The U.S. Securities and Exchange Commission released its draft rule on climate-related risk disclosure Monday.
Despite major exchanges mandating ESG disclosures, today, neither the Nasdaq nor New York Stock Exchange in the U.S. require ESG reporting as a listing rule. In this newly proposed rule, companies would be required to provide Scope 1, 2 (direct) and 3 (indirect, downstream) greenhouse gas emissions disclosures, as well as any material climate-related goals, progress and risk therein.
More specifically, the proposed rule changes would require a registrant to disclose information about: its governance of climate-related risks and relevant risk management processes; how and what climate-related risks have a “material impact” on the business; 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), as well as climate transition activities.
While companies with carbon-intensive business models would be obligated to report, “smaller reporting companies” (generally a company with less than $100 million in annual revenues), are exempt.
The rule, if enacted, would follow a phase-in period. The changes already align with broadly accepted disclosure frameworks, like the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol, in hopes of further standardizing reporting.
Independent verifications are required for direct emissions.
“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,” SEC Chair Gary Gensler, said in a press statement. “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.”
Gensler said investors and issuers stoked the demand, but fashion would argue many stakeholders — among them consumer and activist groups — contributed.
The SEC has periodically evaluated its regulation of climate change disclosures. In 2010, it provided voluntary guidance to issuers on climate-related risks in its “2010 Climate Change Guidance,” outlining ways in which climate change may trigger disclosure obligations.
Some aspects of the rule, like what constitutes material risk, may be contended.
“The proposed language around Scope 3 emissions is somewhat vague and disappointing given this is where the majority of fashion’s emissions lie. The proposal notes that Scope 3 emissions would [be] mandatory only if output is material — so the question is how they are defining material? My sincere hope is that the fashion industry is ultimately not given an ‘out’ when and if the final rule is passed,” Kristen Fanarakis, a former trader on Wall Street and founder of Senza Tempo fashion, told WWD.
But advocacy groups are already welcoming the change.
“The new climate disclosure rule is truly a watershed moment in responding to investor demand for accurate climate disclosure,” said Danielle Fugere, president and chief counsel of shareholder advocacy nonprofit As You Sow. “Clear and standardized reporting of greenhouse gas emissions is the bedrock of sound investor decision-making. The new rule provides investors with more robust, complete, and comparable disclosure of risk and the emissions data to determine which companies are aligning their business activities with Paris targets and minimizing transition risks.”
The release of the draft rule will be published on sec.gov and in the Federal Register where the comment period lasts for 30 days after publication in the Federal Register, or 60 days after the date of issuance and publication on sec.gov, whichever period is longer.