Proposed SEC Rule Would Add New Reporting Requirements
By Amanda Coyne
There are three pending actions from the Securities and Exchange Commission (SEC) aimed at increasing investor transparency into a company’s climate risks and Environmental Social and Governance (ESG) reporting. If these actions are adopted as proposed, they will have impacts on the forest sector. The first would require publicly traded companies to disclose climate-related risks as part of their broader risk disclosures to investors. The second proposal would set more stringent rules for how investment funds are named in order to prevent “greenwashing.” The third would require disclosure of climate-related data for any investment funds that reference climate as part of a fund’s strategy.
A company “is already required [by the SEC] to disclose risk factors that have to do with environmental regulations and human capital,” said Alison Dimond Kardos, director of reporting strategy at reporting firm Buzzword. “This would be a significantly bigger step in requiring some environmental-related reporting in financial reporting specifically about climate.”
The information that would be required to be public under this rule includes greenhouse gas emissions and energy consumption. Companies would have to compile this information and have it verified by an outside source. Many companies are already disclosing this information voluntarily in their ESG reports due to requests from large institutional investors and other stakeholders, but they are not currently required to do so.
Protecting Investors In its proposal, the SEC recognizes that climate-related risks can have a significant impact on companies’ current or future performance and market position, making understanding of these risks important in investors’ decision-making.
“We are concerned that the existing disclosures of climate-related risks do not adequately protect investors,” the SEC’s proposal said. “For this reason, we believe that additional disclosure requirements may be necessary or appropriate to elicit climate-related disclosures and to improve the consistency, comparability and reliability of climate-related disclosures.”
These disclosures could not only make investors and the public more aware of companies’ climate impact, but shed light onto governance and risk management practices, the commission said in its report. Risk would include energy consumption, but also the risk of increasingly severe hurricanes or wildfire to a company’s business.
As climate change continues to impact the economy, a lack of comparable data across companies could undermine investors’ decision-making ability. Self-disclosed data is not subject to the rigorous standards put in place by agencies like the SEC. Some climate data is currently required to be reported by companies to government agencies including the Environmental Protection Agency, but not in a financial context.
“The big change is the question of climate risk financial information,” Kardos said. “It’s shifting this issue of climate and emissions performance into the world of financial materiality, which is a big change from it being a safety issue or an environmental issue.”
In the forestry sector, where climate change presents both risks and opportunities, this data could help characterize on a company-specific basis risks like wildfires and drought, which are increasingly prevalent as temperatures rise. Forests “face some significant physical risks, but they are also part of the solution — their product is a carbon sink,” Kardos said. “They’re a unique industry to think about this policy.”
The Costs and Benefits of Reporting If the rule is adopted, many companies may have to add to their current reporting efforts. While many collect much of this data already, voluntary disclosures like ESG reports do not have requirements that are as strict, and do not always require outside auditing. There can be a “high level of variance” in which data companies choose to publish in these reports, Kardos said.
“A very large percentage of companies put out some kind of voluntary ESG report. But by the nature of being required [by the SEC], it would require companies to do it at a level of detail that many are not doing right now,” Kardos said. “Once it’s an SEC requirement, it’s more specific and it’s required by law, as opposed to a voluntary thing in which you could pick and choose one detail over another. The level of backup and assurance you need for that kind of information is much higher than that in the current ESG.”
Despite potential costs, the reporting and the new tranche of detailed data could bring significant benefits for both companies and their investors.
“If a company doesn’t already know this information, there’s definitely a benefit. There are costs associated with emissions. Every engine you’re running is costing something. Every megawatt of energy you’re using is costing something,” Kardos said. “There are cost reductions to be found in this data and tracking it over time. It can tell you, ‘If I do this, I can reduce my emissions and also reduce my cost.’”
The public comment period for the proposed rule ended in mid-June. ■
Amanda Coyne is a veteran reporter and communications professional. She currently serves as publisher of Georgia’s Cities magazine and communications associate for the Georgia Municipal Association. Her work has also appeared in the Atlanta Journal-Constitution, Cosmopolitan.com, the Greenville News, The State, and the Post and Courier.
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