A proposed rule tries to give investors a fuller picture of risk.
On Monday, the US Securities and Exchange Commission (SEC) announced new rules about disclosing climate risks for companies listed on US-based stock exchanges. The rules are meant to give investors a clearer sense of how companies manage present and future challenges posed by climate change and by attempts to reduce greenhouse gas emissions. The rules will be published in the Federal Register for public comment shortly. A final version is expected later this year, and the lawsuits are likely to begin afterward.
In the announcement, SEC Chair Gary Gensler said the new rules adhere to the organization’s mission. “Our core bargain from the 1930s is that investors get to decide which risks to take,” he said, “as long as public companies provide full and fair disclosure and are truthful in those disclosures.” Typically, risk disclosure occurs in required formal filings that companies make with the SEC, like quarterly financial statements.
Some companies disclose their risks voluntarily, but the absence of standards allows them significant leeway over what to reveal. And many other companies choose not to disclose anything related to climate.
The proposed rules have two components. One is focused on direct risks to a company posed by climate change, such as rising oceans or increased weather extremes. A company would be required to disclose strategies for managing these risks, the costs they impose on the company, and “how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook.”
The disclosures would also have to include information regarding a company’s greenhouse gas emissions, which have the potential to alter its financials as countries start putting a price on carbon released into the atmosphere. The SEC would have the companies disclose the emissions that occur directly due to their activities, including those associated with their electricity supply. Each company would also have to disclose emissions associated with its supply chain and “downstream activities of its value chain.” This would include the emissions related to things like shipping products to customers.
The rules would phase in over the next four years, and small companies would be exempt from some of the more complicated disclosures.
The general outline of the rules seems sensible. Few would argue that our warming climate poses no risks, and some countries have already placed prices on greenhouse gas emissions that pose a more significant threat to some industries than others. But under the present system, investors may be left in the dark about these risks or struggle to understand different methods of accounting for them.
Still, there will likely be legal challenges should the rules be enacted. A Reuters report quotes opponents who argue that the rules are outside of the SEC’s scope or else that there are better, less intrusive ways of describing climate risks.