As previously discussed, SEC Chairman Gary Gensler has
instructed SEC staff to “to develop a mandatory climate risk disclosure rule proposal for the Commission’s consideration by the end of the year.”
Given that Commissioners Allison Herren Lee and Caroline Crenshaw have publicly supported enhanced disclosures, it is nearly certain prescriptive rules are on the near horizon. Willis Towers Watson has
combed through speeches and statements and built a likely scenario:
- Method of disclosure: While Gensler has stated his preference for a mandatory disclosure, he has not discussed a preferred method, such as officially filed with the SEC in a 10-K or furnished through a company’s sustainability report. An official filing with the SEC would entail a higher level of scrutiny and legal risk if disclosures are deemed inaccurate or misleading.
- Comparability: Gensler, Lee, and Crenshaw have discussed their view that disclosures should include easily comparable information. This indicates rules will include specific metric requirements and a greater level of detail than generic text.
- Quantitative and Qualitative: Gensler highlighted that qualitative discussions should be included, such as “how the company’s leadership manages climate-related risks and opportunities and how these factors feed into the company’s strategy.”
- Metrics: The publicly discussed metrics include greenhouse gas emissions, financial impacts of climate change, and progress toward climate-related goals.
- Gensler has stated his preference that disclosures include Scopes 1, 2, and 3 – meaning companies would need to disclose emissions from indirect sources such as suppliers. He noted that “net zero” commitments often do not disclose if they measure all three scopes. He has instructed SEC staff to consider which data or metrics a company would disclose to inform investors how it is meeting commitments.
- Other disclosures: Gensler has noted that industry-specific disclosures may be useful (highlighting banking, transportation, and insurance). Additionally, he has advocated for disclosed scenario analyses covering how a business might adapt to the range of possible physical, legal, market and economic changes.
Given the scope of the new regulations, the process will include a proposed rule, public comment period, and a finalized rule. New rules could be effective immediately upon finalization, possibly as early as mid-2022.
The Center expects investors to latch onto SEC comments focused on performance against stated commitments or progress against climate related goals. Though they have not won large support, it is likely the number of shareholder proposals requesting links between executive pay and performance against climate goals will increase. Large, mainstream investors such as BlackRock and State Street are substantially more vocal about climate risk and have adjusted voting policies accordingly, and may be willing to support shareholder proposals on the topic in the immediate future.
