SEC Dissent No Barrier to US Mandatory Climate Reporting

“Flexible” approach needed to rule-making, says US SIF; as investors map Australia’s path to mandatory disclosures. 

Despite the objections of large corporates and even some SEC commissioners, momentum is building behind the October release of a climate-related financial disclosure framework for US publicly-listed companies, according to Bryan McGannon, Director of Policy and Programmes for the US Sustainable Investment Forum (US SIF).

The US Securities and Exchange Commission’s (SEC) public consultation on plans to regulate, monitor, review and guide climate-related disclosures from publicly-listed US companies, came to a close on 14 June.

Corporates haven’t responded with “full-throated opposition”, McGannon noted, but companies such as Alphabet and are pushing for ‘a liability safe harbour’, because accounting rules and risk data are underdeveloped. This means that they wouldn’t be subject to legal repercussions if their reporting to fulfil minimum requirements.

The Business Roundtable, headed by Walmart CEO Doug McMillon and representing chief executives from more than 200 US companies worth US$7.5 trillion in combined annual revenues, also emphasised the need for a “regulation-lite approach”.

Commissioner Elad L. Roisman outlined his concerns in a speech last week. As well as questioning whether now is the right time to impose new reporting requirements, Roisman expressed doubt as to whether the SEC is the right agency to oversee a climate-related disclosure framework, proposing instead the Environmental Protection Agency (EPA).

“At the end of the day, the Commission only needs three out of the five Commissioners to vote in favour, and three have voted in support of climate-related financial disclosures,” McGannon told ESG Investor.

He added that the framework should be the responsibility of a financial regulator because “while the EPA produces fantastic data and has a lot of climate-related expertise, they don’t have that pivotal understanding of financial markets that’s needed”.

Demand for a climate-related financial disclosure framework has been backed by US-based investors. A recent Principles for Responsible Investment-led (PRI) survey of asset managers and asset owners representing US$3.3 trillion in AUM found that 87.5% want the SEC to require companies to provide ESG-related information. Furthermore, 77 PRI signatories co-signed a letter to the SEC calling for standardised mandatory climate-related disclosures.

“It is tempting to think that the Commission could provide one list of ESG disclosures for companies to make that would satisfy all demands for information […] I worry that by stepping in to promulgate a static list of ESG disclosure requirements, the SEC would displace a good amount of private sector engagement and freeze disclosures in place prematurely,” Roisman said.

McGannon acknowledged that the disclosure framework will need to be “flexible” in order to account for the ever-evolving landscape of climate-related reporting.

The consultation was made up with 15 multi-part in-depth questions, meaning that the SEC is willing for the moulding of the framework to rely heavily on feedback.

International alignment

Where possible, he noted, the SEC should look to align with existing frameworks for climate-related reporting, such as by the Global Reporting Initiative (GRI). The standards-setter body has one of the “most robust” frameworks, McGannon said.

“The SEC is catching up to where other international markets are on measuring ESG-related risks, and this is an important piece of that process. We think progress is going to continue to accelerate,” he said.

SEC Chairman Gary Gensler published the SEC’s annual regulatory agenda on 11 June, which included a line item for a climate change disclosure framework proposal in October, indicating that the framework is high up on the SEC’s priority list, with or without support from all Commissioners.

Once the proposal is published, it will once again be subject to a public consultation before finalisation, meaning the US won’t have a standardised framework for climate-related financial disclosures in place until mid-2022. This also follows Gensler’s recent decision not to enforce new rules for proxy voting advisory firms.

Senator Elizabeth Warren and Congressman Sean Casten responded to the consultation, highlighting both the recent passing by Congress of the Corporate Governance Improvement and Investor Protection Act and a new bill for a Climate Risk Disclosure Act, which both require public companies to disclose their exposure to climate-related risks.

While further indicating that the US is moving in a direction that prioritises ESG-related disclosures, Warren and Casten recommended the SEC issue its own rules on climate-related disclosures within two years of the expected passing of the Climate Risk Disclosure Act to allow for maximum rule alignment.

Executive compensation

In a speech this week, Commissioner Allison Herren Lee emphasised that corporate boards needed to prioritise ESG-related issues, following growing pressure from investors and stakeholders. Engagement needs to be proactive, for example, “tying executive compensation to ESG metrics can offer an important way to deliver on a company’s commitment to issues that matter to investors and consumers”, Herren Lee said.

“There is no one right answer for each individual company on how to mitigate risks and maximise opportunities with respect to climate and ESG issues. They are complex, evolving and, in some cases, highly charged issues. This can make collaborative discussion more difficult.

“[The SEC’s] understanding of the significance of ESG and its short-, medium- and long-term relationship to financial performance has evolved to the point that the principal debates are about when, not if, these issues are material,” she said.

Australia’s path to climate reporting

Separately, a roadmap for mandatory adoption by Australian corporates of a Task Force on Climate-related Financial Disclosures-aligned (TCFD) framework has been developed by CDP, the Investor Group on Climate Change (IIGCC) and the Principles for Responsible Investment (PRI).

The proposal outlines measures for government and regulators to introduce climate reporting for corporates and financial institutions by building on existing efforts.

“The phased implementation of climate risk disclosures in Australia, in coordination with allies and trading partners, is an opportunity for the Government and regulators to cut red tape for business and support investment across Australia,” said Erwin Jackson, the IIGCC’s Director of Policy.

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