Blog: Climate disclosure requirements likely as investor and business support grows – Denver Gazette

Standards requiring companies to report their greenhouse gas emissions and the risks they face from climate change appear all but inevitable.

In recent months, calls for climate disclosure requirements have expanded far beyond environmental and sustainability advocates. Some of the biggest investors, asset managers, pension funds, and even major public corporations themselves have demanded the Securities and Exchange Commission establish mandatory climate disclosure standards.

Thus far, reporting greenhouse gas emissions and physical risks from climate change has been only voluntary in the United States. While there are several different voluntary frameworks under which companies can report, the result is inconsistent, incomplete information that advocates and investors say makes it challenging to compare companies’ performances and risks.

“The current state of climate change disclosure does not meet our needs,” a coalition of investors, companies, advocacy groups, and others wrote in a statement on June 10. “Companies and investors need comprehensive, decision-useful data from all enterprises facing material climate change risks.”

Signatories on the statement included investors with more than $2.7 trillion in assets under management collectively and companies such as Patagonia, Danone, and BHP.

In a separate June 10 statement, hundreds of global investors representing collectively more than $41 trillion called on governments, including the United States, to commit this year to implementng mandatory climate risk disclosure standards “that are consistent, comparable, and decision-useful.”

Steven Rothstein, managing director for the Accelerator for Sustainable Capital Markets at Ceres, which helped organize the investor statements, said that such a level of investor support for mandatory disclosure is “historic” and has “never happened before.”

In the last few months, the SEC has moved quickly to bolster its capacity to address climate change financial risk. In March, the commission created a task force on climate and environmental, social, and governance (ESG) factors within its enforcement division. It has also been seeking public input on how to establish a framework for climate disclosures.

For any disclosure regime, however, the devil will be in the details.

Many companies and investors want to see the SEC use as a foundation the recommendations crafted in 2017 by the Task Force on Climate-related Financial Disclosures, established by the global Financial Stability Board. Those recommendations, which some companies already voluntarily report under, are broad and largely principles-based. For example, they ask businesses to describe the risks they face from climate change, outline how they manage those risks, and disclose operational emissions.

Environmental advocacy groups want to see far more detail. They are generally asking the SEC to require companies to disclose the full scope of their emissions, including the indirect emissions from their products and supply chains, known as Scope 3.

Rothstein of Ceres said requirements around Scope 3 emissions are critical, even though they are the most challenging to measure. Those emissions can often be 10 to 100 times what companies are emitting directly through their operations.

Advocates also want to ensure companies are held accountable for the longer-term climate goals they are setting, as many corporations eye net-zero emissions by the middle of the century.

“It’s great that companies are starting to wake up to the need to reduce emissions over time, but net-zero by 2050 is both too far off and too nebulous to meet the rigor that needs to be met and the urgency of the climate crisis,” said Jeff Conant, director of Friends of the Earth’s international forests program.

Friends of the Earth is recommending that the SEC specifically require disclosure on how companies are using or planning to use carbon offsets or carbon removal technologies to help meet their climate targets. That includes details on where companies would purchase their offsets and specifics about the offset providers.

“If we’re talking about transparency, we want real transparency, all the way down to the level of the offset providers that companies might be using to meet their targets,” Conant added.

Choosing which metrics to include and how specific to be won’t be the SEC’s only challenge.

The commission will also grapple with determining whether it should set the standards itself or enlist a third-party organization, said Jennifer Klass, who co-chairs Baker McKenzie’s Financial Regulation and Enforcement practice. It will also have to decide how much of the disclosure framework the SEC will uniquely create and how much will build off of existing voluntary regimes, such as the TCFD and others, she said.

In addition, Klass said the SEC would have to determine whether and how to define climate-related risks as “material” to investors. Critics of climate-related disclosures, including some in industry and Republican politicians, have questioned the need for separate emissions and climate change requirements.

“If a particular risk to a company meets the standard of materiality — including any risk related to climate change — that company should already be disclosing it in their SEC filings,” a group of nearly two dozen Republican lawmakers wrote the SEC in a comment letter.

Republicans have criticized the SEC’s efforts to establish climate disclosure, arguing that the effort and other climate finance moves from the Biden administration are veiled efforts to choke off financing from fossil fuel producers.

Disclosure requirements don’t guarantee that companies will change their behavior or that investors will move their dollars.

Nonetheless, top Biden administration officials, particularly climate envoy John Kerry, have spoken frequently about disclosure requirements as crucial for aligning global finance with aggressive climate targets under the Paris Agreement.

In remarks on June 8 to a virtual conference hosted by the American Clean Power Association, Kerry touted a “real prospect” of climate disclosures on a global basis, not just in the U.S. Recently, the G-7 finance ministers publicly backed implementing mandatory climate disclosures.

“That is going to have a profound impact, I think, on people’s judgment about where capital ought to go and what the risks are in the long term and in some cases even the short term,” Kerry said.

Regardless of Republican opposition, climate-related disclosures and ESG investing aren’t likely to fade from investor and corporate interest.

“If the question is: Is this a fad? I don’t think that it is,” said Amy Greer, the other co-chairwoman of Baker McKenzie’s Financial Regulation & Enforcement practice, of climate and ESG-focused investing.

She suggested that the types of issues covered broadly by ESG disclosures, particularly in the social and governance categories, may shift over time. But she noted that the typical constituencies of Republican SEC commissioners, such as large asset managers, favor some level of mandated disclosures.

“I don’t think having come to this point that a change in administration would result in a significant alteration of the regulatory regime once in place,” she added.

Original Location: Climate disclosure requirements likely as investor and business support grows

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