Shelter from the Storm: Helping Investors Navigate Climate Change Risk
This is a watershed second for buyers and monetary markets because the Commission at present addresses disclosure of local weather change threat—one of the momentous dangers to face capital markets for the reason that inception of this company. The science is evident and alarming, and the hyperlinks to capital markets are direct and evident.
Thus, I’m more than happy to help at present’s proposal and I need to lengthen my honest because of employees throughout the company for his or her laborious work in crafting the proposing launch. I additionally need to thank Chair Gensler for his focus and dedication to this problem, and his counsel, Mika Morse, whose abilities have been integral to finalizing this proposal. Today’s proposal is extraordinarily effectively performed, skillfully leverages widely-accepted market-driven options together with these created by the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas (GHG) Protocol, and responds to longstanding demand for Commission motion to reinforce climate-related disclosures for buyers and markets.
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Maintaining an efficient disclosure regime for public corporations is among the many most essential and foundational roles of the Commission. We have broad authority to prescribe disclosure necessities as crucial or applicable within the public curiosity or for the safety of buyers. Importantly, with that authority comes accountability. We have a accountability to assist make sure that buyers have the data they should precisely value threat and allocate capital as they see match. We have a accountability to hundreds of thousands of households with retirement financial savings and faculty funds whose financial well-being is linked to our monetary markets. And we’ve got a accountability to remain firmly targeted on details and science and their implications for monetary markets.
The pandemic offered a well timed reminder {that a} disaster with roots exterior monetary markets can, and infrequently will, ship shock waves straight by our markets. When the pandemic hit two years in the past, the Commission sprang into motion, issuing steerage, offering focused reduction, and advancing quite a few different initiatives designed to alleviate lots of the market stresses this public well being disaster created, and to get decision-useful details about these monetary stresses into the markets. Those initiatives have been largely applied on an emergency foundation. However, if we had had extra concrete warning of the approaching catastrophe, we may have taken steps upfront to extend transparency round firm preparedness for among the most foreseeable dangers with the intention to get buyers the data they wanted in a well timed method.
With local weather change, we’ve got ample, well-documented warning of probably huge and sophisticated impacts to monetary markets. Physical and transition dangers from local weather change can materialize in monetary markets within the type of credit score threat, market threat, insurance coverage or hedging threat, operational threat, provide chain threat, reputational threat, and liquidity threat, amongst others. Indeed, we’ve got extra than simply warning as a lot of these dangers have already materialized.
Climate change thus poses a urgent and pressing threat—for buyers, corporations, capital markets, and the economic system. It is not any shock then that buyers representing tens of trillions of {dollars}—greater than the mixed GDP of the highest 5 ranked nations on the earth—have been clear that they want extra and higher climate-related disclosure.
We see this in shareholder proposals, we see this in public campaigns and initiatives, we see it in direct calls for on corporations, and we see it in calls for that the Commission take motion to require climate-related disclosure. And, whereas buyers are the principal drivers of demand and the principal customers of disclosure, the help for enhanced disclosure necessities is much broader. The overwhelming majority of feedback acquired in response to final 12 months’s request for public enter favored enhanced local weather disclosure. Comments from buyers, issuers, lecturers, accounting companies, third social gathering customary setters, lawmakers, our personal advisory committees —a broad and various coalition of market contributors and commentators agree on the necessity for the Commission to suggest climate-related disclosure necessities.
This proposal is conscious of that suggestions, in addition to to those that increase legitimate considerations concerning the challenges of those disclosures. It takes a measured and balanced method to local weather disclosure, constructing upon present market practices, together with proposed lodging for smaller corporations, balancing principles-based necessities with the necessity for climate-related metrics, phasing in sure necessities over time, and even offering a protected harbor for the disclosure of Scope 3 emissions.
The proposal broadly comprises the next provisions:
- It would create new necessities for the disclosure of climate-related dangers and impacts primarily based on the TCFD disclosure framework, together with details about materials impacts of local weather threat on an organization’s enterprise, and details about an organization’s governance, threat administration, and technique associated to local weather threat.
- It would come with a requirement to reveal in an organization’s monetary statements disaggregated metrics on climate-related impacts, expenditures, and estimates and assumptions.
