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Welcome to a special edition of Sustainable Business. It isn’t surprising that the Securities and Exchange Commission plans to scale back its proposed climate-disclosure rules, given the strong pushback from companies. The alternative, however, isn’t no climate disclosure.
Most large companies already are facing requests from numerous customers, suppliers, lenders, insurers and investors to provide a range of climate information, often via an assortment of questionnaires, metrics and individual requests. Even without any SEC rules, those requests will increase as scrutiny of green claims ramps up, and other global jurisdictions impose their own mandatory climate-reporting requirements.
What an SEC ruling would do is standardize metrics and reporting. Yes, it would add some costs, but it also could introduce efficiency and help scale up the tools and industry that can help produce the information. It also should reduce ad hoc climate data requests and the risk that such information is misunderstood.
The SEC’s March 2022 proposal would require listed companies to publish information including: a company’s processes to deal with climate risk; how material climate risks affect its business and financial statements; the effect of climate risk on its strategy, outlook or business model; and any climate costs that were 1% or more of each financial-statement line-item total—known as a bright-line test.
Listed businesses would also need to report their direct greenhouse-gas emissions (Scope 1) and those generated by the power they use (Scope 2). And big companies would also publish their supply-chain’s emissions (Scope 3), if material or covered by their corporate climate-action targets.
The most contentious requirements of the proposal were Scope 3 emissions and the bright-line test. WSJ reported last week that the SEC is expected to require some disclosure of Scope 3 emissions but will likely ease its bright-line test.
That line-by-line test was likely intended to improve companies’ analysis and disclosure of material climate risks and costs, which officials worry have been poor for years. Climate-research organization Carbon Tracker analyzed 134 highly carbon-exposed global companies last year and found “little evidence that they had considered the impacts of material climate-related matters in preparing their financial statements.”
Easing the 1% threshold makes sense. It created onerous demands and relied on very speculative what-if analysis. And even without it, companies’ climate-impact analysis and transparency should improve, given the SEC will still require a host of other climate disclosure that stakeholders will pore over in detail. It also gives the agency a compromise to point to when its new rules are almost inevitably brought to court.
The climate-reporting genie is out of the bottle. Corporate and state carbon-neutral promises, and extreme weather events, mean it isn’t going back in. While they will add new demands on companies, the SEC rules will also bring some order to the chaos. That will be a welcome development.
Editors note: This is a special editon of the newsletter to cover the latest on the SEC's proposed rules. We will be back with the regular newsletter on Thursday.
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