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Catching Up on Climate at the SEC

This month, Prentiss Smith & Company added our voice in calling for the SEC to formalize landmark rule changes requiring that public companies disclose their greenhouse gas (GHG) emissions and climate risks. We believe the proposed rules, which the SEC published in March under the heading “The Enhancement and Standardization of Climate-Related Disclosures for Investors” (and which remain open for public comment until June 17), represent a massive potential improvement for investors like our clients, who wish to understand and make decisions based on the climate impacts of the companies they invest in.

Among the specific provisions we cited in our public comment letter to the SEC as a basis for our strong support were:

  • The requirement (to be phased in over the next 5 years depending on company size) that all companies and foreign private issuers who register securities with the SEC must publicly disclose their Scope 1 and Scope 2 GHG emissions. This requirement would, for the first time, allow investors to understand and directly compare the Scope 1 and 2 emissions of any and all of their stock holdings. This alone would represent a major improvement over the current patchwork of disclosures, under which little more than 50% of companies measure and report these basic figures.
  • The proposed use of almost all recommendations of the Task Force on Climate-related Disclosures (TCFD), which are already in use by many companies and investors around the world, and include essential elements for understanding climate risk.
  • The requirement that GHG emissions data include third-party assurance, so investors can be confident in what is disclosed.
  • The proposed inclusion of climate risk information in corporate financial statements, which we believe would both provide consistency and more deeply embed such information into corporate financial decision-making.
  • The efforts to align the proposed rules with the International Sustainability Standards Board (ISSB), to ensure that climate risk disclosure standards are globally consistent.
  • The requirement that companies also disclose Scope 3 emissions, if material. Scope 3 emissions occur in a company’s value chain, typically either upstream (e.g. emissions generated by suppliers through their operations, resource extraction, deforestation, etc.) or downstream (e.g. emissions generated by customers in the use of a company’s products, such as driving a car).

While we support the proposed rule’s Scope 3 disclosure requirements, in our letter we asked that the requirements be applied to all companies, rather than just larger companies or those for whom Scope 3 emissions pass standards of materiality. The significant time and effort we have put into understanding the Scope 3 emissions of food companies and banks—as we have pushed those companies to improve their own Scope 3 understanding, reporting and goals—tells us that the impacts of these emissions, while massive, remain poorly understood. A blanket requirement would bring Scope 3 emissions fully into the light. As a result, we believe it would also accelerate the adoption of less GHG-intensive products and processes up and down the value chain.

In case the SEC regards a blanket Scope 3 emissions disclosure requirement as a bridge too far, our letter provides an alternative suggestion: to compare a number of factors when determining whether Scope 3 emissions are material to a company, thereby triggering the disclosure requirement. We believe this would give the SEC maximum flexibility around Scope 3 disclosure in the future, while not deterring companies from setting Scope 3 targets or taking other positive actions in the short term out of fear of triggering materiality thresholds.

In general, the SEC’s proposed rule is admirably broad, and includes a number of other provisions which, if implemented, could provide even more useful information for investors: disclosure of how and when any climate-related targets will be achieved, disclosure of board-level oversight of climate risk, and disclosure around how climate-related risks are identified, assessed and managed, to name a few. Each of these provisions on their own—along with those we highlighted in our letter—would represent important progress. Taken together, they could constitute a sea change.

What remains is to get a final rule passed. Individual investors can easily submit comments in support of the rule on the SEC website; comments can be as brief as a single sentence, or provide a more lengthy statement in support of specific provisions like the ones we have outlined above. While companies are already pushing back on the cost of implementing the rule, strong investor support can make a difference in retaining its key provisions, and in strengthening the SEC’s position in the face of challenges that are sure to follow any final rule. If you are an investor who is concerned about climate change, we encourage you to submit a comment today!