SEC Climate Rules Divide U.S. Companies

EIt is easy to overlook the differences in tone between American Bankers Association and American Petroleum Institute. Following a request from the U.S Securities and Exchange Commission (SEC) for feedback, the trade associations presented starkly different views of what the regulator of markets should do to ensure investors are aware about the dangers climate change presents to businesses.

The ABA declared its support for a “climate risk disclosure regime” shaped by the commission that takes into account climate science, international standards, and risk modeling. “Information about climate-related financial risks and opportunities will allow lenders and investors to more effectively assess, price, and manage risk and allocate capital,” Michael L. Gullette, ABA’s senior vice president, tax and accounting, wrote in a June letter to the SEC.

API was also skeptical about new disclosure regulations. According to the trade group, many companies in the sector already disclose their emissions freely and that any new regulations could prove costly for small businesses. “API encourages the SEC to view the oil and natural gas sector’s pre-existing voluntary disclosures and reporting as evidence that the industry seeks to be a partner that, in some cases, has already tackled key areas raised in the request for information,” Frank J. Macchiarola, API’s senior vice president of policy, economics and regulatory affairs, wrote to the SEC.

The SEC received this feedback and issued Monday a 500-page proposal to create a new comprehensive system where companies would have to report the risks climate change presents to their businesses as well as any emissions they generate. Now, the SEC has given the public two months to give feedback on its proposal before it can finalize the rule. For obvious reasons, this process is vital: It will establish how and when companies declare their emissions. This in turn will affect the ability for the financial industry to prevent climate-related hazards.

Beyond the outcome, the fight—pitting one group of corporate actors against another—is also likely to be instructive, illustrating the emerging fault line between companies that are engineering their firms to survive a climate-changed world and those that are hanging on to an old way of doing things. Apple, Walmart, and FedEx, for example, have all previously voiced support for the SEC’s proposal, while the U.S. Chamber of Commerce, a major business lobby group, has expressed skepticism at the changes.

“By no means do I think there’s going to be some sort of monolith of industry opposition,” says Kathleen Brophy, a senior strategist for U.S. climate finance at the Sunrise Project, a non-profit that pushes for the financial sector to address climate change. “I think that there’s actually going to be a huge amount of diversity.”

SEC has proposed a broad range of rules. Concerns about climate change. Publicly-traded companies would be required to publish independently-certified reports of the greenhouse gas emissions that result from their operations and from the energy they consume. The emissions from both the supply chain and product use of larger businesses would need to be shared, thus forming Scope 3 emissions. Publicly establishing emission reduction targets would require companies to adhere to guidelines in reporting details.

This rule will require businesses to declare the potential risks climate change poses to their business. That includes the threat posed by extreme weather and other effects of a warmer planet, such as water scarcity, as well as what’s known as “transition risks” that result from the world moving away from a fossil-fuel economy and towards a cleaner one—think of stranded assets, like a coal mine in a world where no one wants to purchase coal.

In a sense, these rules aren’t all that groundbreaking. SEC guidance was issued in 2010 regarding corporate climate disclosures. Numerous companies have already provided such information, on a voluntary basis. A number of non-profit organisations provide guidelines for companies. More than 1,000 companies representing $23 trillion in market capitalization had signed up to the Science-Based Targets Initiative, for example, and in doing so committed to setting emissions-reduction targets in line with the Paris Agreement’s 1.5°C target and reporting on them with standardized metrics.

However, there is a substantial private sector group calling for mandatory disclosure. These reasons vary from industry to industry and are complex. Particularly institutional investors who have a broad portfolio of assets are very vocal. Investors were particularly vocal. Investors can be sure that companies they fund will survive despite climate-related regulations or natural disasters by having clear disclosure. Government-issued regulations are more effective than voluntary disclosure, which gives reporting legal weight. “It’s consistent with both client and fiduciary demands at this point,” said Ivan Frishberg, the chief sustainability officer at Amalgamated Bank, of climate disclosure rules prior to the SEC’s announcement.

Companies that are committed to cutting their emissions and making transparent disclosures of their progress say clear government regulations would be better than participating in different voluntary frameworks. In a submission to the SEC last June, Peter W. Carter executive vice president and chief legal officer at Delta Air Lines, said that “numerous and sometimes contradictory sustainability frameworks and standards” had led to a “lack of consistency and comparability of information.” The solution, he wrote, is a government-led structure that would “allow companies to simplify climate change disclosure by reporting under a single disclosure framework.”

Elsewhere in the private sector, it’s easy to see why some industries remain skeptical of the rules. Oil and gas leaders are claiming that they’re working hard to combat climate change. In some instances, these targets have been set by the industry to reduce their carbon footprint. But grappling with the reality of climate change under a stringent regulatory regime threatens to expose credibility gaps—and affect investment in the industry. Decarbonizing other heavy industries, such as steel, is also a challenge.

It’s early days, and the rule will face challenges from all angles. However, transparency in climate disclosure could be a key test at this point, as companies are increasingly saying they support climate action.

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