Insights into the SEC Climate Disclosure Proposal
On Monday, March 21st, the Securities and Exchange Commission (SEC) published a proposal that would require publicly traded companies to disclose detailed information around climate risks. While we wait until the 60-day comment period closes, we aim to better understand what this proposal would mean for the investment community at large.
Sunwealth recently sat down with Steven Rothstein, an expert with 40 years of experience working at the intersection of climate and capital markets. Rothstein is the Managing Director of the Ceres Accelerator for Sustainable Capital Markets. Ceres has been tracking and informing the SEC climate risk disclosure policy movement for more than a decade.
“The cost of inaction will exceed the cost of action.”
Risk Disclosure Informs Efficient Capital Markets
Since its inception, the SEC has been committed to mandating proper disclosures to investors so that individuals and institutions can continue to comfortably invest in the U.S. economy without fear of being treated unfairly or dishonestly. Rothstein suggests that trustworthy disclosures are key to market success, stating, “We have a robust capital market, and the biggest reason is that investors have confidence in the information they receive.” Given the material impact of climate risk, he doesn’t see why it should be held separately from any other material risk. Fundamentally, “investors need consistent information on risks to make market-based decisions,” says Rothstein.
Why Climate Risk Disclosure and Why Now?
Rothstein made it apparent that climate risk disclosure has been on the SEC’s radar for decades. In 2010, the SEC released its Climate Change Guidance which clarified how existing disclosure rules may require public companies to report climate change risks. In the last decade, the regulatory environment has changed and so have the risks related to climate change.
Since 2010, investor demand for information about climate risks and opportunities has grown dramatically. At the Climate Change Conference in Glasgow (COP26), investors representing $52 trillion in assets called on all G20 governments to have mandatory climate disclosures. Ceres ran a poll and found that 87% of Americans support the federal government mandating climate disclosures from public companies. The SEC, as Rothstein sees it, was established to “serve as the voice of the investor community,” and companies should heed their calls for more comprehensive disclosures.
The SEC Proposal: Disclosure and Transition Planning
The basis of the SEC’s recent proposal is founded on a framework from the Task Force on Climate-Related Financial Disclosures (TCFD), which is emerging as a worldwide standard. Rothstein sees the Scope 1, Scope 2, and Scope 3 emissions reporting as a key component of this proposal. Additionally, the SEC proposal would require companies to include a transition plan for how they intend to mitigate and adapt to climate risks. “In the long-run, standardized disclosures will benefit investors,” says Rothstein.