- It would require the disclosure of an organization’s greenhouse fuel emissions, drawing on the GHG Protocol, and together with Scopes 1, 2, and, for all however the smallest corporations, Scope 3 emissions.
The proposal would require these disclosures to be filed with the Commission, section reporting necessities in over time primarily based on an organization’s measurement, and importantly, features a phased-in requirement for verification or “reasonable assurance” of GHG Scopes 1 and a pair of for bigger filers to assist make sure the reliability of those disclosures.
I sit up for what I do know can be detailed, data-driven, and strong feedback on all facets of the proposal. I’m particularly to listen to from commenters in just a few particular areas:
Reliability of GHG Emissions Disclosures
An organization’s inside controls. Greenhouse fuel emissions in lots of respects resemble monetary assertion disclosures, involving as they do vital estimates and assumptions and offering critically essential perception into an organization’s operations. As proposed, these disclosures are required underneath Regulation S-Okay somewhat than underneath Regulation S-X with monetary assertion disclosures. If emissions disclosures have been required underneath Reg S-X and situated within the monetary statements, they might usually be topic to an organization’s inside management over monetary reporting (ICFR). In Reg S-Okay, there is no such thing as a such requirement. Would GHG emissions be higher positioned inside Reg S-X and topic to the pains of ICFR? Alternatively, ought to we go away emissions disclosure in Reg S-Okay as proposed however add a brand new requirement to determine ICFR-like inside controls for GHG wherever they reside?
Third-party verification. The location of GHG in Reg S-Okay would additionally imply that the required assurance could also be offered by third-party verifiers that aren’t PCAOB-registered audit companies. On the one hand, will this assist to enhance competitors on this area and thus create higher outcomes? On the opposite hand, PCAOB-registered audit companies are topic to oversight and inspection whereas different varieties of third-party verifiers usually are not. Will this distinction considerably have an effect on the standard of, or confidence in, the verification?
Reasonable vs. restricted assurance. I hope commenters will weigh in on whether or not to maintain the proposal’s requirement to topic GHG Scopes 1 and a pair of to cheap assurance attestation after an interim interval of restricted assurance. Reasonable and restricted assurance are phrases of artwork within the auditing world with vital variations. Broadly, restricted assurance is a type of damaging assurance that the attester is unaware of any materials points. Reasonable assurance, by distinction, is an affirmative attestation that the data is pretty offered in all materials respects. Consider, for instance, parachuting from a airplane. Would you be content material to listen to {that a} evaluate reveals nothing to point an issue with the chute, or would you as an alternative need to know that the chute has been examined and located to be sound in all materials respects? Given what many view because the centrality of GHG emissions in analyzing an organization’s local weather threat, the distinction between restricted and cheap assurance could also be no trifling distinction, and will probably be critically essential to listen to from commenters on this problem.
Scope 3 Emissions
Specificity. Scope 3 disclosures are sometimes vitally essential to understanding an organization’s total greenhouse fuel emissions and subsequently total climate-related dangers. As proposed, Scope 3 emissions have to be reported if they’re materials—both quantitatively or qualitatively. Does the discharge include ample specificity relating to how corporations ought to undertake this evaluation? Also, ought to corporations be required to offer the idea for any dedication that their Scope 3 emissions usually are not materials to ensure that buyers assess whether or not they agree with the dedication, particularly in mild of Supreme Court precedent stating that doubts about materiality must be resolved in favor of disclosure?
Assurance Carve-out. The proposal wouldn’t require any kind of verification or assurance over Scope 3 emissions disclosures. Given the general significance of such information, would it not be extra prudent to section in an assurance requirement over time for Scope 3? Would a phase-in interval be per an expectation that Scope 3 disclosures are prone to mature over time with across-the-board disclosure of Scopes 1 and a pair of emissions?
Safe Harbor. The proposal comprises a broad protected harbor for Scope 3 emissions disclosures except they’re made with out a cheap foundation or not in good religion. Should the protected harbor additionally or as an alternative be conditioned upon using particular methodologies such because the Partnership for Carbon Accounting Financials (PCAF) Standard if the registrant is a monetary establishment, or the GHG Protocol Scope 3 Accounting and Reporting Standard for different varieties of registrants?
