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SEC Open Meeting

Securities and Exchange Commission

Open Meeting

Monday, March 21, 2022

 

Topline

  • The Commission voted to propose amendments that would enhance and standardize registrants’ climate-related disclosures for investors.
  • The comment period will remain open for 30 days after publication in the Federal Register, or 60 days after the date of issuance and publication on sec.gov, whichever period is longer.
  • In her opposition to the proposal, Hester Peirce gave a notably long statement, part of which focused on materiality, the Commission’s statutory authority, impact on investors, the economy, and the Commission, compliance cost, and rationale for the framework.

ITEM 1: The Enhancement and Standardization of Climate-Related Disclosures for Investors

The Commission voted 3-1 to propose amendments that would enhance and standardize registrants’ climate-related disclosures for investors.

Staff Discussion

Renee Jones explained the proposal, including certain climate related metric disclosures, noting that climate risk can have an impact on a company’s performance and that investors have been seeking more detailed, reliable information on climate risk for their decision making. She added that much of the disclosure happens under third party frameworks and stated the need for consistent and comparable disclosure to inform investors.

Elliot Staffin said the proposed rules include concepts of the Green House Gas (GHG) Protocol which will mitigate the compliance burden for registrants. He stated the proposed rules would require a domestic or foreign registrant to include certain climate-related information in its registration statement and periodic reports, adding that the proposed amendments would also create a new subpart of Regulation S-K which would require registrants to disclose information in their annual reports and registration statements about the oversight and governance of climate related risks by the registrant’s board and management. He stated that the information to be disclosed must inform an investor of how any climate related risks identified by the registrant have had a material impact on their business, how any identified climate related risks have affected or are likely to affect the registrants business model, the registrants’ process in identifying, accessing, and managing climate related risks, the plan to identify transition risks, the registrant’s climate related targets or goals, if any, and how the registrant intends to meet its target or goals. He added that when responding to any of the proposed provisions, a registrant should disclose any information related to climate related opportunities and that the proposed rules will require a registrant to disclose on a yearly basis its GHG emissions. He said the emissions disclosures are used by investors to assess a company’s exposure to and management of climate related risks. Staffin added that the proposed rule would require a registrant to disclose separately its Scope 1 and 2 emissions.

Paul Munter discussed two aspects of the proposal, (1) climate related financial statement metrics and (2) attestation requirements over Scope 1 and 2 emissions disclosures, and gave an overview of the recommendations, which would require registrants to disclosure certain disaggregated and aggregate financial statement metrics.

Anita Chan provided more detailed information regarding the recommended proposals regarding financial statement metrics and attestation requirements. She said the proposed amendments would specifically require registrants to disclose the impact of climate related events and the registrants’ identified climate related risks on a registrants consolidated financial statement. She added that the registrant would be required to disclose estimates used to produce its consolidated financial report as it relates to climate related risks.

Jessica Wachter gave a summary of the proposal, including disclosure of risk, a company’s response, and the carbon footprint through Scopes 1, 2, and 3 emissions but that 3 would not apply to smaller firms. She added that a third of public companies already disclose climate risk information, reporting varies, and that lack of a common disclosure framework prevents investors from accurately assessing different company disclosures. She anticipates that these recommendations will impose costs on companies but that these costs are limited to the extent companies already collect information to meet these requirements or already fulfill these requirements and that some requirements do not apply to smaller firms.

Commissioner Discussion

Commissioner Hester Peirce said the proposal would undermine the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures and that the Commission cannot make such fundamental changes to its disclosure regime without harming investors, the economy, and the agency. She added the proposal tells corporate managers how regulators expect them to run their companies, identifies a set of risks and opportunities that managers should be considering and even suggests specific ways to mitigate those risks, and 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.

She described six elements missing from the proposal, including: (1) a credible rationale for such a prescriptive framework, (2) a materiality limitation, (3) a compelling explanation of how the proposal will generate comparable, consistent, and reliable disclosures, (4) an adequate statutory basis for the proposal, (5) a reasonable estimate of costs to companies, and (6) an honest reckoning with the consequences for investors, the economy, and the Commission. She then explained each element in detail.

