The U.S. Securities and Exchange Commission (SEC) is considering a proposal to mandate climate risk disclosures by public companies. In a statement released on March 21, 2022, SEC Chair Gary Gensler said that the proposal, if adopted, "would provide investors with consistent, comparable, and decision-useful information for making their investment decisions and would provide consistent and clear reporting obligations for issuers."
In a dissenting statement, SEC Commissioner Hester M. Peirce said (her italics): "The proposal turns the disclosure regime on its head. Current SEC disclosure mandates are intended to provide investors with an accurate picture of the company's present and prospective performance through managers' own eyes ... The proposal, by contrast, tells corporate managers how regulators, doing the bidding of an array of non-investor stakeholders, expect them to run their companies."
- The SEC is proposing to mandate various disclosures related to potential climate change risks faced by public companies.
- SEC Chair Gary Gensler and SEC Commissioner Allison Herren Lee issued statements in favor. Gensler and Lee see these as material disclosures sought by growing numbers of investors.
- SEC Commissioner Hester M. Peirce issued a dissenting statement. Peirce sees this as costly regulatory overreach that will hurt investors, the economy, and the SEC, instead benefitting a growing "climate-industrial complex."
The Proposed Climate Risk Disclosure Rules
The proposed disclosures would include a registrant's greenhouse gas emissions, a commonly used metric to assess a registrant's exposure to such risks. More specifically, they would require disclosures about: 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 reports; how climate-related risks have affected or are likely to affect strategy, business models, and outlook; and the impact of climate-related events on the line items of financial statements, and on financial estimates and assumptions.
The proposed rules also would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions and indirect emissions from purchased electricity or other forms of energy. Also, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain.
The Case For
In his statement supporting the proposal, SEC Chair Gary Gensler said: "Over the generations, the SEC has stepped in when there's significant need for the disclosure of information relevant to investors' decisions. Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. That principle applies equally to our environmental-related 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 UN Principles for Responsible Investment (PRI) have more than 4,000 signatories that managed more than $120 trillion as of July 2021.
In a similar vein, Gensler cited findings that almost two-thirds of companies in the Russell 1000 Index, and 90% of the 500 largest companies therein, published sustainability reports in 2019 using various third-party standards, including information about climate risks. He also indicated that SEC staff, in reviewing nearly 7,000 annual reports submitted in 2019 and 2020, found that one-third included some disclosure about climate change.
The Case for New Climate Disclosures
SEC Chair Gary Gensler: "Companies and investors alike would benefit." SEC Commissioner Allison Herren Lee: "[O]ne of the most momentous risks to face capital markets since the inception of this agency."
Gensler also commented: "Companies and investors alike would benefit from the clear rules of the road proposed in this release. I believe 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."
SEC Commissioner Allison Herren Lee also issued a statement in support of the proposal. Her opening paragraph stated, in part: "climate change risk [is] one of the most momentous risks to face capital markets since the inception of this agency. The science is clear and alarming, and the links to capital markets are direct and evident."
Later on, Lee commented: "The pandemic provided a timely reminder that a crisis with roots outside financial markets can, and often will, send shock waves directly through our markets ... With climate change, we have ample, well-documented warning of potentially vast and complex impacts to financial markets. Physical and transition risks from climate change can 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 her dissenting statement, "We are Not the Securities and Environment Commission - At Least Not Yet." It is a highly detailed rebuttal running 6,351 words and including 74 footnotes. The first five sections argue, in turn: existing rules already cover material climate risks; the proposed rule dispenses with materiality in some places and distorts it in others; the proposal will not lead to comparable, consistent, and reliable disclosures; the SEC lacks authority to propose this rule; and the SEC underestimates the costs of the proposal.
The Case Against New Climate Disclosures
SEC Commissioner Hester M. Peirce: "The placard at the door of this hulking green structure will trumpet our revised mission: 'protection of stakeholders, facilitating the growth of the climate-industrial complex, and fostering unfair, disorderly, and inefficient markets.'"
In the sixth section, Peirce argues that the proposed rule would hurt investors, the economy, and the SEC. In its opening paragraph, she states, in part: "It is important to remember, though, that noble intentions, once baked into complex regulatory plans, often have ignoble results. This risk is considerably heightened when the regulatory complexity is designed to push capital allocation toward politically and socially favored ends, and when the regulators designing the framework have no expertise in capital allocation, political and social insight, or the science used to justify these favored ends."
In her conclusion, Peirce states: "We are here laying the cornerstone of a new disclosure framework that will eventually rival our existing securities disclosure framework in magnitude and cost and probably outpace it in complexity. The building project upon which we are embarking will consume our attention and enrich many, as any massive building project does. The placard at the door of this hulking green structure will trumpet our revised mission: 'protection of stakeholders, facilitating the growth of the climate-industrial complex, and fostering unfair, disorderly, and inefficient markets.' This new edifice will cast a long shadow on investors, the economy, and this agency. Accordingly, I will vote no on laying the cornerstone."