For the first time, the Securities and Exchange Commission has stated that public firms must inform their shareholders and the federal government on how they influence the climate, a far-reaching proposal long sought by environmentalists.
At a meeting on Monday, the country’s highest financial regulator handed preliminary approval to the much-anticipated climate disclosure rule, moving forward with a step that would buttress the Biden administration’s stagnated environmental agenda.
The proposed rule, which was approved by a vote of three to one, aims to provide investors with a comprehensive view of the risks that climate change may pose to companies as a result of disasters such as droughts and wildfires, changes in government environmental policies, or consumers’ declining interest in products that contribute to global warming.
However, the ramifications might be far-reaching: environmental and corporate-governance activists said the rule’s need for transparency would hold firms accountable for their involvement in climate change and give investors greater clout in pressing changes to business practices that contribute to increasing global temperatures.
“This will allow all interested stakeholders, including shareholders, to then pressure firms to take actual action,” said Bill Weihl, a former Google green energy expert and Facebook director of sustainability who now runs ClimateVoice, a nonprofit that pushes employees to fight for climate action.
The public will have 2 months to comment on the idea, which, if implemented, would establish a reporting structure for firms to include information about climate-related risks in their annual reports and stock registration statements.
However, the idea has already sparked resistance from certain industry trade organisations and may be contested in court, potentially delaying its implementation date. Much of the criticism has focused on the extent to which emissions-related data falls under the authority of the S.E.C.
The disclosure of information that is “material” to investors, meaning they require it to make an educated choice about buying or selling a company, is a cornerstone of S.E.C. standards.
Representative Patrick T. McHenry of North Carolina, the leading Republican on the House Financial Services Committee, slammed the idea as “tone-deaf and foolish,” claiming that climate concerns aren’t a major concern for most firms.
“The Biden administration is pushing its climate agenda through finance regulators because they don’t have the numbers in Congress to pass it,” he explained.
However, many corporations have already begun to disclose information about their greenhouse gas emissions; the SEC estimates that one-third of the 7,000 corporate annual reports evaluated in 2019 and 2020 included some climate impact disclosures. Senator Jack Reed of Rhode Island, a Democrat, said the proposed regulation will restore order to the process.
“Publicly listed firms will no longer be able to cherry-pick climate reporting, and investors will have a far better understanding of their exposure to serious climate risks,” he added.
According to regulators, the regulation relies on recommendations offered by the Securities and Exchange Commission in 2010 to corporations about providing information regarding climate change. The S.E.C. took that measure at the same time that the Environmental Protection Agency began forcing certain major corporations to collect data on greenhouse gas emissions.
“Over the decades, the S.E.C. has stepped in where there is a compelling need for the disclosure of information pertinent to investors’ decisions,” said Gary Gensler, head of the commission. And, he claims, more investors are clamouring for such information.
“Shareholders managing $130 trillion in assets have asked corporations to disclose their climate risks,” Mr Gensler added.
The US Chamber of Commerce, a business lobbying organisation, stated that it broadly supported the purpose of corporate climate disclosure but desired a more “clear and practicable” guideline that would not require corporations to report inconsequential risks.
“We will campaign against elements of this plan that depart from that criteria or are overly broad,” said Tom Quaadman, executive vice president of the chamber’s Center for Capital Markets Competitiveness.
Mr Gensler stated in a session with investors following the commission decided that the S.E.C. would seriously examine the opinions from corporations, investors, and the legal community before enacting a disclosure rule. “We look forward to hearing from the public,” he stated.
Some corporations, such as Apple, Facebook, Google, and Microsoft, already provide significant data and have set timelines for achieving net-zero carbon emissions. However, the proposed regulation, which is almost 500 pages long, would provide a framework for all publicly traded corporations.
Companies would be forced to perform three levels of study of their influence on the climate, which is similar to how scientists evaluate the environmental impact of corporate activities.
Companies in the first two tiers would be required to publish annually the direct impact of their activities on climate change in terms of the items they manufacture, as well as any indirect environmental consequences associated with the use of power, trucks, or other vehicles.
The third level is more comprehensive, involving an assessment of the so-called carbon footprint of suppliers, business travel, and any assets leased by a corporation. The S.E.C. plan would compel only the largest firms to report this degree of climate damage — known as Scope 3 emissions — but would leave it up to individual companies to determine whether the information would be relevant to investors.
Scope 3 emissions, which mostly encompass gases produced by a company’s suppliers or more incidental operations, frequently outnumber the other two classifications. In most circumstances, the regulation would not take effect for major corporations for at least two years.
In addition, major firms reporting Scope 3 emissions would initially get a so-called safe harbour provision from investors who felt the corporations’ analysis was faulty because Scope 3 emissions can be more difficult to evaluate and collect, the S.E.C. chose a safe harbour option.
Todd Phillips, the Center for American Progress’ director of financial regulatory and corporate governance, said he had some concerns about how the regulation would address Scope 3 emissions. He did, however, add that the new regulation would provide investors with “access to crucial information they need to make educated investing decisions.”
When the commission announced last year that it was considering whether to introduce climate laws, it encouraged the public to send comment letters. Ceres, a nonprofit organisation that works with investors and corporations to address environmental concerns, reported that 65 per cent of comments made by investment firms urged for companies to be obliged to list Scope 3 emissions.
Some business leaders are expected to embrace the proposed regulation because they feel that standardising climate statements would make it simpler to compare firms’ environmental efforts.
Microsoft, for example, submitted a letter in favour of the commission’s climate-change initiative. Large technology corporations have positioned themselves as leaders in the transition away from fossil fuels, but they are not without challenges: Microsoft has reported an increase in emissions despite their goal of becoming “carbon zero” by 2030. The rise was almost entirely due to an increase in Scope 3 emissions as the firm developed new data centres and Xbox usage skyrocketed during the epidemic.
Environmentalists think that compelling businesses to monitor and report their greenhouse gas emissions would push them to take more aggressive actions to reduce their impact on the environment.
“There’s an ancient adage in business: what gets measured gets managed,” remarked Rhode Island Senator Jack Reed.
The Sierra Club and the Environmental Defense Fund both praised the new regulation and urged it to be implemented as soon as possible. The requirement, according to Ben Cushing, who heads the Sierra Club’s drive for stricter climate disclosures, is “far overdue.”
“Companies have made commitments to address their climate impact without disclosing the entire scale of their emissions, the risks to their own companies from climate change, or the appropriate business strategies to meet their climate pledges,” he added.
If the regulation is made permanent, it will be a significant success for the Biden administration, which has failed to implement its wider climate agenda. Because of the slow success, it has achieved with emissions-focused legislation, financial regulation has become one of the most important weapons it has to modify the behaviour of firms as climate change worsens.
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