SEC Gives Time and Takes Action

The US Securities and Exchange Commission (SEC) has extended the comment period for its landmark climate reporting proposal to June 17th. This move, seemingly taken in response to commenter requests, comes just two weeks after the SEC filed a major ESG-related enforcement action case against the NYSE-listed Brazilian mining company, Vale. 

According to the SEC’s complaint, Vale used its ESG disclosures to make false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam, which killed 270 people and led to a loss of more than $4 billion in Vale’s market capitalization. 

The SEC’s action appears to demonstrate its commitment to putting ESG disclosures on a similar footing to existing corporate disclosures. 

As investors rely on public disclosures when making investment decisions, the overarching aim of the SEC’s new climate reporting proposal is to provide investors with consistent, comparable, and decision-useful information that they can use when making investment decisions and to provide issuers with consistent and clear information about their reporting obligations. 

“Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures,” SEC Chairman Gary Gensler said when the US securities regulator released its proposal to formalize its climate risk reporting rules in March. 

Under the SEC’s corporate climate disclosure proposal, US public companies would have to report their climate change-related physical and transition risks and their greenhouse gas (GHG) emissions when they file registration statements and in annual filings. They would also have to report the impact of climate-related events on a line item basis in their consolidated financial statements, as well as on the financial estimates and assumptions used in financial statements. 

In its proposal, the SEC set a one percent threshold for materiality. For physical risk, this means that if a registrant has determined that a physical risk has had - or is likely to have - a material impact on its business or consolidated financial statements, that registrant is required to disclose it. A registrant’s disclosure should include a description of the identified physical risk for the properties, processes, or operations subject to the physical risk on a ZIP code, or a comparable geographical, basis. 

If a registrant uses scenario analysis, the SEC’s proposal noted that investors may benefit from the use of scientifically based, widely accepted scenarios, such as those developed by the Intergovernmental Panel on Climate Change (which underpin the Gro Climate Ensemble model), the International Energy Agency, or the Network of Central Banks and Supervisors for Greening the Financial System. Investors may also benefit by the use of more than one climate scenario, including one that assumes that climate policies are delayed or divergent across countries and industrial sectors, the SEC added. These could enhance the reliability and usefulness of the scenario analysis for investors, it noted. 

On GHG emissions, the SEC’s proposal asks all US public companies to report information about their direct GHG emissions (Scope 1) and their indirect GHG emissions, which are emissions associated with the purchase of electricity, steam, heat, or cooling (Scope 2). It also requires companies to include these disclosures in their audited financial statements. For Scope 3 emissions, which include all other indirect emissions that occur within a company’s value chain, the proposal requires disclosure if a company has made a commitment that included a reference to Scope 3 emissions or if such emissions were material to investors. 

In this week’s announcement, the SEC did not say if its 30-day comment period extension would affect the proposal’s start date. If enacted, the SEC’s new climate risk disclosure rules will be phased in, starting in 2024 at the earliest, and additional time will be given for Scope 3 disclosures.