On these and the various different essential questions raised by the proposal, I hope commenters will weigh in with their views and supporting information.
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Climate change has broader implications than these inside the Commission’s remit that we handle at present. Other regulators or lawmakers might take into account or take motion primarily based on their very own jurisdictions and tasks. However, our accountability to assist guarantee correct and full disclosure of dangers for buyers and markets is long-standing and central to our mission. Climate threat is just not distinctive on this regard. It is just not in contrast to equally urgent considerations for buyers comparable to cybersecurity threats, or dangers associated to provide chains and employee security delivered to the fore by the pandemic. And with local weather, we get pleasure from an in depth physique of analysis on this threat and the way it will influence monetary markets, years of labor and evaluation by market contributors making an attempt to enhance disclosure of the danger, and a transparent document of fairly rational investor demand for higher disclosure of local weather threat info. Today’s proposal displays a dedication to remaining targeted on these details and to data-driven policymaking.
One closing thanks once more to the handfuls of employees all throughout the company who’ve labored so laborious on this proposal, and a particular because of my counsel, Katherine Kelly, who has labored tirelessly and with deep dedication on this effort. Thank you.
Endnotes
1Bob Dylan, Shelter from the Storm (Ram’s Horn Music 1974).(return)
2Recent scientific information from the United Nations Intergovernmental Panel on Climate Change (IPCC) report, drawing from some 34,000 research all over the world, comprises a dire message that has been known as a “Code Red for humanity.” See United Nations, Secretary-General, Press Release 20847, Secretary-General Calls Latest IPCC Climate Report ‘Code Red for Humanity,’ Stressing ‘Irrefutable’ Evidence of Human Influence (Aug. 9, 2021); see additionally IPCC, Climate change: a menace to human wellbeing and well being of the planet. Taking motion now can safe our future (Feb. 28, 2022) (“Human-induced climate change is causing dangerous and widespread disruption in nature and affecting the lives of billions of people around the world, despite efforts to reduce the risks. . . People’s health, lives and livelihoods, as well as property and critical infrastructure, including energy and transportation systems, are being increasingly adversely affected by hazards from heatwaves, storms, drought and flooding as well as slow-onset changes, including sea level rise.”).(return)
3See Swiss Re Institute, The economics of local weather change: no motion not an choice (April 2021) (“The world stands to lose close to 10% of total economic value by mid-century if climate change stays on the currently anticipated trajectory, and the Paris Agreement and 2050 net-zero emissions targets are not met.”); Managing Climate Risk within the U.S. Financial System, Report of the Climate-Related Market Risk Subcommittee, Market Risk Advisory Committee of the U.S. Commodity Futures Trading Commission (Sept. 9, 2020) (“Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy. Climate change is already impacting or is anticipated to impact nearly every facet of the economy, including infrastructure, agriculture, residential and commercial property, as well as human health and labor productivity. Over time, if significant action is not taken to check rising global average temperatures, climate change impacts could impair the productive capacity of the economy and undermine its ability to generate employment, income, and opportunity.”); Financial Stability Board, The Implications of Climate Change for Financial Stability (Nov. 23, 2020) (“The manifestation of physical risks—particularly that prompted by a self-reinforcing acceleration in climate change and its economic effects—could lead to a sharp fall in asset prices and increase in uncertainty. This could have a destabilising effect on the financial system, including in the relatively short term. Market and credit risks could also be concentrated in certain sectors of the real economy and geographies. Disruption could also occur at national level. Some emerging market and developing economies (EMDEs) that are more vulnerable to climate-related risks, especially those in which mechanisms for sharing financial risk are less developed, may be particularly affected. A disorderly transition to a low carbon economy could also have a destabilising effect on the financial system.”).(return)
4The Enhancement and Standardization of Climate-Related Disclosures for Investors, Release No. 33-11042 (March 21, 2022) [Proposing Release].(return)
