Chair Gensler Makes Renewed Case For Mandatory Climate Risk Rules – Corporate/Commercial Law

In a speech last week before the Principles for
Responsible Investment’s “Climate and Global Financial
Markets” Webinar, the Securities and Exchange Commission’s
(SEC) Chair Gary Gensler made another case for mandatory climate
risk disclosure rules.

Drawing parallels between the Olympics and public disclosure,
Gensler noted that the Olympics’ standardized scoring system
allows for comparability in evaluating athletes across performances
or across generations, much like a standardized disclosure system
allows for comparability across companies and industries. He also
stated that changes in fans’ tastes allowed for Olympics to
evolve with new events and additional participants, much like
investors’ desire for additional and new types of information
led to the advent of risk factor disclosure and Management’s
Discussion and Analysis.

Gensler asserted that investors increasingly want to understand
public companies’ climate risks and are looking for consistent,
comparable and decision-useful disclosures to help them invest in
companies that fit their needs. Supporting this claim, he cited the
more than 550 unique comment letters that have been submitted in
response to SEC Commissioner Allison Herren Lee’s request for
public comment on climate change disclosures, of which three out of
every four letters support mandatory climate risk disclosure rules.
Gensler remarked that companies are trying to meet the demand for
climate information, citing a report that nearly two-thirds of
companies in the Russell 1000 Index, and 90% of the 500 largest
companies in that index, published sustainability reports in 2019
using various third-party standards. Contending that companies and
investors alike would benefit from clear rules of the road and that
the SEC should step in when there is a heightened level of demand
for information relevant to investor decisionmaking, Gensler noted
that he has asked SEC staff (Staff) to develop a mandatory climate
risk disclosure rule proposal for the Commission’s
consideration by the end of the year.

After offering his views on why mandatory climate risk
disclosure rules are needed, Gensler addressed some of the specific
attributes he asked the Staff to consider in drafting the rule
proposal:

Consistency and Comparability – Gensler
noted that the new rules should be consistent and comparable,
arguing that information consistency leads to comparability between
companies, today and over time.

Mandatory, not Voluntary – Gensler argued
that mandatory disclosures allow for consistency and comparability,
while voluntary disclosures allow for a wide range of inconsistent
disclosures.

Disclosure Vehicle – Gensler did not
state any preference, but noted that he asked the Staff to consider
whether these disclosures should be filed in the Form 10-K,
alongside other information that investors use to make their
investment decisions.

Decision Useful – Gensler asserted that
the new disclosures must provide sufficient detail so that
investors can gain helpful information, adding that in appropriate
circumstances, he believes prescribed disclosure strengthens
comparability.

Qualitative Disclosures – Addressing the
more subjective aspects of the proposed disclosure, Gensler stated
that qualitative disclosures could answer key questions, such as
how a company’s leadership manages climate-related risks and
opportunities and how these factors feed into the company’s
strategy.

Quantitative Disclosures – Addressing the
more objective aspects of the proposed disclosure, Gensler stated
that quantitative disclosures could include metrics related to
greenhouse gas emissions, financial impacts of climate change, and
progress towards climate-related goals. He also stated that the
disclosures could include metrics for specific industries, such as
banking, insurance, or transportation.

Greenhouse Gas Emissions – Noting that
some companies currently provide voluntary disclosures related to
Scope 1 emissions (those from a company’s operations) and Scope
2 emissions (those from use of electricity and similar resources),
Gensler added that many investors have been seeking information on
Scope 3 emissions (those of other companies in the reporting
company’s value chain). He revealed that he had asked the Staff
to make recommendations about 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.

Scenario Analyses – Gensler commented
that the new rules might address how a business might adapt to the
range of possible physical, legal, market and economic changes that
it might contend with in the future. Such analyses might cover the
physical risks associated with climate change or the transition
risks associated with stated commitments or requirements from
jurisdictions in which the companies operate.

Independent Standard– While acknowledging
the benefit of external standard-setters, such as the Task Force on
Climate-related Financial Disclosures (TCFD) framework, and
imploring the Staff to learn from and be inspired by such groups,
Gensler resolved that the SEC should independently move forward to
write rules and establish the appropriate climate risk disclosure
regime for its markets, as it has done in prior generations for
other disclosure regimes.

Before closing, Gensler turned to address investment funds, what
he termed as the other side of the equation, noting that although
many market themselves as “green,”
“sustainable,” or “low-carbon,” there is
currently little objective information available for an investor to
validate such claims. To address this problem, Gensler remarked
that he had directed the Staff to consider recommendations about
whether fund managers should disclose the criteria and underlying
data they use and to consider whether the SEC might take a holistic
look at the Names Rule, which, for instance, stipulates that if a
fund’s name suggests a particular investment type, the fund
must invest at least 80% of the value of its assets in that
investment type.

Chair Gensler closed by commenting that investors have expressed
the climate risk disclosures they want to see from public companies
and investment funds. It is now time, as he remarked, for the
Commission to take the baton.

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