The U.S. Securities and Exchange Commission's proposed climate risk disclosure rule would require firms to report the risks they face from climate change to give investors the ability to assess a company's overall risk.
The SEC requires publicly traded companies to file reports that provide an overview of the company's financial and business positions. Investors rely on the filings to make informed decisions when investing in a company. However, certain risks including climate risk have not previously been required for companies to include in 10-K filings. Instead, companies can voluntarily report their environmental, social and governance data.
SEC Chair Gary Gensler said during a recent webinar that investors recognize that climate change can pose a significant financial risk to companies, and that investors need reliable information about those climate risks to make informed investment decisions. That's why the SEC proposed its climate risk disclosure rule, the Enhancement and Standardization of Climate-Related Disclosures for Investors, in March.
"Climate disclosures are already happening and today investors are already making investment and voting decisions using information about climate risk," Gensler said during the webinar hosted by nonprofit sustainability organization Ceres. "Companies and investors alike would benefit from clear rules of the road."
Gensler is getting pushback in some of the comments it's now collecting on the proposal. Notably, a letter this month signed by 19 Republican U.S. senators urged the SEC to drop its effort. "The SEC is not tasked with environmental regulation, nor has Congress amended the SEC's regulatory authority to pursue the proposed climate disclosures," said the letter by Sen. Kevin Cramer (R-N.D.).
Investor interest drives need for SEC climate risk disclosure rule
SEC staff analyzed 7,000 annual reports between 2019 and 2020, finding that a third of those filings included some risk disclosure related to climate change.
Proposing a climate risk disclosure rule now "makes sense to build on what so many companies are already doing," Gensler said.
Gary GenslerChair, U.S. Securities and Exchange Commission
The proposed climate risk disclosure rule is based on an existing disclosure framework called the Task Force on Climate-Related Financial Disclosures (TCFD) developed in 2015, which Gensler said is a widely used framework that will provide standards for reporting climate risk.
By requiring companies to report climate risk data in their SEC filings, it will provide investors with consistent, accurate information, Gensler said.
"It's important for investors to find this information in one place," Gensler said. "Further, placing disclosures in filings also benefits investors because there are more controls around disclosures."
SEC seeks feedback
Gensler said the SEC wants feedback on the proposed climate risk disclosure rule from both companies and investors, as well as other interested parties.
More than 100 comments have already been submitted to the SEC, ranging from supportive to asking for additional time to comment.
A comment by Apex Companies LLC, a sustainability management firm, said the company "welcomes the SEC's renewed focus on climate and ESG disclosures and writes in support of established rules that facilitate the disclosure of consistent, comparable and reliable information on climate change."
Yet the Industrial Minerals Association -- North America (IMA-NA), a nonprofit trade association representing minerals producers, said in its comment that the "combined scope, complexity and cost" of the proposed rule requires more time than allotted for association members to assess how the rule could affect their businesses and respond accordingly.
"The rule would require information about a company's climate-related risks that are reasonably likely to have a material impact on its business, results of operations or financial condition," according to the statement. "Many IMA-NA members are already facing a plethora of logistical, financial and supply chain challenges, and this rule represents yet another factor they must account for going forward."
The comment period on the climate risk disclosure rule is open until May 20, 2022.
Makenzie Holland is a news writer covering big tech and federal regulation. Prior to joining TechTarget, she was a general reporter for the Wilmington StarNews and a crime and education reporter at the Wabash Plain Dealer.