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Climate disclosure ‘rules of the road’ are coming from the SEC on Monday. Here’s what to know

March 17, 2022, 11:00 AM UTC

Imagine a 10-K. 

Peppered with legalese and marketing speak, a public company’s annual report is far from an enthralling read. Its dense welcome pages, the form language throughout, all the tables—none of it would seem to make for a great pick to sit down with in front of a warm fire. Unless you’re an investor, that is. Then, all those details—the company’s profits, expenses, legal beefs, controlling shareholders—become parts of a story that provide at least a glimpse into how companies think about some of the most pressing issues of the day, no matter how humdrum the writing. Its chapters are structured by the rules and guidance of Wall Street’s top regulator, which has long crafted such writing skeletons based on what investors are craving more information on. And their favorite genre of late—how companies are handling and contributing to the climate crisis—is about to stir up what could be the biggest change to corporate disclosures in the U.S. in decades. 

On March 21, the Securities and Exchange Commission is expected to propose a landmark climate risk disclosure rule that could require thousands of companies across corporate America to begin publicly reporting information about their environmental footprint, including greenhouse-gas emissions. If ultimately approved, the proposal would represent a watershed moment in the decades-long campaign steered by investors to get companies to fully understand just how hard their businesses may be hit by a changing world where devastating hurricanes, floods, and wildfires are only worsening—and cop to the role they’re playing in worsening those conditions.

“The reality is, climate change is here, now. Not tomorrow. We don’t need a time machine to see the effects of it; it’s all around us,” says Elizabeth Small, general counsel and head of policy in North America for the environmental disclosure nonprofit group CDP. “We need urgent action at an unprecedented scale, and that’s going to be required from all sectors of the global economy.”

An ESG risk evolves

For decades, going as far back as the 1970s, the SEC has been under pressure to require publicly traded companies to make environmental disclosures.

Widely viewed as little more than the advocacy work of environmental groups 50 years ago, the push has seen an explosion of buy-in from the traditional investment community of late, though—giving it new legs in Washington, D.C., as climate has emerged as a “material” matter.

Today, investors of all types—from pension funds like the California Public Employees’ Retirement System to sustainability-minded shops such as Trillium Asset Management to BlackRock, the world’s largest asset manager—are pushing for better disclosure. For investors, climate change is a twofold issue. On one front is the physical threat: Do you want to own stock in a Miami-based company whose headquarters could be swept away by rising tides, or buy a bond issued by an Iowa community bank whose branches sit in a flood zone that just keeps getting doused year in and year out? The other stems from the transition toward a low-carbon economy. Who will be left behind by not adapting? Who’s pulling ahead by inventing the next wave of green technology? 

“Climate risk is investment risk,” wrote BlackRock, which has more than $10 trillion in assets under management and controls a massive stake in just about every public company imaginable, to the SEC in June 2021. “It is our conviction that integrating assessment of climate-related considerations into our investment processes will result in better long-term risk-adjusted returns for our clients.”

Corporate America steps up

Staring down a mountain of investor pressure, companies have already been disclosing information about their environmental footprint for years now through a mix of different voluntary reporting frameworks like the Task Force on Climate-Related Financial Disclosures (TCFD), the Value Reporting Foundation, and CDP. Of the S&P 500’s members, for instance, about 80% of companies disclose environmental data through CDP, according to the group.

Investors have welcomed the new data over the years, but there’s a catch—not much of it is apples to apples.

A company reporting into the TCFD may not be disclosing the same information that another reporting framework requires, and, as a result, ESG data and ratings providers can show diverging conclusions on the same companies. Stacking up one competitor versus another can be an even bigger challenge. “[It’s] not consistent. It’s not comparable. It cannot be used by investors,” says Margarita Pirovska, director of policy at the Principles for Responsible Investment, of the information that’s available today. “The market needs more information about climate risks, about climate preparedness, about climate performance.” 

Enter the SEC. 

Mandatory climate disclosures inbound

As the standard setter for corporate disclosure across the U.S. public markets, the SEC finally figures to offer the clarity that investors and companies have been itching for when grappling with climate disclosures. And so far, corporate America has been supportive of the SEC’s ambitions to establish a mandatory regime.

In comment letters to the regulator, Salesforce, Etsy, Apple, and Uber all wrote in support of the measure. Uber even went so far to make it clear that standardization would be a load off its back, too, considering the excess demand for ESG data has “created a myriad of cumbersome and time-consuming commitments for companies.”

“The fact that this rule is coming out is a pretty momentous occasion for investors and the SEC,” Satyam Khanna, who worked in 2021 as a senior policy adviser for climate and ESG to the SEC’s then–acting chair Allison Herren Lee, tells Fortune. “The SEC is responding to a groundswell of interest from investors and companies alike for clarity in the space, and I think you see a pretty remarkable consensus in the market on the fact that some basic rules of the road are needed on climate risk that have been lacking for a long time.” 

A spokesperson for the SEC did not respond to a request for comment from Fortune

Plenty of concerns are still bubbling up about the SEC’s plans, though.

In an interview with Fortune, Tom Quaadman, executive vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, questioned how the regulator plans to handle scope 3 emissions and whether it needs to. Scope 3 emissions are the most intensive measure of a company’s carbon footprint, given that they include emissions outside the company’s control, like those created by a consumer using its products or those within its supply chain. But scope 3 emissions are also the hardest to calculate. “I drive a car, right?” Quaadman says. “So do my car’s emissions count against the manufacturer? Do they count against the insurance company that insures my car? Do they count against the various manufacturers whose parts go into it?” Later, Quaadman adds, “if you put out data that’s meaningless, you’re not achieving the goal.”

The SEC has reportedly been wrestling with some of the same issues around scope 3 emissions for months now. On Tuesday, a report from the Washington Post indicated that the SEC might be looking to introduce scope 3 emission disclosures over time, and even possibly requiring them only from the largest companies. 

The right takes issue

Others, like West Virginia Attorney General Patrick Morrisey, have gone so far as to suggest the SEC should not be looking at the issue of climate change at all. In a sharp rebuke of comments that Lee made in 2021 around the need for climate risk disclosures, Morrisey threatened litigation over any “federal regulation compelling speech in violation of the First Amendment.”

“Today, the confluence of private competition for customers and for investors yields a vast amount of voluntary statements on a host of environmental, social, and governance issues,” Morrisey wrote. “We live in an information marketplace where Americans have broad access to data and facts. As such, the Commission should stick to its core mission of requiring statements on matters that are material to future financial performance—not statements on issues that drive a political agenda.”

Republicans on Capitol Hill have been no less welcome to the idea, either. Led by Sen. Pat Toomey of Pennsylvania, a group of Republican senators wrote to SEC chair Gary Gensler and Lee in 2021 to say that “determining how to address global warming is a difficult process that involves weighing costs and benefits, making tradeoffs, and negotiating to reach political consensus. If our laws are inadequate to deal with climate change, then it is [the] job of members of Congress—who are accountable to the voters through elections—to address them and not the SEC.”

If approved come March 21, the proposal will enter what will likely be a monthslong review process where commentators will be able to, once again, write in to the agency to voice their support or dissent about it before it heads for a final vote. 

Under Gensler, the SEC, for its part, seems undeterred.

On Twitter, where Gensler has been using videos to break down complex financial topics in what are known as “Office Hours” sessions, the SEC chair recently reposted one explaining why the regulator is looking at climate risk. Gensler’s answer leaves little room for doubt. “Simple,” he said. “Because investors are.”

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