Trader Talk

The SEC wants to know a lot more about what companies are doing about climate change

U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler testifies before a Senate Banking, Housing, and Urban Affairs Committee oversight hearing on the SEC on Capitol Hill in Washington, September 14, 2021.
Evelyn Hockstein | Pool | Reuters

The Securities and Exchange Commission wants to know a lot more about what companies are doing about climate change.

SEC Commissioners will be meeting Monday to propose rules to enhance disclosures regarding climate-related risks. 

It’s part of an ambitious regulatory agenda set out by SEC Chair Gary Gensler.  More than 50 proposed rules are under consideration by the SEC, one of the most ambitious regulatory agendas in decades.

However, climate disclosure rules are likely to be particularly controversial.

“Investors increasingly want to understand the climate risks of the companies whose stock they own or might buy,” Gensler said in a July 2021 speech. “Investors are looking for consistent, comparable, and decision-useful disclosures so they can put their money in companies that fit their need,” he said.

The SEC will publish details of its proposed rules late Monday morning.  However, based on previous speeches Gensler has given these rules are likely to:

Require mandatory disclosures. The U.S. does not have clear standards on what, if anything, corporations need to disclose to investors about climate risk.  Gensler has previously said climate disclosures should be  “consistent and comparable.”

Be required to be filed in the company’s annual report (Form 10-K). That would make it visible next to other information that investors use to make investment decisions.

Require both qualitative and quantitative disclosures. Gensler has previously said that quantitative disclosures might include information related to greenhouse gas emissions, financial impacts of climate change, and progress towards climate-related goals. The SEC will also likely seek disclosure of climate risks that are “material” to investors, like risks posed by hurricanes, floods, or droughts.   Qualitative disclosures might include how the company’s leadership manages climate-related risks and opportunities and how these factors feed into the company’s strategy.

Require companies to back up their claims.  In the past, Gensler has noted that companies, for example, could claim to be “net zero” in their greenhouse gas emissions but not provide any information that substantiates the claim.

Gensler has separately been critical of investment funds that market themselves as “green,” “sustainable,” or “low-carbon,” but are fuzzy about what criteria they are using to define themselves. Gensler has said he wants fund managers to disclose the criteria and data they use in creating these funds.

Expect push-back

While many companies already acknowledge climate change, and some have already signaled their willingness to move toward net-zero emissions, the move is likely to spark pushback from many in the business community, who are worried about a mountain of new disclosure requirements coming from the SEC, on climate change and many other issues.

In a statement to CNBC,  Kenneth E. Bentsen, Jr., president and CEO of the Securities Industry and Financial Markets Association (SIFMA), an industry group representing securities firms, banks, and asset management companies, said: “SIFMA believes any ESG disclosure rule should deliver a balance of tailored disclosures and comparable quantitative information across registrants, while minimizing registrant compliance costs and ensuring a flexible disclosure regime that can meet evolving circumstances.”

Many in Congress are also worried about regulatory overreach.

In a statement to CNBC, U.S. Congressman Andy Barr (R-KY), a senior member of the House Financial Services Committee who led GOP pushback against the SEC climate disclosure rulemaking process back in October of last year, said: “The statutory mission of the Securities and Exchange Commission (SEC) is to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation.  It is definitively not to reduce carbon emissions or solve climate change.”  

“But the SEC, by wading into environmental policy debates, like climate change, in which it has zero expertise…will politicize the agency and reduce its credibility by hurting investors, elevating non-pecuniary factors above financial returns,” he said.

This is only the start of the process

 The SEC’s proposed rules, should they be approved by the Commission, is only the start of the process. 

Once a new rule has been proposed,  a public comment period will follow, which recently has been either 30 days from when it is published in the Federal Register, or 60 days after it is issued, whichever is longer.  

The SEC can then respond to comments, ask for additional comments, or propose a final rule. The final rule can then be voted on and adopted.

Getting to that final vote is not always easy, Amy Lynch, president of FrontLine Compliance and a former SEC compliance official, told me in February.

 ”There has to be agreement in the division responsible for that rule with the SEC commissioners, which can be a very political process,” she told me.  “The key is, whether the proposal is on the minds of the majority.”

SEC Chair Gary Gensler will be on Squawk Box on Monday at 2:15 PM to discuss the proposed climate disclosure rules.