5See 15 U.S.C. 77g(a)(1) (“Any such registration statement shall contain such other information, and be accompanied by such other documents, as the Commission may by rules or regulations require as being necessary or appropriate in the public interest or for the protection of investors.”); see additionally 15 U.S.C. 78m(a); 15 U.S.C. 78l(b); 15 U.S.C. § 78o(d).(return)
6See SEC Coronavirus (COVID-19) Response (setting forth dozens of company actions conscious of the pandemic, together with exemptive reduction for issuers and registered entities from sure regulatory necessities, steerage on regulatory tasks together with disclosure obligations, momentary amendments to guidelines to facilitate capital formation for small companies, and different initiatives conscious of the results of the general public well being disaster on the capital markets).(return)
7See Bank for International Settlements, Basel Committee on Banking Supervision, Climate-related threat drivers and their transmission channels (April 2021) (figuring out credit score, liquidity, market, operational, and reputational dangers as impacts for banks from bodily and transition dangers of local weather change); Nahiomy Alvarez, Alessandro Cocco, Ketan B. Patel, A New Framework for Assessing Climate Change Risk in Financial Markets, Chicago Fed Letter, No. 448, Nov. 2020 (discussing supplying chain threat flowing from bodily local weather threat and different impacts from bodily, transitional, and legal responsibility dangers); Managing Climate Risk within the U.S. Financial System, Report of the Climate-Related Market Risk Subcommittee, Market Risk Advisory Committee of the U.S. Commodity Futures Trading Commission (Sept. 9, 2020) (figuring out market, credit score, coverage, authorized, technological, and reputational dangers arising from transition threat, in addition to operational disruptions arising from bodily dangers).(return)
8See, e.g., Russell Gold, PG&E: The First Climate-Change Bankruptcy, Probably Not the Last, The Wall Street Journal (Jan. 18, 2019); Christopher Flavelle, Climate Change is Bankrupting America’s Small Towns, The New York Times (Sept. 2, 2021).(return)
9The mixed GDP for the highest 5 ranked nations on the earth by GDP is roughly $45.69 trillion. See GDP Ranked by Country 2022. By comparability, Climate Action 100+ consists of buyers representing $65 trillion {dollars} in property underneath administration. See additionally remark letters in help of enhanced local weather disclosure necessities from BlackRock (June 11, 2021) ($9 trillion); Ceres (June 10, 2021) ($37 trillion); Council of Institutional Investors (June 11, 2021) ($4 trillion); Investment Adviser Association (June 11, 2021) ($25 trillion); Investment Company Institute (June 4, 2021) ($30.8 trillion); SIFMA (June 10, 2021) ($45 trillion); and Vanguard Group, Inc. (June 11, 2021) ($7 trillion).(return)
10Indeed the proposal would current vital potential advantages for market contributors aside from buyers, notably for issuers who’re grappling with competing and typically conflicting calls for for climate-related info underneath numerous requirements and/or in response to bespoke questionnaires. This proposal would assist stage the enjoying area for issuers by offering much-needed certainty and a uniform disclosure customary. Further, I word that local weather dangers seemingly “disproportionately impact groups that have traditionally faced higher barriers to participating in the economy than the general population, including low-income communities, communities of color, and Tribal populations.” Elizabeth Mattiuzzi and Eileen Hodge, Federal Reserve Bank of Chicago, Climate-Related Risks Faced by Low- and Moderate-Income Communities and Communities of Color: Survey Results (Dec. 2021). In that regard, the proposal has potential implications for capital formation in these communities.(return)
11See, e.g., remark letters in help of enhanced local weather disclosure necessities from Ceres (June 10, 2021); State Street (June 14, 2021); Microsoft (June 14, 2021); Gina-Gail S. Fletcher, et al. (on behalf of the Regenerative Crisis Response Committee) (June 14, 2021); PWC (June 10, 2021); Sustainability Accounting Standards Board (now Value Reporting Foundation) (May 19, 2021); and Senator Elizabeth Warren and Representative Sean Casten (June 11, 2021). See additionally Recommendation from the Investor-as-Owner Subcommittee of the SEC Investor Advisory Committee Relating to ESG Disclosure (May 14, 2020) and Asset Management Advisory Committee Recommendations for ESG (July 7, 2021). Among distinctive remark letters in response to the request for public enter, these favoring Commission adoption of enhanced local weather disclosure necessities outnumbered these in opposition by a margin of roughly four-to-one. See Comments on Climate Change Disclosures. The margin is significantly bigger if the 1000’s of type letters favoring enhanced disclosure necessities are considered.(return)
