SEC proposes landmark climate rule

The SEC rule would generate detailed information about how corporations, financial services firms and other businesses are affected by climate change. This would require them to explain how they deal with extreme weather, supply chain disruptions and other climate-related upheavals.

At one level, the proposal merely enshrines common practices in law. Thousands of companies already disclose emissions and reduction targets as part of voluntary standards set by the business community. The SEC cited two – the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol – and modeled some of its proposals on those frameworks.

The proposed rule also relies on the concept of materiality, information that a shareholder might consider material to a company’s revenues, profits or operations, for example. Companies are already required to disclose any material information, and many include climate risk in their disclosures.

But shareholders, consumers and many business groups have demanded uniformity and legal accountability, which Biden-appointed SEC Chairman Gary Gensler has promised to uphold. In thousands of comment letters to the regulator, companies and shareholders have largely aligned themselves on the need for standardized climate risk reporting.

The commission is due to vote on Monday to release the proposal, triggering a public comment period.

Here are the highlights:

— Climate-related disclosures, including any short-, medium-, or long-term risk to bottom line, would be required in corporate filings such as SEC Form 10-K. Many companies currently limit their disclosures to informal reports that carry less legal liability.

— Companies that have committed to eliminating greenhouse gas emissions or reducing their impact through a net zero plan must report their progress annually. Companies will be required to detail their use of offsets – the controversial practice of paying to plant trees, capture carbon, generate renewable energy or other activities to offset emissions.

— A company’s emissions and energy consumption — referred to as scope 1 and scope 2 emissions — must be disclosed.

— Indirect emissions generated by a company’s suppliers and customers — scope 3 emissions — must be disclosed if they are material to a company’s performance or if the company has set emission reduction targets. All disclosures would be phased in, with a safe legal haven for Scope 3 disclosures. Small businesses would be exempt from Scope 3 disclosure.

— Large companies would be required to obtain assurance from an independent third party that their emissions reports are accurate. Third parties may include traditional accounting firms, but may also include other experts, such as engineering firms.

— Companies that put a price on carbon to inform their planning and investments should disclose that price and how it is set. Internal carbon pricing – effectively a private tax on polluting activities – has gained adherents even as policymakers debate a carbon tax.


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