SEC chairman Gary Gensler said today that he wants a draft proposal for mandatory climate risk disclosures by the end of this year, and dropped more hints than ever before about what that proposal might entail.
Gensler made his remarks on a webinar hosted by Principles for Responsible Investment, a think tank that supports more consideration of ESG issues in investment decisions. This particular webinar was titled Climate and Global Financial Markets, so Gensler was clearly preaching to the choir.
Preaching what, exactly? That’s harder to say. Gensler spent most of his time talking about what he has asked SEC staff to consider in their climate proposal, rather than what he wants to see in the proposal itself. And the idea of a climate risk disclosure rule is not new; SEC officials have been talking up their desire for more such disclosure for months.
Still, a few points from Gensler’s comments are worth noting.
First, Gensler wants that proposed rule by the end of this year. As in, “I have asked SEC staff to develop a mandatory climate risk disclosure rule proposal for the Commission’s consideration by the end of the year.” Can’t get much more clear than that.
Second, Gensler wants a proposal for mandatory disclosure, rather than voluntary; because that strengthens consistency and comparability of disclosure among large groups of filers. In contrast, “when disclosures remain voluntary, it can lead to a wide range of inconsistent disclosures,” he said. So it seems like a rule for mandatory climate risk disclosure is highly likely.
Another question is whether climate disclosures would be filed as part of the 10-K, where liability attaches for making erroneous disclosures; or only furnished, where liability doesn’t. Gensler said he asked SEC staff to consider that issue, but didn’t say what he prefers.
Levels of Climate Risk Detail
Let’s assume for a moment that the SEC does mandate disclosure of climate change risks in the 10-K. The next question for companies is how much detail they would need to include. That’s an important point, because the answer will dictate how much information gathering that someone (quite possibly you, the compliance officer) will need to gather from your own business operations and from your third parties.
Gensler said he wants climate disclosures to be “decision-useful.” What does that mean? Gensler explained:
A decision-useful disclosure has sufficient detail so investors can gain helpful information — it’s not simply generic text. In appropriate circumstances, I believe such prescribed disclosure strengthens comparability… Qualitative disclosures could answer key questions, such as how the company’s leadership manages climate-related risks and opportunities and how these factors feed into the company’s strategy. Quantitative disclosures could include metrics related to greenhouse gas emissions, financial impacts of climate change, and progress towards climate-related goals.
Gensler also said he has asked SEC staff to consider both types of disclosure in their proposed rule. So compliance, sustainability, and risk management executives should start thinking now about how their company would fulfill either type of disclosure.
For an example of quantitative disclosures, consider greenhouse gas emissions. Right now, some companies already report so-called Scope 1 emissions (emissions directly from a company’s own operations) or Scope 2 (emissions generated by a company’s consumption of electricity).
But many investors, Gensler said, also want to know about a company’s Scope 3 emissions: the total greenhouse gas emissions generated from a company’s supply chain. So, Gensler continued, “I’ve asked staff to make recommendations about how companies might disclose their Scope 1 and Scope 2 emissions, along with whether to disclose Scope 3 emissions — and if so, how and under what circumstances.”
The chairman then linked that disclosure issue to companies that proclaim their emissions will be net-zero by some future date. Well, Gensler asked, “Do they mean net zero with respect to Scope 1, Scope 2, or Scope 3 emissions?”
For whatever it may be worth, this was the only specific example Gensler gave in his speech. My gut tells me that compliance and corporate disclosure folks pay attention to that. It’s suggestive of the level of detail you might need to anticipate for these disclosures.
One other notable item: Gensler did not mention whether climate disclosures should be audited. The audit industry does favor this idea because, duh, it’s another revenue stream for the firms — but disclosures that must be audited exist on a higher level of headache than those that don’t. So I’ll be curious to see where the SEC lands on this question.