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SEC climate disclosure rule is a major step forward

New SEC climate disclosure rule

The long-awaited U.S. Securities Exchange Commission (SEC) draft rule on climate disclosure was released in March requiring companies to provide Scope 1, 2, and 3 emissions disclosures; any climate-related goals and progress; climate transition plans, if any; climate-related risk assessment information, including transition risk; and climate governance information, among others. This rule will reduce costs and increase investor knowledge about climate risk and whether companies are reducing the full range of their emissions in line with the Paris climate agreement’s 1.5-degree goal.

Jessica Wachter, SEC chief economist, noted the new rules will provide greater comparability and reduce costs to investors who currently struggle to assess information from a “variety of reporting frameworks in a variety of places.” She also stressed how the new rule will reduce “information asymmetry,” insider trading, and investor costs by standardizing the format and location of material information. 

As climate risk increases and climate transition gains speed, businesses must be able to look across their supply chains and receive accurate information about whether suppliers are factoring climate risk into their business operations and business decisions, and whether they are also reducing their climate emissions. This information is critical to executives’ ability to make informed, long-term, strategic decisions.

The climate disclosure rule is truly a watershed moment in responding to investor demand for accurate climate disclosure. Clear and standardized reporting of greenhouse gas emissions is the bedrock of sound investor decision-making. The new rule provides investors with more robust, complete, and comparable disclosure of risk and the emissions data to determine which companies are aligning their business activities with Paris targets and minimizing transition risks.

Danielle Fugere, As You Sow president and chief counsel

SEC Commissioner Allison Lee discussed that maintaining effective disclosure regimes is a major part of the SEC’s job. The SEC has a responsibility to investors to accurately price risk, she said, adding the agency has a responsibility to make sure markets are based on facts. She pointed out many climate risks have already materialized and are having a negative impact on capital markets and the entire economy. 

The new rule applies to the majority of issuers, including companies with carbon-intensive business models. Scope 3 emissions are particularly important as the largest source of emissions from most companies. According to Paul H. Munter, SEC chief accountant, the new rule will require that Scope 1 and 2 will be required to be included in the company audited financial statements, with Scope 3 reporting, where material, being phased in over time depending on the size of the company. Smaller companies are exempt. The requirements for verification, attestation, and reasonable assurance of this information will help increase the accuracy, reliability, and standardization of climate-related risk information. Requirements of disclosure of assumptions used by companies will also help investors understand the disclosed impact of climate on financial documents. 

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