SEC adopts watered-down climate disclosure rule: a ‘mixed bag for investors’
The US Securities and Exchange Commission has voted to adopt a watered-down version of its climate disclosure rule but dropped reporting requirements, the move was welcomed by investors who said more needs to be done
Few rules have been met with as much public backlash as the SEC’s Climate-related disclosure rules which are aimed at bringing climate-risk reporting standards in line with those set by the EU and other markets.
24 months, 24,000 comment letters and 4,500 unique letters later, the US financial markets regulator adopted the much-contested new rules, albeit a significantly watered down version.
While the initial proposals would have required listed firms to disclose their Scope 1, 2 and 3 emissions, in line with EU standards, the new rules dropped the requirement to report on Scope 3 emissions amid concerns over legal challenges.
“Investors representing tens of trillions in assets are making decisions relying on the disclosures that are already happening. What we did today recognises investors would benefit from greater consistency comparability and decision usefulness to such disclosures” said SEC chair Gary Gensler, who has been a driving force behind the introduction of the new standards.
But Michael Littenberg, head of law firm Ropes & Gray’s ESG, CSR and Business and Human Rights Practice argued that the standards are largely a win for issuers.
Not only has Scope 3 emissions reporting, which accounts for the bulk of corporate carbon footprints, been dropped, the rules also subject Scope 1 and 2 emissions reporting to materiality tests, he said.
Moreover, while the initial rules foresaw the inclusion of climate risks in financial statements, this has now been limited to risks deriving from severe weather events and other natural conditions, and in some cases carbon offsets and RECs, he added.
Consequently, he described the new rules as a mixed bag. “For institutional investors, the rules are an improvement over voluntary sustainability disclosures, since climate disclosures will have greater consistency and comparability. Many institutional investors will bemoan the exclusion of a Scope 3 emissions disclosure requirement, although there are divergent views in the investor community regarding the usefulness of that information.”
These limitations were also acknowledged by CalPERS, the largest defined benefit public pension fund in the US. CalPERS CEO Marcie Frost endorsed the new climate reporting rules as a step in the right direction.
“CalPERS supports the work of the commission in crafting the rule, a much-needed boost for transparency through clear, consistent, and comparable information.
Climate risk is investment risk. CalPERS has long been a proponent of enhanced disclosure, particularly in regards to Scope 1 and Scope 2 emissions, because it is crucial in making investments on behalf of our 2 million members” she added.
“While any progress is a victory for investors, there is still more work to do. Transparency is vital to the success of CalPERS’ sustainable investment plan and the transition to a lower-carbon economy” Frost concluded.
While the SEC's climate reporting rules are initially limited to public markets, they could in time also improve standards in private markets predicted Sabine Chalopin, head of Sustainability at Denham Sustainable Infrastructure.
“The SEC ruling to mandate Scope 1 and 2 climate risk disclosures by public companies is a surefire signal of the appetite from investors to factor in climate data when making investment decisions.
"In line with this trend, we expect that private companies will, in time, directly or indirectly, fall under the scope of mandatory climate risk reporting. In anticipation of this, at Denham Sustainable Infrastructure, we believe in preparing our portfolio companies from an early stage when it comes to carbon reporting and climate risk data collection.”
