On March 21, the US Securities and Exchange Commission (SEC) proposed a landmark rule that would require publicly traded companies to disclose climate-related information. If passed, the rule could have cascading effects, helping to bring transparency to capital markets and setting a baseline for future climate-related disclosure requirements.
The SEC’s proposed disclosure rule is partly based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), a globally-recognized framework that outlines how companies should report their climate governance, strategies, risk management processes, and metric and targets.
Since the SEC’s proposal dropped, there’s been discussion and debate about what it could mean for businesses. To help unpack the proposed law, Manifest Climate hosted a conversation with Ivan Frishberg, the chief sustainability officer at Amalgamated Bank, and Todd Phillips, the financial regulation and corporate governance director at the Center for American Progress. Here’s what we learned:
Companies should think beyond climate-related metrics
The SEC’s proposed rule will require businesses to think about their climate disclosures as more than just metrics. While tracking greenhouse gas (GHG) emissions is important, companies will also need to consider their climate strategies, oversight, and governance frameworks.
Instead of thinking of climate information as something that belongs in sustainability reports or brochures, businesses should look at this data as financial risk disclosures that need to be reported. The SEC proposal makes it clear that climate risks and opportunities need to be at the core of companies’ financial discussions. Moreover, the SEC’s proposal could also force more teams across companies to be climate competent and conscious, which is something that has been commonly relegated to corporations’ sustainability and marketing departments.
Investor pressure may encourage businesses to take climate action
The SEC’s proposal will only force companies to disclose climate-related information and will not require businesses to take action or develop transition plans with respect to climate risks. However, the disclosure proposal could result in market changes in which firms may start to see investors move their capital away from organizations that aren’t doing enough to address climate risks.
In many ways, investor pressure for companies has already taken place when it comes to voluntarily adopting climate disclosure frameworks, like the TCFD or the Partnership for Carbon Accounting Financials (PCAF). The SEC’s proposed rule could push businesses to pursue action to address climate risks if they’re scared that their share prices will drop or that investors will withdraw their financing. The climate disclosures proposed in the rule will also reveal whether companies’ climate targets and goals are legitimate since the proposal would mean there would be consistent, reliable, and comparable market information available.
Private companies could adversely be affected
While the SEC’s proposed rule will only apply to businesses that are publicly traded on US exchanges, there are a number of ways that private companies could experience spillover effects. For instance, public corporations that would fall under the proposed disclosure rule may ask their private company suppliers to provide them with emissions data to meet their reporting requirements.
However, private companies would not have to comply with any disclosure requirements on their own, nor would they need to report their climate-related information to the SEC. Still, it’s important for private companies to pay attention to the climate disclosure ecosystem and reporting requirements since this information is of interest to investors.
Climate disclosures must be data-driven and understood by auditors
Climate change is both a business risk and opportunity. As a result, organizations need to think about how they’re considering, managing, and responding to climate change. They also must think about what climate risk and opportunity means, in addition to how their current risk management procedures could address climate risks.
Firms need to be driven by data when it comes to producing their climate-related disclosures. Risk management teams will play a large role in aggregating the necessary climate risk data. Businesses will also need to make sure their auditors and accountants understand what’s in the SEC’s proposed climate disclosure rule so that they can properly prepare.
The SEC’s proposed climate disclosure rule could influence and shape other climate reporting requirements both within the US and internationally. Central bank regulators and stock exchanges around the world are already beginning to adopt the recommendations of the TCFD to ensure companies’ climate disclosures are consistent and comparable.
Moving forward, one next question centers around how the US federal reserve, which is responsible for mitigating risk, will come into play with regards to climate change. Since some industries don’t agree with the SEC’s climate disclosure proposal, it’s expected that some sectors will challenge it in court.
It’s also predicted that climate disclosures will continue to gain momentum worldwide in order to address climate change as a critical economic risk.