In a speech yesterday in a webinar hosted by the Principles for Responsible Investment, SEC Chairman Gensler offered additional clarity on his thoughts concerning mandatory disclosures about climate risk.
First, Chairman Gensler defended his focus on mandatory climate disclosures by relating it to investor demand, saying that "investors increasingly want to understand the climate risks of the companies whose stock they own or might buy." In doing so, Chairman Gensler connected the recent movement towards mandatory climate disclosures with broader trends in the evolution of SEC disclosures over time (e.g., the increasing detail of mandatory disclosures concerning management's compensation).
Second, Chairman Gensler offered a degree of clarity as to the purpose of these mandatory climate disclosures, stating that they should be "consistent and comparable," which "leads to comparability between companies, today and over time." For this reason, Chairman Gensler defended making such climate disclosures mandatory, as "[w]hen disclosures remain voluntary, it can lead to a wide range of inconsistent disclosures."
Third, Chairman Gensler offered certain insight into the type of information that would be demanded by these mandatory climate disclosures. Chairman Gensler stated these disclosures should be "decision-useful," meaning that they would have "sufficient detail so investors can gain helpful information." He further related that these disclosures could concern a "variety of qualitative and quantitative information about climate risk." Specifically, Chairman Gensler identified quantitative disclosures as potentially "includ[ing] metrics related to greenhouse gas emissions, financial impacts of climate change, and progress towards climate-related goals," and qualitative disclosures as focusing on "answer[ing] key questions, such as how the company's leadership manages climate-related risks and opportunities and how these factors feed into the company's strategy."
Additionally, with respect to potential aspects of these mandatory disclosures, Chairman Gensler identified certain areas where he specifically asked the SEC staff to make recommendations:
- Emissions: "how companies might disclose their Scope 1 and Scope 2 emissions, along with whether to disclose Scope 3 emissions--and if so, how and under what circumstances"
- Industries: "whether there should be certain metrics for specific industries, such as banking, insurance, or transportation"
- Foreign Jurisdictions: "which data or metrics those companies" (that "operate in jurisdictions that have made commitments, such as to the Paris Agreement, that could lead to regulatory or economic changes within those locations") could "use to inform investors how they are meeting those requirements"
- Extant Disclosure Standards: to "learn from and be inspired by these external standard-setters," including the "Task Force on Climate-related Financial Disclosures (TCFD) framework, which was recently endorsed by the Group of Seven"
It is quite possible that one (or all) of these areas could feature in the SEC's mandatory climate disclosures.
Fourth, Chairman Gensler proclaimed that while the SEC may be "inspired" by "external standard-setters," it is his belief that the SEC should not fully rely on such external sources to determine the substance and form of its new regulations, but rather should "write rules and establish the appropriate climate risk disclosure regime for our markets, as we have in prior generations for other disclosure regimes."
This speech by Chairman Gensler offers a useful amount of clarity into the thinking of the SEC concerning the mandatory climate disclosure regulations that will likely be promulgated in the coming months. Although aspects of this speech reflect prior comments by Chairman Gensler (and others), particularly concerning the investor demand for climate disclosures, certain new information has been provided, especially about the potential areas and metrics that these new climate disclosures may focus on. (Of course, complete clarity will not be achieved until the SEC actually discloses the content of these proposed regulations.) Significantly, though, the SEC has also indicated that it will not adopt an externally-developed standard wholesale, but will rather develop its own disclosure regime. While not unexpected, this development reduces the relevance of potential guidance from currently extant disclosure regimes concerning climate risk.
So why am I talking about climate risk? Simple: because investors are. Today, investors increasingly want to understand the climate risks of the companies whose stock they own or might buy. Large and small investors, representing literally tens of trillions of dollars, are looking for this information to determine whether to invest, sell, or make a voting decision one way or another. Investors are looking for consistent, comparable, and decision-useful disclosures so they can put their money in companies that fit their needs. More than 550 unique comment letters were submitted in response to my fellow Commissioner Allison Herren Lee’s statement on climate disclosures in March. Three out of every four of these responses support mandatory climate disclosure rules.