Assets Under Management AUM

SEC plans to mandate climate risk disclosure

The U.S. Securities and Exchange Commission (SEC) is considering a proposal to mandate climate risk disclosure by public companies. In a statement issued on March 21, 2022, SEC Chairman Gary Gensler said the proposal, if adopted, “would provide investors with consistent, comparable and useful information to make their investment decisions and provide consistent and clear reporting obligations for issuers.”

In a dissenting statement, SEC Commissioner Hester M. Peirce said (in italics): “The proposal overturns the disclosure regime. The SEC’s current disclosure mandates are intended to provide investors with an accurate picture of the performance current and future business through managers’ own eyes… The proposal, by contrast, tells business leaders how regulatorsbidding on a range of non-investor stakeholders expect them to lead their businesses. »

Key points to remember

  • The SEC is proposing to mandate various disclosures related to potential climate change risks facing public companies.
  • SEC Chairman Gary Gensler and SEC Commissioner Allison Herren Lee made statements in support. Gensler and Lee see it as important information sought by a growing number of investors.
  • SEC Commissioner Hester M. Peirce issued a dissenting statement. Peirce sees it as a costly regulatory overrun that will hurt investors, the economy and the SEC, to the benefit of a growing “climate-industrial complex.”

Proposed rules on climate risk disclosure

The proposed disclosures would include a registrant’s greenhouse gas emissions, a measure commonly used to assess a registrant’s exposure to such risks. Specifically, they would require information on: risk management processes related to climate risk; how climate-related risks have had or are likely to have a material impact on the business and its financial reporting; how climate-related risks have affected or are likely to affect strategy, business models and outlook; and the impact of climate-related events on financial statement line items, as well as on financial estimates and assumptions.

The proposed rules would also require a registrant to disclose information about its direct greenhouse gas (GHG) emissions and indirect emissions from purchased electricity or other forms of energy. In addition, a reporter would be required to disclose GHG emissions from activities up and down its value chain.

The case for

In his statement supporting the proposal, SEC Chairman Gary Gensler said, “Over generations, the SEC has stepped in when there is a significant need for disclosure of information relevant to investor decisions. Our The main market of the 1930s is for investors to decide what risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. This principle also applies to our environmental disclosures, which date back to the 1970s.”

He indicated that investors with $130 trillion in assets under management (AUM) have requested such disclosures. He added that the United Nations Principles for Responsible Investment (PRI) had over 4,000 signatories managing over $120 trillion as of July 2021.

Along the same lines, Gensler cited findings that nearly two-thirds of companies in the Russell 1000 Index and 90% of its 500 largest companies published sustainability reports in 2019 using various third-party standards, including climate risk information. He also said that SEC staff, in reviewing nearly 7,000 annual reports submitted in 2019 and 2020, found that a third included information about climate change.

The Case for New Climate Disclosures

SEC Chairman Gary Gensler: “Companies and investors would benefit.” SEC Commissioner Allison Herren Lee: “[O]one of the most significant risks facing the capital markets since the establishment of this agency.”

Gensler also commented, “Companies and investors would benefit from the clear rules of conduct offered in this release. I believe the SEC has a role to play in the face of such a high level of demand for consistent and comparable information that could affect financial performance. The proposal is therefore driven by the needs of investors and issuers.”

SEC Commissioner Allison Herren Lee also released a statement in support of the proposal. Its opening paragraph stated in particular: “the risk of climate change [is] one of the most significant risks facing the capital markets since the creation of this agency. The science is clear and alarming, and the links to capital markets are direct and obvious.”

Later, Lee commented, “The pandemic was a timely reminder that a crisis with roots outside financial markets can, and often will, send shockwaves directly into our markets… With climate change, we have ample and well-documented warning of potentially large and complex impacts on financial markets Physical and transitional risks related to climate change may materialize in financial markets in the form of credit risk, market risk, insurance or hedging risk, operational risk, supply chain risk, reputational risk and liquidity risk, among others.”

The case against

SEC Commissioner Hester M. Peirce titled his dissenting statement, “We are not the Securities and Environment Commission – At least not yet.” It is a very detailed rebuttal of 6,351 words and includes 74 footnotes. The first five sections argue, in turn: existing rules already cover material climate risks; the proposed rule removes materiality in some places and distorts it in others; the proposal will not lead to comparable, consistent and reliable information; the SEC does not have the authority to propose this rule; and the SEC underestimates the costs of the proposal.

The Arguments Against New Climate Disclosures

SEC Commissioner Hester M. Peirce: “The sign at the door of this towering green structure will announce our revised mission: ‘protecting stakeholders, facilitating the growth of the climate-industrial complex, and promoting unfair markets , messy and inefficient.’ “

In the sixth section, Peirce argues that the proposed rule would harm investors, the economy, and the SEC. In her opening paragraph, she states, in part: “It is important to remember, however, that noble intentions, when incorporated into complex regulatory plans, often have despicable results. This risk is greatly increased when regulatory complexity is designed to push capital allocation for politically and socially privileged ends, and when the regulators designing the framework lack expertise in capital allocation, political and social insight. , or the science used to justify those preferred purposes.

In his conclusion, Peirce states, “We are laying here the cornerstone of a new disclosure framework that will eventually rival our existing securities disclosure framework in breadth and cost and likely exceed it in complexity. The construction project we engage in will consume our attention and enrich a lot, as any large-scale construction project does. The sign at the door of this towering green structure will announce our revised mission: “To protect stakeholders, facilitate the growth of the climate-industrial complex, and promote unfair, disorderly practices and inefficient markets. This new edifice will cast a shadow on investors, the economy and this agency. Consequently, I will vote no on the laying of the first stone.