The Securities and Exchange Commissions (SEC) has just proposed Climate Disclosure Rules, which aim to standardize climate disclosure and increase transparency in publicly traded companies. For years, investors have struggled to compare both the impact that companies have on the climate, as well as the risks climate change poses to them.
Investors have been pressuring the SEC to introduce rules and guidelines regarding Environmental, Social and Governance (ESG) transparency since the late 1960’s. It had been discussed within the SEC then, but little action was taken. ESG reporting has remained largely voluntary, with some companies following different voluntary standards and guidelines such as the GRI (Global Reporting Initiative) standards. The SEC did publish guidance for climate reporting in 2010, which was helpful but went unenforced.
This has led to huge differences between publicly traded companies in climate impact and climate risk reporting, meaning investors can’t make decisions based on climate-related risk or the environmental impact of a company.
The SEC’s proposed rules are set to change all this. They include a requirement for all publicly traded companies to report their scope 1 and 2 greenhouse gas emissions, and a requirement to report scope 3 emissions if they are significant or if the company’s emission targets include scope 3 emissions. They also require that publicly traded companies be transparent about the climate-related risks they face, what impacts they’d have and how they’re being managed.
These changes would greatly improve the comparability and consistency of information available to investors. SEC chair Gary Gensler explained, “Our core bargain from the 1930s is that investors get to decide which risks to take…climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.”
Not only would these rules serve to improve the information available to investors, but they would help combat climate change on a large scale.
Investors will want to minimize the risk and emissions associated with their investments, and companies will have to address their emissions and their exposure to climate-related risk in a meaningful way.
Action is taking place globally, too. The ISSB (International Sustainability Standards Board) is a regulating body that has put forward a similar set of rules, as well as a framework for companies to investigate their risks and impacts, and report them properly. Countries around the world could adopt this standard, increasing comparability and transparency globally.
This is a big win for climate action, and we look forward to a future of further action and transparency.
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IFRS: ISSB proposes global baseline of sustainability disclosures
US SEC: Chair Gary Gensler’s statement on mandatory climate risk disclosures
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US SEC: SEC Press release on Climatet discolsures
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Felix Von-Moltke