A Risk by Any Other Name

Commissioner Caroline A. Crenshaw. Image Credit: US SEC

Statement on the Enhancement and Standardization of Climate-Related Disclosures

March 6, 2024/US SEC

By Commissioner Caroline A. Crenshaw

I. Introduction

Good morning and welcome. I want to start by thanking the hard-working staff of the Securities and Exchange Commission. Your professionalism, expertise, and dedication are surpassed by none, and it is a privilege to work with you in service of the public. You are all making your way through our regulatory agenda with poise, thoughtfulness, and creative problem-solving. Thank you.

I also want to thank former Acting Chair Lee for beginning this project in 2021 with a request for information, which was instrumental in initiating this process.[1]

There has been an intense media glare on our proposal and robust public dialogue. Conversations have been myriad; discourse has been at times heated; opinions have been diverse. And, speculation on the substance of the rule – what is in and what is out – has reached a fever pitch.

I have observed a tendency in these discussions to let the dialogue steer away from the true purpose of our proposal: we proposed this rule to benefit investors who, at the end of the day, are people. That includes people who have put in a lifetime’s worth of labor, and who invest their savings with the promise of a better future for themselves and their families. With luck, some are able to build stability, and create incremental progress toward their financial goals. Investors are at the heart of today’s rulemaking, and it is critical that we give them the information they need to properly assess the risks that underlie the value of their hard-earned savings. They are entitled to consistent, comparable, and reliable climate risk disclosures – and many investors have been calling for such disclosures for years.[2]

Notwithstanding that strong and consistent demand, investors continue to face costly, inconsistent, disparate, and, at times, unreliable data without clearly disclosed methodologies for how these data are calculated.[3] Today’s rule finally begins to change that. As you have heard from the staff, it establishes a floor for a disclosure framework that will provide investors with climate risk information, help inform investors’ investment decisions, and be subject to the rigor of Commission filings.

That floor includes:

First, a requirement for larger companies to disclose material Scope 1 and Scope 2 Greenhouse Gas (“GHG”) emissions as a quantitative metric to gauge transition risk or a company’s publicly stated target or goal.[4] Investors have made clear that GHG emissions disclosures are necessary to understand the current and future risks to the financial condition of companies. These data may be classified by some as non-financial, but commenters emphasized that emissions disclosure is an invaluable proxy for financial risk. These disclosures serve such an important role because, among other things, they are quantitative and comparable across companies.

Second, a level of third-party review subject to attestation standards of those emissions data to increase their veracity and reliability.[5] In short, companies will have to disclose a quantitative dataset of GHG emissions subject to a gatekeepers’ review. These gatekeepers must follow certain widely-accepted attestation standards, which includes a requirement that the gatekeepers be independent from the company. Moreover, companies will have to disclose if they dismissed or fired a gatekeeper over disagreements related to GHG emissions disclosures, making it harder to hide deceptive or irregular practices.

Third, a quantitative disclosure about certain expenditures associated with activities to mitigate or adapt to climate-related risks, transition plans, targets, and goals so that investors can assess any progress or cash allocated for those purposes.[6] Disclosure of these expenditures provides fundamentally important insight into how a company is managing risk and whether and how expenditures align with qualitative disclosures and stated plans, targets, and goals. Investors will have a new avenue to ensure that companies are doing what they say they’re doing and consider what the impacts of those activities.

Fourth, a disclosure of material impacts on financial estimates and assumptions.[7] This will enable investors to assess the reasonableness of the estimates and assumptions being made by companies.

These requirements, among others laid out in the rule, move a haphazard potpourri of public company disclosures into the Commission’s well-developed and standardized filing ecosystem. Commission filings come with a greater disclosure review process, heightened liabilities for material misstatements and omissions from both our enforcement program and private lawsuits, a level of reliability and year-over-year reporting that is conspicuously absent from climate risk information today, and being able to access those disclosures in one location. Investors made clear to my colleagues and me that these provisions are of key importance. Investors need insight into a company’s business, its results, and its financial condition, including material risks it faces.

To be crystal clear, though, this is not the rule I would have written. While these are important steps forward, they are the bare minimum. Ultimately today’s rule is better for investors than no rule at all, and that is why it has my vote. But, while it has my vote, it does not have my unencumbered support. And, although I am loath to leave for future Commissions those obligations that I see as our responsibilities today, I’m afraid that is precisely what we are doing.