12Disclosure can also be supported by the general public at massive. See Jennifer Tronti, Just Capital, Survey Report: Americans Want to See Greater Transparency on ESG Issues and Support Federal Requirements for Increasing Disclosure (Feb. 2022) (discovering that, amongst a nationally consultant, geographically various, and probability-based net panel reaching respondents in all 50 states, 87 % of respondents supported the federal authorities requiring massive corporations to publicly report local weather info).(return)
13The proposal would require the disclosure of GHG emissions information in gross phrases, excluding any use of bought or generated offsets. Companies, aside from smaller reporting corporations, can be required to reveal Scope 3 emissions if materials or if they’ve set a GHG emissions discount goal or purpose that features Scope 3 emissions. See Proposing Release 168-70. In addition to the exemption for smaller reporting corporations, the Scope 3 compliance date can be delayed (i.e., the reporting requirement would begin one-year after reporting Scopes 1 and a pair of), and the proposal features a protected harbor from legal responsibility for disclosure of Scope 3 emissions. See Proposing Release at 232.(return)
14The assurance requirement for Scopes 1 and a pair of emissions would apply to massive accelerated and accelerated filers, which collectively make up roughly 95 % of market capitalization amongst registrants that file annual experiences. See Proposing Release at 396 (“Large accelerated filers constitute approximately 31% of the universe of registrants that filed annual reports during calendar year 2020 (1,950 out of 6,220), but account for 93.6% of market cap within the same universe. Accelerated filers constitute approximately 10% of the universe of registrants that filed annual reports during calendar year 2020 (645 out of 6,220) and account for 0.9% of market cap within the same universe.”). The proposal would require cheap assurance over Scopes 1 and a pair of emissions disclosures after a three-year transition interval, with an interim requirement of restricted assurance. See id. at 238.(return)
15See 15 U.S.C. 7262(b).(return)
16See PCAOB AS 4105: Reviews of Interim Financial Information (Describing an opinion that, “[b]ased on our review and the report of other accountants, we are not aware of any material modifications that should be made to the accompanying interim financial information (statements) for it (them) to be in conformity with accounting principles generally accepted in the United States of America.”).(return)
17See PCAOB AS 3101: The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (Describing an “opinion that the financial statements present fairly, in all material respects, the financial position of the company as of the balance sheet date and the results of its operations and its cash flows for the period then ended in conformity with the applicable financial reporting framework.”).(return)
18See, e.g., remark letters from Wellington Management Company (June 11, 2021) (“GHG Emissions information serves as the starting point for transition risk analysis because it is quantifiable and comparable across companies and industries. Ranking companies within industries based on their GHG Emissions intensity helps us prioritize companies for engagement to better assess transition risk exposure, as well as encourage better management through a climate transition plan and time-bound emissions reductions targets.”); BlackRock (June 11, 2021) (“We recommend GHG emissions as an appropriate starting point for issuers to provide mandatory quantitative disclosure, recognizing that Scope 3 and any other quantitative disclosures may require a phased approach and appropriate safe harbor where data and methodologies are still developing. However, we support the SEC mandating disclosure of these additional metrics as soon as practicable.”); Ceres (Dec. 15, 2021) (“As noted by investors, Scope 3 data is the highest source of emissions for critical industries to investors and the economy, such as banking (financed emissions) and oil and gas (used of sold products). The Commission and the investors protected within its mandate cannot adequately evaluate issuers’ climate-related financial risk exposure without accurate, comparable, consistent, complete and mandatory Scope 3 disclosure in these and other industries with significant Scope 3 emissions.”).(return)
19TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438, 448 (1977) (recognizing there might be doubts concerning the materiality of knowledge, however explaining that, “particularly in view of the prophylactic purpose” of the securities legal guidelines,” and “the fact that the content” of the disclosure “is within management’s control, it is appropriate that these doubts be resolved in favor of those the statute is designed to protect,” specifically buyers.).(return)