Battlefront Emerges Over Disclosure of Financial Climate Risks

April 6, 2022
As part of the Biden administration focus on financial climate risks, the SEC has begun drafting rules around climate risk disclosure. Above, SEC Chair Gary Gensler in a promotional video last year. Image: U.S. SEC, YouTube. Click to enlarge.

WatchDog Opinion: Battlefront Emerges Over Disclosure of Financial Climate Risks

By Joseph A. Davis

Get ready for an epic fight over requiring businesses to disclose climate change risks. It has already begun — yet it’s barely started.

The Securities and Exchange Commission on March 21 approved by a 3-1 party-line vote a draft of rules for publicly traded corporations to follow in disclosing climate risks.

While the main job of the SEC is not environmental, it does aim to protect investors by requiring companies to make public the risks behind traded stocks. So if a hurricane could wipe out an insurance company, investors deserve to know about that, under the law.

You can see the 506-page pre-published text of the draft, or a fact sheet summarizing it.

Billions and billions of dollars are at stake. And a lot of businesses have already shown they have a stake in keeping the debate hard to understand. That makes this a story where environmental journalists can help (for more on that, see our previous WatchDog, “Climate Risk Disclosure Guides Journalists, Not Just Investors”).


Multiple related conflicts emerging

Recent years have witnessed a spate of corporate green pledges and claims. But concrete and specific data to back these claims is often scarce, and some (not all) of these claims amount to greenwashing.

WatchDog is sad to report that some mainstream media have simply passed them along like stenographers. We still hope that the SEC will put forth a rule that helps environmental reporters tell the difference.

The Biden administration, with its “whole-of-government” attack on climate change, has made it clear that the financial arena will be a major battlefront. Biden issued an executive order on financial climate risks back in May 2021.

The latest SEC move comes at a time when a big part of President Biden’s climate program, dubbed the Build Back Better legislation, is stalled in the evenly divided Senate.

Just look, for example, at what happened to the nomination of Sarah Bloom Raskin as the Federal Reserve’s top cop for bank regulation.

Raskin had declared her intent to police climate risks, drawing GOP resistance in hearings. Republican opposition eventually held up other Fed nominations. Once Sen. Joe Manchin (D-W.Va.) declared his opposition, it was clear the nomination could not pass in a 50-50 Senate. Raskin withdrew (may require subscription).


The Raskin fracas merely illustrated

the intensity of the conflict over climate

risk disclosure.  Although the SEC is the

main event, there are other fights on the card.


The Raskin fracas merely illustrated the intensity of the conflict over climate risk disclosure. Although the SEC is the main event, there are other fights on the card.

Treasury Secretary Janet Yellen had made clear from the start her intention to make climate a finance issue — and gave a major speech on it at the COP26 talks in Glasgow. Yellen serves ex officio as chair of the Financial Stability Oversight Council, an interagency panel of state and federal financial agencies accountable to the president and Congress.

The issue plays out in other federal financial agencies as well. The Office of the Comptroller of the Currency (which oversees banks) is another. It has supported the SEC’s efforts. The Federal Deposit Insurance Corporation, another bank regulator, has itself proposed guidelines for banks to use in evaluating their own climate risks.


The SEC backstory

We know climate risk disclosure will be a fight because people have been fighting about it for quite a while. The SEC, in fact, already took a swing at it back in 2010 (the Obama years).

That effort was kind of vague. Although published in the Federal Register as a rule, the document called itself “guidance” and an “interpretive release.” It explained the importance of climate risk disclosure and stated that some companies were already doing this voluntarily.

The SEC has been talking about issuing a stronger climate risk disclosure policy — one with regulatory teeth — since at least March 2021.

SEC Chairman Gary Gensler had said he was shooting for October 2021 to propose a draft, but it finally came out this March.

That may give a clue about how controversial the eventual rule will be. Although published in the Federal Register as a “proposed rule,” it must now receive public comment.

Comments are due by May 20 at the latest. You can preview the arguments by looking at the docket.


What’s in the proposed rule?

The SEC has stated that its rule was developed in response to demand from investors. This is true, but we may add that the demand did not come from all investors and certainly not from all companies (some are already meeting many of the requirements).