II. GHG Emissions and Expenditures

Important disclosures remain absent from this final rule. On March 21, 2022, we proposed a rule that, among other things, included: 1) a more robust GHG emissions reporting requirement and 2) transition-related expenditure disclosure in the financial statements. There is clear legal authority to update our disclosure regime to require reporting of these metrics, and robust public demand (as demonstrated by the public comments) showing that investors actively use those metrics for their investment and voting decisions. Further, reporting companies themselves voiced support for these disclosures.[8] The final rule leaves this out.

GHG Emissions – Materiality Qualifiers. Today we require certain companies to report Scopes 1 and 2 GHG emissions—emissions directly produced by the company or that come from the energy the company purchases and uses—only if the company determines that such emissions would be material to a reasonable investor. However, users of the disclosures expressed clear support for mandatory reporting for all public issuers with no materiality qualifier.[9]

GHG Emissions – Scope 3. Moreover, today’s final rule excludes requirements to disclose Scope 3 GHG emissions, despite comments making it abundantly clear that they represent a key metric for investors in understanding climate risk, particularly transition risk.[10] Today we remove any Scope 3 requirement—even one with a safe harbor that would have shielded issuers from liability for good faith estimates in reporting.[11] Indeed, comments from investment advisers, pension funds, and the SEC’s Investor Advisory Committee, among many others, highlight that Scope 3 remains an invaluable metric for investors. It is a comparable, quantitative metric that allows investors to measure that risk across companies, sectors, and their portfolios.

Overall, investor commenters described how they use GHG emissions data to inform their financial decisions to buy, sell, or hold securities. For example, one large pension fund expressed clear support for mandatory reporting of Scope 1, Scope 2, and Scope 3 (subject to a materiality qualifier) and described how climate-risk information permeates their investment analysis and decision-making across their $450 billion portfolio of state employee retirement funds. They noted that assessing the climate-related risks of their portfolio is conducted across active, passive, fundamental, quantitative, and factor-based strategies and within each of these strategies climate risk is assessed at the individual security level as well as at the aggregated portfolio level.[12] In other words, the use of these data mirrors the use of other key risk metrics and are fundamentally important to investors.

Expenditures. Also absent from the rule is expenditure reporting. The initial proposal contained requirements to provide line item disclosures in the financial statements related to, and financial estimates and assumptions impacted by, transition activities.[13] These proposed provisions were met with overwhelming investor support as they would provide better transparency and disclosure in the financial statement reporting.[14] These disclosures would provide: insight into publicly stated targets, goals, or plans that hundreds of US public companies have made;[15] a reference for investors to gauge whether qualitative discussions on climate risks are reflected in expenditures, estimates, and assumptions;[16] and, generally, they provide a degree of visibility into financial reporting for which investors have been advocating in this context, and in others, for years.[17] Today’s recommendation adopts an unnecessarily limited version of these disclosures.

III. Statutory Authority

And why? One posited critique of the proposed rule was that the Commission lacks the authority to enact a rule requiring the disclosure by public issuers of climate risk. I disagree.[18]

The Commission has clear authority under the Securities Act and the Exchange Act to require disclosures that are in the public interest and for the protection of investors, as today’s rule is. This well-established authority has been consistently relied upon, and affirmed and reaffirmed across dozens of disclosure rulemakings over multiple decades.[19] And, this authority would have supported a more robust rule. The adopting release (as well as the comment file) details our numerous statutory authorities and the many disclosures we have promulgated based upon those authorities. I will not re-hash in great detail the work the staff has already done, but there are two noteworthy points I would like to highlight.

First, our public company disclosure regime is meant to be updated as markets innovate and investor demand changes.[20] For example, in response to calls from investors, the Commission has updated disclosure requirements through rulemaking to include information about executive compensation,[21] environmental protection law compliance and related litigation risk,[22] legal proceedings,[23] the background and qualifications of directors and how the board monitors and oversees risks,[24] more detailed plans of operations for companies issuing securities for the first time,[25] and a description of the registrant’s human capital resources which was enacted in 2020,[26] among other disclosures.[27] It is our obligation to respond to investors as the information needed to better assess the fundamental value of the securities they research, buy, sell and hold evolves or changes. The Commission today is moving forward with a disclosure rule in response to well-demonstrated need for consistent, comparable, and reliable information. This rule responds to demands presented by investors and the market, in a manner consistent with our practices in the past.

