The SEC’s climate disclosure rule is explained

With the spread of land and rising sea levels, the economic consequences of climate change will reach trillions of dollars. Swiss insurance company predicts that global disasters will cost the world up to $ 23 trillion by 2050, greater than the impact of the pandemic and on The Great Recession of 2009 combined.

It is prudent for business planning to take into account all this foreseeable risk just like planning cyberattacks or business disruptions from a pandemic. Last year, for example, the United States had to spend $ 145 billion dealing with floods, fires and other climate-related disasters.

Yet somehow climate change has passed through the cracks in US financial regulation. Publicly traded companies are required to disclose information about “substantial” risks that affect their company, regardless of their cause, from sanctions to chaos in the supply chain. But there are no uniform standards for revealing how much fossil fuel pollution generates or the impact that climate change may have on their future growth. Instead, companies are left free inflate their environmental progressall with little public attention.

This type of information is theoretically essential for a functioning free market, so that investors can make decisions based on complete information. But the interests of fossil fuels, conservative ideologues and corporate trade groups seek to keep shareholders unaware of climate risks.

The Biden administration is trying to make companies more publicly accountable risk of the climate crisis. A key element of Biden’s plan is a draft rule proposed by the Securities and Exchange Commission (SEC) in March. Over 500 pages, SEC roulette proposes that publicly traded companies disclose how climate change affects their business prospects and designate a board member or board committee to focus on climate risks.

Once the rule is finalized, companies will need to reveal how their operations are affected by extreme weather events and the impact of climate change on short- and medium-term business prospects. They will also have to report emissions from both the company’s operations and the way their products are used. This is particularly bad news for fossil fuel companies with business models based on the sale of pollution. Until that rule, they had not fully taken into account the environmental impact of things like selling gas that burns from consumers’ cars.

“This is a rule, in other words, that helps the free market act as a free market by giving investors exactly the information they need to make decisions,” said Emory University business law expert Georgi Georgiev.

With the expiry of the comment period on the draft rule, it is clear that any regulation on climate change is facing serious headwinds. The loudest protests came from right-wing groups and non-profit corporate organizations, which flooded public comments with previews of the argument they will make in court.

Many companies in the financial sector can take advantage of this rule, such as investment giant BlackRock, which is committed to bringing its assets in line with climate goals. But some can be hurt. Companies that take advantage of greening their climate commitments are doing their best to protect the chaotic status quo.

Financial transparency regarding climate change is hardly a radical idea

The SEC has required and standardized public disclosure since 1933. In recent decades, the SEC has issued non-binding guidelines on how publicly traded companies should consider Disturbances from Covid-19, Russian invasion of Ukraineand even afraid “Y2K” crash at the beginning of the 21st century, so companies will fulfill their fiduciary duty.

But the SEC has been painfully slow on climate change. Businesses are currently disclosing the risks and costs of their business to the climate on a voluntary, uneven basis without clear standardization.

In 2020, the Government Accountability Office surveyed 32 medium and large publicly traded companies and found few sequence. Airlines, for example, used years between 1990 and 2017 as a baseline for calculating their climate footprint. Water companies have used completely different measurements to account for water yield. Some companies will simply report carbon emissions, while others will report total greenhouse gas emissions (including sources such as methane).

The SEC’s proposed rule cites other evidence that companies ignore this risk, such as an internal study of climate-related keywords in companies’ 10-Ks between June 2019 and December 2020. They found that only 31 percent of all mention climate change.

This information is not only in favor of climate change efforts; it is also useful for investors. It shows more clearly, for example, that a retail company’s warehouses may be threatened by increased flooding, that an airline may have to suspend more flights due to rising heat waves, or that the bank’s support for a major expansion of fossil fuels is high. chances to backfire in a world that is switching to renewables. Without any regulation and standardization, companies will simply continue to try to overshadow each other in terms of their environmental and social commitments without hard data to support it. This discrepancy will become an existential risk of financial instability if, for example, extreme weather conditions hit a business that has not prepared properly.

Environmental activists have called for more than companies, offering shareholder solutions at annual meetings that require more transparency, but meets mixed success in the votes of the shareholders who do not oblige the company to take action.