SEC’s title for the rule, “enhancement and standardization,” makes clear that the agency is trying to strengthen it (disclosure is currently voluntary but would be mandatory in many cases under the rule) and to set comparability standards so apples can be compared with apples.

This will not be easy, because the ways businesses interact with climate change are varied and manifold. Here are some examples:

  • Reporting: Companies that register with the SEC would have to report climate-related information upon first registering, as well as in the annual reports (10-Ks) required to be filed with the SEC. Companies already must also file notice of significant events (e.g., a corporate acquisition or a hurricane), and the climate change requirement would apply to these types of filings also.
  • Graduated requirements: The SEC has stricter requirements for larger companies and these differences would apply to climate reporting too. Climate reporting deadlines and auditing requirements would also be more relaxed for smaller companies.
  • Climate risks: Companies would have to report climate-related risks and their actual or likely material impacts on the registrant’s business, strategy and outlook. They would also have to report the governance process by which they controlled these risks.
  • Metrics: The proposed SEC rule would require companies to regularly file reports giving hard numbers on their climate performance. These would include amounts of greenhouse gas emissions, amounts of emission offsets, renewable energy certificates, internal carbon price, if any, and data on specific climate-related events.
  • Transition plan: Registrants must include information about their plans for the energy transition, if any.
  • Reporting scope: The easiest thing for a company to know and control is the amount of greenhouse gas emissions it directly emits itself in the course of its operations. But that is not the end of the story — in fact, it is the start of some common deceptions. The climate impact of an oil company is not just what is emitted during its refinery operations, but also what is emitted by customers burning the fuel it sells. SEC tries to address this by setting up “scopes” of reporting. Scope 1 covers direct emissions from sources owned or controlled by the registrant. Scope 2 covers indirect emissions from purchased energy in various forms, such as electricity supplied to a company by electric utilities. And Scope 3 covers emissions from sources both up and down the value chain from the registrant. That might include energy used to make or transport constituent parts to an auto factory. Or the gasoline burned by an oil company’s customers. There would be a schedule for phasing in the requirements plus a further two-year phase-in period for reporting Scope 3 emissions.


The fights to come

You can probably tell a lot about the intensity of debate over the SEC rule by watching the comments that come in on the rulemaking docket. A lot of important voices have already been heard in initial media coverage.

Rep. Patrick T. McHenry of North Carolina, the ranking Republican on the House Financial Services Committee, told The New York Times (may require subscription) that the SEC proposal was “tone-deaf and misguided,” and that climate information was immaterial to investors in most companies.

Many Republicans can be expected to oppose the rule, but GOPers are currently a minority on the five-member SEC.


Specific objections to some provisions in the rule

have come from the U.S. Chamber of Commerce,

Amazon and Alphabet Inc. … Green groups,

on the other hand, tend to like the proposal.


Specific objections to some provisions in the rule have come from the U.S. Chamber of Commerce, Amazon and Alphabet Inc. (Google’s parent). The American Petroleum Institute, whose members have perhaps the most at stake, has also objected.

Green groups, on the other hand, tend to like the proposal (or want it to go farther). Ceres, a group that has long argued for socially responsible investing, supported such a rule even before the SEC released its draft. Progressive groups like the Center for American Progress have long argued for the disclosure of Scope 3 emissions.

There will be a crescendo of lobbying and PR pressure before the rule goes final — something that will be increasingly fraught as the 2022 midterms near.

It seems that some of the phase-in provisions are designed to slow the inevitable lawsuits. The SEC’s leaving it up to companies to define “material” may be another way to dodge lawsuits. But we can expect plenty of litigation after the SEC finalizes the rule.

Joseph A. Davis is a freelance writer/editor in Washington, D.C. who has been writing about the environment since 1976. He writes SEJournal Online's TipSheet, Reporter's Toolbox and Issue Backgrounder, and curates SEJ's weekday news headlines service EJToday and @EJTodayNews. Davis also directs SEJ's Freedom of Information Project and writes the WatchDog opinion column.

* From the weekly news magazine SEJournal Online, Vol. 7, No. 14. Content from each new issue of SEJournal Online is available to the public via the SEJournal Online main page. Subscribe to the e-newsletter here. And see past issues of the SEJournal archived here.

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