Second, SEC rules have consistently required disclosure of risks, even when the metrics related to those risks are labeled by some as not strictly financial, such as the GHG emissions discussed above.[28] Yet here too we have heard the argument that this agency does not have authority to require disclosure of information related to greenhouse gases because such data are not financial metrics. Once again, our actions are entirely consistent with existing precedent. Executive compensation, environmental protection law compliance, governance disclosures risk, and other disclosures mentioned above, are prime examples of this. Cumulatively, these non-financial metrics provide investors with information that they can use to assess the overall state of an issuer.[29] Likewise, disclosure of GHG emissions provides information that helps investors understand the current and potential financial risks a company faces.

Given our clear authority, rolling back the proposal is a missed opportunity. It remains my great hope that a future Commission will rise to the occasion and enact more fulsome disclosure requirements, in furtherance of our mandate and investor demand.

IV. Looking Ahead

Looking ahead, the Commission should also issue an order to recognize alternative regimes that would satisfy compliance with the rule we finalize today. Commenters noted that standard setters for other regulatory bodies, such as the International Sustainability Standards Board (ISSB),[30] are implementing their own climate-risk reporting regimes. An order recognizing such a regime would not only respond to investors, but also to the many corporate commenters who favored such an approach. Although we leave it to the future, it would be an easy and meaningful step for the Commission to take in order to avoid a patchwork of reporting obligations and potentially conflicting demands.[31] This idea was overwhelmingly popular in the comment file and mirrors other areas of the securities laws where there are comparable cross-border regimes.[32]

Once implemented, the Commission should also carefully review the effectiveness of this disclosure regime. Should we find that requiring materiality qualifiers in Scope 1 and Scope 2 GHG emissions reporting, or other changes from the proposal, result in insufficient information to adequately assess climate-related risk, we could consider guidance, 21A reports, FAQs, or other Commission actions to ensure that investors have the tools necessary to make informed investment decisions and allocate their hard-earned money as they see fit.

V. Conclusion

I have sat on this virtual dais before and cited Romeo and Juliet by William Shakespeare.[33] And perhaps I need a new well from which to draw literary references. But at the risk of sounding repetitive, I think it bears relevance today. “What’s in a name?” Juliet asks Romeo. “That which we call a rose by any other name would smell as sweet; so Romeo would, were he not Romeo call’d.” Ultimately, the last names of Romeo and Juliet dictated their outcomes.

The critiques that I have heard about our rulemaking attempt to disguise our authority as something that it is not. It is said that we are not an environmental agency and that we should not be in the business of supporting green agendas or setting pollution standards. Those statements are true. But, we are in the business of requiring public company disclosure about risk. We have done it myriad times without having our authority questioned. We require of our public company registrants disclosures of risks related to interest rates,[34] commodity prices,[35] how a board is informed of risks,[36] changes of ownership,[37] merger transactions,[38]– the list goes on. That the term “climate” has become a buzz word should be of no moment to a clear-eyed Commission. It should not compel us to shy away from our duties and obligations to investors. Indeed, a risk by any other name of such import to public company investors would be worthy of Commission rulemaking, and so too is this.

Our disclosures cannot remain stagnant; we must provide investors the information they need to understand the risks associated with their public company investments in today’s world. A different outcome would harm the markets and investors. It would harm the safe-keeping of hard-earned retirement funds, college funds, and savings of individual people and their families. Dollars that represent a lifetime of savings, financial stability, quality of life, and comfort. We owe it to investors to ensure that they can adequately assess financial risk. Today we take a step in that direction. And while important, this rule could have been more.

Thank you to all the commenters who took the time to give us your thoughts, data, and views.

I also want to thank the expert staff at the Commission one more time, including those in the Division of Corporation Finance, Office of the Chief Accountant, Office of the General Counsel, Division of Economic Risk and Analysis and all those who worked on this rule.

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