Voluntary global connections have emerged in this regulatory vacuum, including the Net Zero Asset Managers Initiative, which accounts for about $ 43 trillion in assets, and the Climate Action 100+, which represents more than $ 60 trillion. Another of these groups has emerged from the Financial Stability Board as a working group on climate financial disclosure (TCFD), a voluntary system that has grown to more than 3,000 companies. The working group’s recommendations tell companies to take into account short-term, medium-term and long-term climate impacts, emissions from investment decisions and pollution of their operations, and to take into account climate change changes for businesses. IN hundreds of companies those who voluntarily comply with these standards are not necessarily environmentally friendly or good for the environment, but are an additional gold star for their transparency for sustainability.

Eight countries, including the United Kingdom, have passed laws that will reflect the TFCD’s recommendations, but the United States will be left without an SEC rule. “Investors are investing where they think there is a good opportunity and good information,” said Seth Rothstein, managing director of Ceres Accelerator for Sustainable Capital Markets. “If we don’t have good information, we risk falling behind internationally.”

The SEC’s rule is basically for the United States to play catch-up, based on standards that the core TFCD-compliant corporate community has already endorsed.

Initially, companies will have to spend extra to comply with the rule – up to $ 530,000 per year for larger SEC companies evaluation, but will vary depending on how many companies are already doing on climate disclosure. Usually the cost of rules shrinks over time. Otherwise, the rule itself is quite modest. The SEC “does not say you should or should not invest in air conditioning products,” Rothstein said. “They just say, tell investors what you’re doing and do it consistently.”

Environmentalists and some Democrats say the SEC can do even more. The SEC does not change the way companies disclose climate-related activities, such as PR campaigns and political influence, a type of activity that is usually outsourced to non-profit organizations that protect their activities from the public. In March sen. Sheldon Whitehouse (D-RI) Called it is a “nerve-wracking failure that completely avoids the legitimate, necessary response to the climate threat we face” because political efforts remain “the only major discoveries a company can make to achieve climate security”.

Right-wing groups say financial transparency is an attack on freedom of speech

Not surprisingly, the SEC is facing enormous pressure to withdraw this rule because of the same shady political costs that companies should not disclose in the first place. Groups such as the US Chamber of Commerce, the National Association of Manufacturers, Americans for Prosperity and the Competitive Enterprise Institute have flooded the SEC with comments that the company’s freedom of speech will be violated.

Trade groups and right-wing think tanks claim that requiring companies to report these emissions is similar to violating their rights to free speech under the First Amendment, citing a lawsuit that ruled that a regulation requiring the discovery of minerals in the conflict zone , would represent “Forced Speech” and has violated the rights of companies.

The American Petroleum Institute, the lobby of the oil industry, has it disputes the rule “could raise serious problems with the First Amendment in the recent recent tightening of controls on content-based laws that take over speech”.

The argument was bought by conservative lawmakers, such as West Virginia Attorney General Patrick Morrissey, who took up the argument in his 2021 year. letter at the Ministry of Finance last year. In Congress, 19 Republican senators argued submitted comments that the rule “is not within the SEC’s mission to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation”. Another 40 Republican Representatives wrote that the rule would work to “undermine and embarrass public companies”, while the Republican Attorney General described the rule as a complete rearrangement of [the SEC’s] the current disclosure regime. ”

The attack on regulation under the guise of the rights of the First Amendment has become more well-known in recent years. “Unfortunately, the Supreme Court is constantly giving corporations more leeway, more and more rights,” said Ciara Torres-Spelisi, a corporate law expert who has published several books on corporate speech.

The court also opened the door to more of these cases, hitting down a law in California that required nonprofits to disclose their donors by supporting the Americans for Prosperity’s argument against disclosing their donors and providing IRS 990 forms to the state. Other legal challenges to campaign finance laws and unions have used the First Amendment.

Legal experts supporting the SEC rule say the argument is long in court. “I think this argument is really too strong,” said Georgiev of Emory.

But it is still worrying. If it succeeds, whether in court or as a tactic of intimidation to force the SEC to withdraw, it sets a dangerous precedent for the financial system as a whole. “If this climate rule violates the First Amendment, it has been through all nine decades [the SEC has been] violates the First Amendment, “Georgiev said. “They will definitely try it in court. In the end, many exaggerated arguments succeed in court.

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