She explained that existing rules require companies to disclose material risks regardless of the source or cause of the risk, adding that under current rules, climate-related information could be responsive to a number of existing disclosure requirements like Regulation S-K Item 303, 101, 103, and 105, Securities Act Rule 408, and 2010 Commission guidance. She then said that some of the proposed disclosure requirements apply to all companies without a materiality qualifier, that others are governed by an expansive recasting of the materiality standard, and that both approaches are problematic because they depart from the generally applicable materiality constraint on required disclosures. Peirce described Justice Thurgood Marshall’s “reasonable investor” as laid out in his materiality definition as someone whose interest is in a financial return on an investment in the company making the disclosure, drawing a link between materiality of information and its relevance to the financial return of an investment. She then said the proposal’s mandate disregards materiality or tweaks it even where the materiality threshold exists, adding that the Commission obliquely admits that it is playing a little fast and loose with materiality and is trying to decouple materiality from its financial context. She also characterized the proposal’s suggestion that climate consulting firms are available to assist registrants in making the materiality determination as a score for the climate industrial complex. Peirce stated that the Commission is presuming materiality for Scope 3 emissions and that the Commission’s distorted materiality analysis for Scope 3 disclosures departs significantly from the “reasonable investor” contemplated by Justice Marshall. She then explained that Commission-mandated disclosures will lull investors into thinking that they understand companies’ emissions better than they actually do, including for physical transition risk, which she said would entail stacking speculation on assumptions. She also criticized the proposal’s required disclosure of transition risks as rooted in prophecies of coming governmental and market action that often does not come to fruition. She then highlighted how the proposal steps outside the Commission’s statutory limits by using the disclosure framework to achieve objectives that she said are not the Commission’s to pursue and by pursuing those objectives by means of disclosure mandates that may not comport with First Amendment limitations on compelled speech. Citing Professor Sean Griffith, she argued that disclosure mandates must be limited to information that is material to the prospect of financial returns and that the proposal requires disclosure of immaterial information. In emphasizing the costs of the proposal, Peirce explained that the frameworks that the proposal is based on are neither universally used nor precisely followed, a company may not even be able to get the information it needs to calculate Scope 3 emissions, the assurance that companies do have to get likely will be expensive, and that Companies will incur audit costs in connection with a number of metrics included in the notes to the financial statements. She also said that investors will be harmed if Commission lawyers, accountants, and economists dictate how companies should address climate change, driving down investor returns, and driving investors to private markets. She then explained how the proposal will hurt the entire economy and the Commission by undercutting the reliability of filings and the Commission’s reputation as an independent regulator. Peirce concluded by characterizing the new framework as rivaling the existing securities disclosure framework in magnitude and cost and probably outpacing it in complexity.

Commissioner Allison Herren Lee said the links from climate risk to capital markets are direct and evident and that ensuring an effective disclosure regime for investors is one of the Commission’s most important roles, adding that crises with roots outside financial markets can, and often will, send shock waves directly through our markets, prompting action from the Commission. She explained that climate change physical and transition risk can materialize in different types of risk in capital markets and that many of those risks have already materialized. She added that most of the comments received through the Commission’s request for input were in favor of climate disclosure requirements. She also said that some aspects of the proposal would benefit from further input, including the reliability of GHG disclosures, including a company’s internal controls, third-party verification, and reasonableness versus limited assurance and Scope 3 emissions, including specificity, assurance carve-out, and the safe harbor.

Commissioner Caroline Crenshaw stated the proposed rules will empower investors to make more informed decisions and standardize disclosures so investors and their advisors can effectively compare data across companies and sectors. She added the proposal also offers needed modernization while providing flexibility to adapt to a constantly changing market. She said independent third-party reviews promote accuracy and reliability, adding that, moving forward, the Commission will need to make crucial decisions about how to best bring robust accountability to emissions disclosures and whether the Commission has properly calibrated the scope of such disclosures. Crenshaw said investors have determined GHG emissions to be material and needed to determine allocation and help with voting decisions.

Commission Chair Gary Gensler said the proposal would provide comparable, decision-useful information for investors and explained the Commission’s history of stepping in when there is significant need for disclosure of relevant information for investors decisions, which applies to disclosure of climate risk information. He then discussed materiality and the Supreme Court’s definition of materiality where there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment or voting decision or if disclosure would have significantly altered the total mix of information made available. He then explained that the proposed rules would require disclosures on Form 10-K about a company’s governance, risk management, and strategy with respect to climate-related risks and disclosure of any targets or commitments made by a company, as well as its plan to achieve those targets and its transition plan, if it has them. He also said the Private Securities Litigation Act safe harbors would apply to forward looking statements and that the proposal would require a company to disclose certain disaggregated climate-related financial statement metrics, including the impact of the climate-related events and transition activities on the company’s consolidated financial statements. Gensler then explained that GHG emissions data are increasingly being used as a quantitative metric to assess a company’s exposure to climate-related transition risks, that all filers will be required to disclosure their Scope 1 and Scope 2 GHG emissions, and that Scope 3 disclosure may be necessary to present a complete picture of climate related risk, particularly transition risk, adding that Scope 3 disclosure would be provided via structured data and phased in and that smaller companies would be exempt. He further explained how the proposal draws on existing rules and guidance governing climate related disclosure and international frameworks adopted by other countries.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.