SOURCE: Ceres
DESCRIPTION:
Investors need a complete picture of issuers’ financial risks to make informed decisions about their portfolios—and that includes climate-related risks, Anne Simpson, the global head of sustainability at Franklin Templeton, explained during a virtual meeting of corporate executives and investors that Ceres hosted on April 12 with Gary Gensler, chair of the U.S. Securities and Exchange Commission (SEC), to discuss the agency’s new landmark climate disclosure proposal.
“Information is the lifeblood of the capital markets,” Simpson told the audience of over 2,000 attendees, as she explained why Franklin Templeton, which manages $1.5 trillion in assets, supports the new proposal.
The SEC’s proposed rule, the Enhancement and Standardization of Climate-Related Disclosures for Investors, would require publicly traded companies in the U.S. to disclose climate-related risks and opportunities. This includes reporting their greenhouse gas (GHG) emissions and informing investors on how those emissions drive their risk management strategy.
Joe Allanson, Finance Executive Vice President of ESG at Salesforce, stressed that there is an overwhelming appetite for the standardized disclosure between companies and their investors that the SEC rule proposes.
“There is an urgent and strong desire for a common language where companies are able to communicate with their investors the risks and opportunities that climate presents to each of our businesses. A language that is predicated on comparability, consistency, and reliability," he said.
Chair Gensler highlighted the key purpose of this thoughtful rule proposal--to respond directly to concerns from investors and issuers about the lack of standardization in current climate risk reporting. The SEC’s proposal also aligns with existing, globally endorsed frameworks and standards, drawing specifically from the Task Force on Climate-related Financial Disclosures (TCFD) guidance, and the GHG Protocol standards, the world’s most widely used carbon emissions protocol. The proposal is also in step with the SEC’s authority, which is to protect investors and guard against market shocks.
A broad base of U.S. investors and a growing number of companies support standardized, mandatory disclosure because the climate-related financial risks facing businesses and their shareholders is not a future challenge—it exists today, said Mindy Lubber, Ceres CEO and president. “That is why last year, in the largest investor call to world governments, 733 investors with $52 trillion in assets, called for mandatory corporate climate disclosure,” she said. It is no surprise that domestic and global markets and regulators are moving quickly to address climate risk as they have addressed other critical market risks, such as cybersecurity and the pandemic, she explained.
In his remarks, Chair Gensler stressed the long tradition of mandated disclosure in the agency’s history. He also pointed out that many companies are already measuring and reporting their GHG emissions.
“The SEC has a role to play, as it has for eighty-eight years, as it can now, in bringing some standardization to the conversation happening between issuers on the one side and investors on the other, particularly when it comes to disclosures that are material to investors,” he said.
The new proposal is not occurring in a vacuum. It builds on guidance the SEC issued in 2010, their work before this, and is in line with the trend of its global peers, which are also adopting mandatory climate risk disclosure. In May 2021, the Biden administration released an executive order outlining the role of federal regulators and other government entities in addressing climate-related financial risks, as part of their responsibility of ensuring the stability and competitiveness of the U.S. financial system and economy.
In responding to company concerns, the SEC’s proposal offers generous carveouts and accommodations, particularly around GHG emissions. Reporting of GHG emissions will be phased in through 2028 and the proposed rule will allow for greenhouse gas emissions estimates to be presented as a range. In fiscal year 2023, only large, accelerated filers, which are companies that have a public float (the number of shares that a company has issued publicly multiplied by the share market price) of $700 million or more, will be required to make climate risk disclosures.
A key feature of the proposed rule is its requirements on carbon emissions scopes, particularly scope 3 emissions, explained Isabel Munilla, director of U.S. financial regulation for the Ceres Accelerator for Sustainable Capital Markets. The disclosure of GHG emissions includes scopes 1, 2, and 3 with scope 1 referring to direct emissions, scope 2 referring to indirect emissions from purchased energy, and scope 3, referring to all other indirect emissions from the reporting entity’s suppliers.
While scopes 1 and 2 are important, the bulk of most companies’ emissions occur in the value chain. Without scope 3, investors are left with an incomplete picture of a company's exposure to climate risk and opportunities.
As Munilla explained, financial resilience and economic stability across sectors are at the heart of the SEC’s climate disclosure proposal. The comment period goes until May 20 and the public can submit their comment here. To view a recording of the briefing on April 12 and find additional resources, visit ceres.org/sec.
KEYWORDS: SEC, Gensler, proposed rule, CERES
