US climate disclosure rules expected soon

January 17, 2022|Written by David Clarke|Federal Reserve

The US Securities and Exchange Commission (SEC) is expected to propose new climate risk disclosure requirements for publicly traded companies in the first part of 2022.

Climate reporting is set to be made mandatory. SEC chair Gary Gensler has said that he believes only mandatory, rather than voluntary disclosures can result in firms publishing information that is consistent and comparable, both between companies and over time.

Mandatory disclosure was supported by three out of every four of the 550 comment letters received by the SEC in response to a request for input. The majority of those in favour also agreed that direct greenhouse gas emissions, and some indirect emissions, should be among the disclosures that are required.

The rules are expected to draw on the Task Force on Climate-related Financial Disclosures (TCFD) framework, which incorporates recommendations related to governance, strategy, risk management, and metrics and targets. The UK is set to make TCFD-aligned disclosures – as well as net-zero transition plans – a legal requirement within the next two years, while the EU is developing proposals as part of its new Corporate Sustainability Reporting Directive.

When asked about the timescale for the upcoming rule in a webinar in December, SEC commissioner Caroline Crenshaw said they plan for it to be published in early 2022.

She said the SEC has been closely observing the public commitments made by companies to reach net-zero emissions, particularly in the weeks leading up to the Cop26 climate summit. The majority of the biggest US firms now have a net-zero pledge, as do the 30 biggest North American and European banks. But she said the SEC is concerned that firms are not always providing investors with the information they need to assess how those goals are being met.

“It’s sometimes unclear to me how companies will achieve [their net-zero] goals,” she said. “Nor is it clear how companies will provide investors with the information they need to assess the merits of these pledges and to monitor their implementation over time. Investors have noted the importance of how the pledges are being implemented this year, five years from now and ten years from now, rather than simply waiting to see if in 30 years from now the goal of net-zero emissions comes to fruition. That will simply be too late.”

According to Crenshaw, the SEC also wants to address the disparities that occur between companies’ public statements on climate, and any political spending that contradicts those statements. She said that after the Paris Agreement, a number of public companies went on the record in support of its goals, while potentially continuing to make political contributions that supported opposition to it.

However, S&P Global recently reported that the SEC could face a legal backlash led by officials in Republican-led states. In a response to the call for input, 16 attorney generals said they opposed a “forced imposition” of the SEC’s environmental, social and governance policies. Analysts say their case will draw on the argument that companies are already required to make climate disclosures if they are material to their performance.

This page was last updated January 17, 2022

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