The SEC’s Proposed Climate Risk Disclosure Rule Comes Under Fire

The SEC’s Proposed Climate Risk Disclosure Rule Comes Under Fire

In March 2022, the SEC (Securities and Exchange Commission) released its long awaited proposal, which would make climate-related disclosures mandatory for public companies; it is aiming to release final rules by the end of 2022 at the earliest. June 17th marked the final day of the comment period for the climate rule, and saw the proposal draw criticisms from a wide variety of listed US firms. What exactly would the SEC’s proposed climate risk disclosure rule entail for firms?

The SEC’s proposed climate risk disclosure rule is in part built on the recommendations of the TCFD (Taskforce on Climate-related Financial Disclosures), which is designed to help financial market participants assess both the risk exposure and potential opportunities present in firms. The main difference between the TCFD recommendations and the SEC’s proposal is that of principle versus detail; the SEC would require specific and detailed climate-related disclosures in mainstream financial filings. Listed firms would have to produce disclosures covering:

• The oversight and management of climate risk; 
• Impacts of climate-related risks on business, financials, strategy, business model, and outlook; 
• Processes for identifying, assessing, and managing climate-related risks; 
• Historical GHG emissions (Scopes 1, 2, 3) with third-party assurance; 
• Climate related targets (if applicable); and 
• Financial statement disclosure on the monetary impacts of both physical, and transition risks. 

Reception to the SEC’s proposal has been mixed. The Business Roundtable Group, whose members include Apple, American Airlines, and General Motors, has urged a rewrite to the proposal, criticising the inclusion of emissions data in audited financial statements. However, the proposal is supported by technology firms Microsoft and Salesforce, both of which have been historically supportive of ESG and sustainability. It is likely that the SEC’s proposal will be challenged in court; varied critics, including a group of 19 Republican senators, have argued that the SEC does not have the authority to propose the rule. Although it is impossible to tell what the outcome of this will be, the SEC’s conflict minerals rule was passed despite litigation (and firms were required to disclose against this rule during the litigation period).

The SEC’s proposal breaks new ground in the realm of mandatory climate related disclosures. Some of the most challenging requirements for firms include the integration of climate related disclosures into mainstream financial filings, the need for detailed governance disclosures, and the requirement for data (including third party) attestation.  How should firms react? 

Undoubtedly the proposal will differ to the final, adopted rules. Regardless of if or when the SEC rules are live, firms should focus on building technology stacks to manage varied data demands in line with the recommendations of the TCFD, to ensure that they are both prepared for the final rule and meet current stakeholder demands for climate-related information. Firms should also keep a careful eye on building and retaining ESG talent. The proposed rules would require registrants to disclose if board members have expertise in climate related risks; such expertise is currently in short supply.