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SEC Wants Companies to Disclose Climate Change Risk. Is it Enough?

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Rakesh  Sharma's picture
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I am a New York-based freelance journalist interested in energy markets. I write about energy policy, trading markets, and energy management topics. You can see more of my writing...

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  • Aug 4, 2021 4:10 pm GMT
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In an era of increased urgency about climate change, the Securities and Exchange Commission (SEC) is stepping up its game. The agency is planning to make climate change risk disclosures mandatory by the end of this year, according to its chief Gary Gensler. It had earlier sought commentary and public input through a list of detailed questions on its site.

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Gensler said the agency would seek “qualitative” and “quantitative” information about climate change risk from companies. While he did not elaborate or provide examples, I assume he was referring to political and legal risks for the former and quantifiable metrics affecting operations and finances from climate change.

 

The SEC’s comprehensive approach to climate change risk is a signal of changing priorities. Previously, the agency only required voluntary “material” disclosures from companies. Since the job of a publicly-listed company was to maximize shareholder value, the materiality of a firm’s disclosures was restricted to issues that affected its finances. The SEC’s current stance represents a broadening of the definition for “materiality.”

 

Climate risk disclosures may also come with a healthy side of market gains for companies. According to research conducted earlier this year, publicly-listed companies that disclosed climate change risks after pressure from shareholders witnessed a 1.21% price increase on average in the days following their disclosure.

 

Is Mandating Disclosure Standards Enough?     

 

Making climate change risk disclosures might be the easy part of the job, however. There are several wrinkles in implementing such an initiative.

 

There’s the problem of standardizing an approach for companies in different industries. They operate in different circumstances and have varying levels of exposure to carbon emission depending on the unit. A standardized set of climate change risk disclosures might not sit well with publicly-listed industrial companies and electric utilities, both of which have high levels of carbon emissions. (The California Public Service Commission requires electric utilities to disclose their climate change risk disclosures while the New York Public Service Commission is considering mandating it).  

 

Companies will also have a hard time reconciling direct and indirect carbon emissions in their portfolio and reporting it as environmental risk to investors. Related to this, a recent Bloomberg article highlighted the need for more stringent reporting for Scope 3 emissions, or emissions made from burning coal and petroleum directly.

 

Not that companies are taking special efforts to get it right. A 2020 Moody’s Analytics survey found that less than 20 percent of the roughly 12,000 companies it polled had “significant variation” in content, details, and quality. A report by the Sustainability Accounting Standards Board (SASB) found that companies use “boilerplate” language more than 50% of time while addressing material risks. The problem is prevalent across geographies.

 

A report by Ernst & Young earlier this year found that there is a wide dissonance between coverage and quality of disclosures made based on the Task Force on Climate – related Financial Disclosures (TCFD) standards across the globe. For example, although 84% of publicly-listed companies opted to disclose climate change risks in the US, only 60% were deemed to have quality coverage. In Ireland, the performance was even more abysmal. Sixty-three percent of companies disclosed climate change risks and only 25% had quality coverage.  

 

Finally, there are the costs of making such disclosures for companies. I have written a bit about the operational and financial costs of these changes for utilities here

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Matt Chester's picture
Matt Chester on Aug 4, 2021

Companies will also have a hard time reconciling direct and indirect carbon emissions in their portfolio and reporting it as environmental risk to investors

This highlights my initial concern-- not is it enough, but would companies even comply? Any gray area of this could be subject to confusion, or worse subject to gamesmanship and looking for loopholes

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