The SEC is helping refine standards on reporting climate risk. Not everyone is happy about it

March 23, 2022, 10:47 AM UTC

The Securities and Exchange Commission (SEC) released a landmark proposal on rules governing corporate climate change disclosures Monday, potentially providing a uniform framework for U.S.-listed companies to follow when reporting climate risk.

“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.

The world of climate disclosures is fractured, with little centralized oversight on how corporations count and report greenhouse gas emissions. The SEC is well-positioned to provide some uniform instruction to many of the world’s largest and most influential companies.

But not everyone believes the financial regulator should take advantage of its central standing and expand its remit into policing climate risk.

SEC Commissioner Hester M. Pierce says the proposed rule change, filed as the Sunshine Protection Act, “turns the disclosure regime on its head” and distorts markets by creating a framework that “forces investors to view companies through the eyes of a vocal set of stakeholders” that value climate risk above all else.

“We are not the securities and environment commission,” Pierce said in her formal statement of objection. Despite its detractors, the SEC voted to move the proposal forward to its public consultation stage, giving third parties 60 days to provide feedback.

One note of interest that may be picked up in the months of public discussion is the proposal’s “safe harbor” clause for Scope 3 emissions or greenhouse gas emissions produced by a company’s customers, rather than by the company’s own actions.

Under the SEC’s rules, all companies will be required to report Scope 1 and Scope 2 emissions, which cover pollution produced as a result of a corporation’s own operations, including consuming electricity to keep the office lights on. But the SEC will only require disclosure on Scope 3 emissions if the company has publicly declared a Scope 3 target or if its Scope 3 emissions are “material.”

So when do Scope 3 emissions become material? Well, I pulled that thread.

The SEC’s proposed rules take guidance on when Scope 3 emissions become ‘material’ from frameworks created by the Task Force on Climate-Related Financial Disclosures (TCFD), a corporate advisory panel chaired by Michael Bloomberg and created off the back of the Paris Agreements.

In turn, the TCFD takes its guidance on Scope 3 emissions from the Science Based Target Initiative (SBTi), which builds its frameworks on the guidance of the Intergovernmental Panel on Climate Change (IPCC).

The SBTi says Scope 3 emissions become “material” if they account for more than 40% of a company’s total emissions or if the company concerned is involved in oil and gas. That actually sounds like pretty decent coverage, leaving potentially few companies exempt from reporting Scope 3 emissions to the SEC.

But after digging out all of the above, the benefits of streamlining guidance on disclosing climate risk are clear to me.

Eamon Barrett


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