The SEC’s Proposals on Climate

Environmental and climate issues are the headliner for the Commission this week. The agency issued proposed rules on Monday which would require issuers to disclose certain information tied to climate issues if approved following a sixty day comment period. Specifically, the proposals, which are based in part on those adopted by The Task Force on Financial Disclosures, created seven years ago, would require issuers to disclose information regarding:

–The oversight and governance of climate related risks by the board and management;

–How climate risks identified by the issuer have, or are likely to have, a material impact on the issuer;

–How the identified climate related risks have impacted, or are likely to impact, the issuer’s business in the near, medium and long term;

–The issuer’s process for identifying and assessing climate related risks;

–The impact of climate elated events such as severe weather events on the issuer’s financial statements; and

–The metrics used to assess what are called Scopes 1 (direct by the issuer), 2 (indirect) and 3 (from other activities of the issuer such as travel) greenhouse gasses (GHG) .

Collectively, the disclosures would provide investors with material information regarding key climate and environmental risks faced by the company as well as basics on its greenhouse gas impact.

While the Release detailing the proposals presents them as key material information that every investors should have, they are likely to be controversial. This point is well illustrated by the vote at the Commission regarding whether the agency should move forward with them. Chair Gensler, for example voted in favor of the proposals. Mr. Gensler essentially argued that the proposed series of disclosures are, in reality, a recognition of matters whose time has come. Stated differently, Chair Gensler essentially stated that there is significant investor interest in the type of information that would be mandated by the proposals. Commissioner Lee, who really began the discussion of these issues while serving as Acting Chair, concurred.

On the other hand, Commissioner Hester Peirce noted that the “proposal turns the disclosure regime on its head.” She argued that the new proposals are not needed because in part existing rules require that certain climate information be disclosed and, in any event, the agency does not have the authority to adopt the new proposals.

The split among the Commissioners is likely to be reflected in the comments that will be submitted. Many will support the proposals. A number of regulators in other parts of the world , for example, such as Hong Kong, Singapore and Switzerland have already adopted rules regarding environmental and climate issues. The same is true for many investment funds. Over the last several years many fund managers have created “green” funds which have proven popular. And, there should be little doubt that boards and management of any number of entities are carefully evaluating the manner in which environmental and climate issues are impacting the firm’s they manage. Indeed, if boards and management are ignoring the impact of environmental issues on the business, shareholders should rightly be concerned.

Nevertheless, look for many to argue in comments submitted on proposals that the agency should stick to straight-forward dollars and cents issues that go to the bottom line. Yet in the end it is difficult to sustain the view that the environment and climate are not having a material impact on virtually every business organization.

If in fact that is true, then good corporate stewards are essentially obligated to consider the kind of information presented in the proposals. Viewed in the context, issuers should be disclosing the kind of information called for by the proposals now. After all, years ago the Commission stated that the MD&A section of corporate filings was designed to put the shareholder, the investor, in the seat of the issuer’s senior executive so that the enterprise could be viewed through his or her eyes. If that is the goal of the SEC’s disclosure requirements and filings, then it is time that boards and managers start telling shareholders if and what they consider on key environmental and climate issues.

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