Investors and others need more climate risk data to make informed business decisions. The US joins the EU in calling for more transparency.
Publicly traded companies in the United States would have to comply with new and tougher standards in reporting their climate risks to investors under rules proposed Monday by the U.S. Securities and Exchange Commission.
The proposed rules would ensure that companies are more transparent about climate risks that could reasonably be expected to impact business operations or change a firm’s financial health. “The required information about climate-related risks would also include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks,” said the SEC filing.
Commission officials say the changes are necessary because, in the face of an urgent energy transition and rapidly accelerating climate impacts, investors don’t have enough information to make fully informed decisions.
For example, frequent and severe disasters can interrupt business operations and damage assets. Evolving technologies can drive shifts in a business model. Or, as is increasingly the case in the banking sector, a firm may discover its financing options are more limited because of climate-driven regulatory changes.
“Many investors—including shareholders, investment advisers, and investment management companies—currently seek information about climate-related risks from companies,” the SEC said. To be sure, many businesses have stepped up there sustainability efforts and are reporting them to investors, often because their investors and customers are demanding climate accountability. It’s still not yet enough.
“We are concerned that the existing disclosures of climate-related risks do not adequately protect investors,” the SEC says.
The proposed rule changes are modeled in part on recommendations made by the Task Force on Climate-Related Financial Disclosures (TCFD), a group of 32 members drawn from G20 nations led by climate activist and former U.S. presidential hopeful Michael Bloomberg.
The SEC proposal also was shaped by input received from more than 6,000 academics, government and industry leaders, climate advisors and investment managers, among others. It will now be subject to a 60-day public comment period.
Among the changes would be a more robust reporting requirement of not just the climate risks that affect investors, but also the methodology to explain how companies arrive at their conclusions. The SEC also says it hopes to bring the U.S. rules in line with others around the world, and advance the goal of standardized filings.
“Several jurisdictions, including the European Union, are developing or revising their mandatory climate-related disclosure regimes to provide investors with more consistent, useful climate-related financial information,” the U.S. officials said.
Indeed, the EU proposal filed in April 2021 seeks similar reporting rule changes meant to protect investors in keeping with sustainable finance goals.
“The current legal framework does not ensure that the information needs of these users are met. This is because some companies from which users want sustainability information do not report such information, while many that do report sustainability information do not report all the information that is relevant for users,” the EU said in its proposal. “When information is reported, it is often neither sufficiently reliable, nor sufficiently comparable, between companies.”