A Glimpse into Required Climate Risk Disclosure Considerations by the SEC

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On July 28, Securities and Exchange Commission (SEC) Chair Gary Gensler delivered remarks at the Principles for Responsible Investment’s Climate and Global Financial Markets Webinar.  In his remarks, he offered a glimpse of responses received by SEC Commissioner Allison Herren Lee to her March 2021 call for input on climate change disclosures.  (See our recent blog post summarizing recent efforts by the Biden administration.) Chairman Gensler also covered some of the items he has asked the Staff to consider as part of its proposal for mandatory climate risk disclosure to be developed by the end of this year.

Chairman Gensler noted that more than 550 unique comment letters were submitted in response to Commissioner Lee’s statement on climate disclosures in March. He pointed out that three out of every four of these responses supported mandatory climate disclosure rules.

The demand for climate risk disclosure is strong and supports Chairman Gensler’s simple rationale for the SEC’s recent focus on climate risk disclosure – “So why am I talking about climate risk? Simple: because investors are . . . Investors are looking for consistent, comparable, and decision-useful disclosures so they can put their money in companies that fit their needs.”  Required climate risk disclosure might help bring the clarity and consistency that investors have been seeking in this regard.

To that end, Chairman Gensler offered some insight as to what the Staff is considering as part of its proposed mandatory climate risk disclosure:

Disclosure that is consistent and comparable.

As Chairman Gensler stated, the consistency with which issuers report information leads to comparability between companies.

Disclosure in 10-K Reports.

The Staff is considering whether to require this disclosure within a registrant’s annual report on Form 10-K, alongside other information that investors use to make their investment decisions.

Information that is “decision-useful”

Decision-useful disclosure would contain “sufficient detail so investors can gain helpful information,” rather than “simply generic text.” To that end, Chairman Gensler directed the Staff to consider various qualitative and quantitative information about climate risk that investors either currently rely on or believe would help them make investment decisions going forward.

  • Qualitative disclosures could address fundamental questions, such as how the company’s leadership manages climate-related risks and opportunities and the role of these factors in the company’s strategy.
  • Quantitative disclosures may include metrics related to greenhouse gas emissions, financial impacts of climate change, and progress toward climate-related goals. Concerning greenhouse gas emissions, the Staff has been asked to make recommendations about how companies might disclose their Scope 1 and Scope 2 emissions, along with whether to disclose Scope 3 emissions — and if so, how and under what circumstances.

Specific Industries

Chairman Gensler has asked the Staff to consider whether there should be certain metrics for specific industries, such as banking, insurance, or transportation.

Existing Frameworks

In the 550+ comment letters received this year, Chairman Gensler noted that, among other frameworks and standards, many commenters referred to the Task Force on Climate-related Financial Disclosures framework.  Regarding utilizing existing standard-setters, Chairman Gensler noted he has asked the Staff to “learn from and be inspired by” them, though the SEC should propose rules that are appropriate for the climate risk disclosure regime for U.S. markets, consistent with prior generations for other disclosure regimes.  That is consistent with previous views expressed by the Staff.  (See our recent blog post discussing the distinction between potential SEC Mandates and existing standard-setters.)

The Staff’s consideration of required climate-related disclosure appears thoughtful, responsive to investor concerns, and catered to U.S. markets.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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