Financial markets are gearing up for the SEC rule on climate disclosure, says Greg Hershman, Head of US Policy at the Principles for Responsible Investment.
As we approach the summer, questions about the depth and scale of the US Securities and Exchange Commission’s (SEC) rulemaking on climate-related financial disclosures loom. Amid increased scrutiny surrounding responsible investment, this should come as no surprise.
But while the SEC’s upcoming rule is important, we should not confuse the investor’s need for a final rule with the market needs for a final rule. Whether investors are protected by the certainty of SEC-mandated disclosures or not, the demand for climate disclosures will continue to advance at pace.
Already, almost 90% of S&P 500 companies report climate-related information to the public. But investors do not simply want 100% of anything. What they need is consistent, comparable climate information with all data that could have material impacts on corporate outlooks. That’s why investors have continued to push for regulators around the world to codify their needs so that corporations are not just disclosing what they wish.
A list of leading global bodies like The International Organization of Securities Commissions (IOSCO), the Taskforce on Climate-Related Financial Disclosure (TCFD) and the International Financial Reporting Standards (IFRS) are coordinating to establish baseline recommendations, much of which was incorporated into the pending SEC rule.
Global financial regulators are aligned on the need for climate disclosures because global investors are aligned in what they need from companies to accurately assess climate-related risks across their portfolios. The SEC’s proposal reflects this. A final rule closely matching the SEC’s proposal will give investors information they can trust when making decisions and potentially allow US companies to use one disclosure – their US disclosure – in other jurisdictions around the world.
This has not stopped detractors of responsible investment from using every tool in their arsenal to weaken the rule. However, even with judicial delays or efforts to deter the inclusion of Scope 3 emissions disclosure – emissions companies contribute to as part of their supply chain – from the rule, nothing will limit investor demand or slow the growing market expectation for climate disclosure.
Climate-related information is material and investors have a fiduciary duty to find, assess and utilise it. And global regulators and standard setters like IOSCO, IFRS Foundation, TCFD and others will continue to establish rules to protect investors as they increasingly rely on this information as a core part of their investment assessments.
In fact, other regulators are already moving beyond what the SEC proposed. The European Union’s Corporate Sustainability Reporting Directive goes into effect January 2024. Its reporting standards are both more comprehensive and granular than the SEC.
The EU’s disclosure rules don’t stop at the Union’s borders either—initial estimates show that more than 3,000 US companies could be required to report under the EU’s stricter climate disclosure regime, which includes Scope 3 disclosure.
Even in the US, regulators are working to keep pace with innovation, with California including Scope 3 in proposed legislation that would cover more than 5,000 companies. Regardless of Scope 3’s status in the SEC’s final rule, investor demand for emissions data is not going away.
Inarguably, the SEC’s work is vital. Having US financial markets at the table and supporting this work will create efficiencies for investors and companies alike. It can help align climate disclosures so one report is acceptable for multiple (or all) jurisdictions. And it can help in preventing a race to the bottom.
But the SEC’s work is just codifying what markets are already demanding, and requiring disclosure of what companies are already doing. The SEC’s rule will not address climate change – nor is it an attempt to do so. Nor will it directly change any corporate behaviour. But it will give investors the information they need to understand if and how companies are addressing climate risks and opportunities. And it will give important insight to investors seeking more sustainable products.
There is no future in which investors and markets demand less climate-related disclosure from companies. The only questions on climate disclosure remaining are how quickly investors will be able to depend on these disclosures, and whether the US will write its own rules or let the rest of the world dictate to US companies.