On March 6, 2024, the United States Securities and Exchange Commission (SEC) will hold an open meeting on “whether to adopt rules to require registrants to provide certain climate-related information in their registration statements and annual reports”. In other words, the SEC will discuss whether United States (US) publicly-traded companies have to issue certain climate disclosures.
The new rule that is up for discussion had initially been proposed in March 2022. According to the proposal, publicly-traded companies would be required to disclose climate matters in their registration statements and periodic reports. These disclosures would include “information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition”.
Requirements under the SEC’s Proposed Rule on Climate Disclosures
The proposed rule requires business owners to disclose four key aspects related to climate risks. Firstly, they need to explain their governance structure regarding climate risks. Secondly, they must outline how these risks could impact their business and financial statements over short, medium, and long terms. Thirdly, they are obligated to disclose how these risks influence their overall strategy, business model, and outlook. Lastly, the changes demand disclosure of the effects of climate-related events and transition activities on specific items in their financial statements, emphasizing transparency and accountability in addressing climate risks.
The SEC would also require the reporting of Scope 1 and Scope 2 greenhouse gas (GHG) emissions. Initially, the proposed rule included the requirement to disclose Scope 3 emissions if these are material or if the company had set a GHG target that included Scope 3 emissions.
Predictions Following Adoption of the SEC’s Rule
As reported by JDSupra, it is expected that the final agreed rule will be a toned down version of the proposed framework, especially regarding the obligated reporting of Scope 3 emissions. Reuters has recently reported that the SEC has already removed most of the rules regarding reporting of Scope 3 emissions.
There has also been speculation whether the SEC’s proposed climate rule will be challenged under the ‘Major Questions Doctrine’. Under the Major Questions Doctrine, the US Congress can only authorise an agency to regulate on major issues – such as climate change – if there is a clear legislative directive. If the language of the agency’s foundational statute doesn’t do so, then the agency cannot assume that they have broad authority over the ‘major question’. The SEC’s authorising statute does not detail any authority to regulate environmental matters. Last year, a group of House and Senate Republicans already criticised the proposed rule for exceeding the SEC’s “mission, expertise, and authority”.
The Importance of Climate Disclosures for Investors
Climate disclosures assist investors in accurately pricing their investment in a company, and determining whether they need to hold or sell stock. The proposed climate disclosure rule is the SEC’s response to increased investor demand for transparency into how companies are affected by a variety of climate risks and what they are doing in terms of mitigation.
In a 2023 study, ‘Climate Risk Disclosure and Institutional Investors’, it was found that 79% of institutional investors think climate risk is at least as important as financial disclosure, with 33% even thinking it is more important. 67% think that current disclosures by companies are not precise enough. Finally, 73% of institutional investors think mandatory climate risk reporting is needed.
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