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The proposal had been pitched for years, but the SEC has finally adopted new rules that will require many public companies to disclose climate-related risks in their financial statements and annual reports. Lively debates and legal threats have surrounded the updated framework, and there's still some confusion about the guidelines. On a basic level, the rules would provide "investors with consistent, comparable, decision-useful information, and issuers with clear reporting requirements," according to the agency, but not everyone is happy about the new requirements.
Quote: "The SEC is merit neutral. We're agnostic to climate risk itself, but we have a role to play in disclosures made by companies... and that they have proper controls around those disclosures," SEC Chairman Gary Gensler declared. "It's about investors making investment decisions and what risks it poses to investors. It's grounded in materiality, a multi-decade old concept, that companies disclose that which a reasonable investor would consider amongst the total mix of information."
To translate, Gensler framed the new guidelines as more related to the risks that companies and investors may face from the effects of climate change versus the risks that corporate businesses might pose to the climate. However, some of the new rules in the framework do center around how companies contribute to climate change. Namely, Scope 1 emissions, or those that result from a company's operations, as well as Scope 2, which come from energy and power bought by a company. The most difficult greenhouse gases to calculate - Scope 3 - were left out of the final proposal, and refer to indirect emissions of a company's product, like those produced by its suppliers and customers.
Nearly half of all public U.S. companies registered with the SEC will be required to report Scope 1 and 2 emissions if they are considered material climate-related risks. Meanwhile, the controversy surrounding the new disclosures resulted in a close 3-2 vote at the SEC, with the two dissenting Republican Commissioners calling the framework "climate regulation promulgated under the Commission's seal" and stating it would "increase the typical external costs of being a public company by around 21%." A coalition of ten states also filed a legal challenge to vacate the new rules, referring to them as "illegal and unconstitutional."
Go deeper: "Climate-focused investment is more than just excluding companies that have risk to climate change. It really is taking advantage of those opportunities," AllianceBernstein writes in The Weather Is Changing For Climate-Focused Investors. "Capital flows in this area are not dependent upon economic growth and cycles. We're seeing secular growth here that shouldn't be vulnerable to economic slowdown." Also see Climate-Focused Investing: Two Approaches For Equity Portfolios.
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