 3 emissions disclosure to hold companies accountable for all the carbon dioxide and methane they help generate. Even companies that have set greenhouse gas targets are not counting Scope 3 emissions, yet.
SEC chair Gary Gensler said the agency is responding to investor demand for consistent information on how climate change will affect the financial performance of companies. Corporations also have asked for better rules.
“I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers,” said SEC Chair Gary Gensler. “Investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions. Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. The SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance. Today’s proposal thus is driven by the needs of investors and issuers.”
Republicans claim that the SEC is reaching beyond its authority. The U.S. Chamber of Commerce agrees.
“Answers begin with the truth,” said Gary Chandler, CEO of Crossbow Communications. “Most corporations have never accounted for the environmental costs or the public health costs of their business models. Full disclosure is part of free-market capitalism.”
Insurance companies also will appreciate the transparency. The proposed rule changes require public companies to disclose information about:
- The registrant’s governance of climate-related risks and relevant risk management processes;
- How climate-related risks have had, or are likely to have, a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term;
- How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and
- The impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.
The proposed rules require companies to disclose information about their direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant must disclose GHG emissions from upstream and downstream activities in its supply chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.
Better data provides investors with more accurate information to analyze a company’s exposure to, and management of, climate-related risks, and transition risks. The proposed rules would provide a safe harbor for liability from Scope 3 emissions disclosure and an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies. The proposed disclosures are similar to those required by the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. All emission disclosures would be phased in between 2023 and 2026.
Legal challengers will argue that the SEC doesn’t have the authority to require Scope 3 emissions data. Proponents claim that the SEC has the authority because investors need better data to evaluate risk versus reward.
A record $71 billion flowed into U.S. environmental, social and governance-focused funds in 2021. Investors are clearly interested in safer harbors in this risk-averse stock market.
It’s unclear whether the SEC will demand the same compliance from foreign companies listed on American exchanges. Of course, the rule would have no impact on private companies, partnerships and sole proprietors.