SEC could mandate climate-risk disclosures

The U.S. Securities and Exchange Commission (SEC) is considering mandating climate-risk disclosures by public companies.

In a statement, SEC chairman Gary Gensler said the proposal, which draws upon recommendations from the Task Force on Climate-related Financial Disclosures, “would provide investors with consistent, comparable, and decision-useful information for making their investment decisions and would provide consistent and clear reporting obligations for issuers.”

Gensler said SEC staff found that one-third of the nearly 7,000 annual reports submitted in 2019 and 2020 included some disclosure related to climate change.

The proposed rules would require comparable, structured disclosures on Form 10-K about a company’s governance, risk management and strategy with respect to climate-related risks, the SEC indicated. Companies would also have to disclose climate-related targets or commitments, as well as their plans to achieve those targets and their transition plans, if applicable.

Companies would also be required to disclose greenhouse gas emissions data, specifically Scope 1 and Scope 2 emissions (which result directly or indirectly from facilities owned or activities controlled by a company). Certain registrants would have to disclose Scope 3 emissions (which are from upstream and downstream activities) “if such emissions were material to investors or if the company had made a commitment that included reference to Scope 3 emissions,” Gensler said.

The proposal would include a phase-in period, and there would be an additional phase-in period for Scope 3 disclosures.

Finally, the SEC would require a company to disclose “certain disaggregated climate-related financial statement metrics that are mainly derived from existing financial statement line items” in a note to its financial statements. This would include the impact of the climate-related events and transition activities on the company’s consolidated financial statements.

SEC commissioner Hester Peirce criticized the proposal. In a statement titled “We are not the Securities and Environment Commission — at least not yet,” Pierce said the proposal “forces investors to view companies through the eyes of a vocal set of stakeholders, for whom a company’s climate reputation is of equal or greater importance than a company’s financial performance.”

In October 2021, the Canadian Securities Administrators published its proposed approach to issuers’ climate-related disclosure, and the associated consultation generated about 130 comment letters. While the notion of explicit disclosure requirements targeting climate-related risks is widely supported, the details of what should be disclosed remain hotly contested.

The SEC proposals are out for comment for at least 30 days. According to an SEC fact sheet, large accelerated filers would need to comply with the disclosure requirements beginning in fiscal 2023, while other firms would need to comply beginning in 2024. These dates assume the rules are adopted with an effect date of December 2022.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.