S.E.C. Votes For Mandatory Climate Disclosure: Now What?

The question now is whether the S.E.C. is the right agency to police these disclosures in the years to come.
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Editor’s Note: As ESG governance and disclosure enters a new, more intense phase, we’ll be hosting a one-day update session focused on the most critical issues for public company board members May 5, 2022. Join Us >

After months of negotiating the details, the U.S. Securities and Exchange Commission on Monday voted 3-1 to propose tough new climate requirements for publicly-traded companies, culminating a years-long push to make so-called ESG metrics a formal part of corporate disclosure.

Under the proposal, which will be open for public comment over the next 60 days, companies would be required to spell out the greenhouse-gas emissions from their own operations as well as getting independent audits of their estimates, in much the same way they now must account for financial results.

As the Wall Street Journal reported, they would also, in some cases, need to report out in S.E.C. filings the emissions for not only their own companies, but those of their supply chains and consumers, known as Scope 3 emissions. An official told the paper that under the proposal, most Fortune 500 companies would likely need to report Scope 3 information to the S.E.C.

“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,” SEC Chair Gary Gensler wrote in a statement. “Companies and investors alike would benefit from the clear rules of the road proposed in this release. I believe the S.E.C. has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance.”

Critics of S.E.C. involvement say the nation’s investing watchdog has dubious jurisdiction when it comes to measuring environmental standards among companies.

The S.E.C.’s approach under Gensler is part of a larger push by the Biden administration to involve the federal government far more in the fight against climate change, citing it as a major risk to the financial system.

Many companies have said over the past few years that they would welcome clarity—and a centralized set of metrics—amid an onslaught of confusing ESG disclosure “frameworks” that pummel their IR departments with endless, differing requests for information.

The question now is whether the S.E.C. is the right agency—or will prove to be the right agency—to police these disclosures in the years to come.

“Setting climate policy is the job of lawmakers, not the S.E.C., whose role is to facilitate the investment decision-making process,” former S.E.C. chair Jay Clayton wrote in a Oped for the Wall Street Journal on Sunday. “Taking a new, activist approach to climate policy—an area far outside the S.E.C.’s authority, jurisdiction and expertise—will deservedly draw legal challenges. What’s worse, it puts our time-tested approach to capital allocation, as well as the agency’s independence and credibility, at risk.”


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