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SEC to review climate risk reporting by publicly traded companies

25 February 2021 Amena Saiyid

The acting head of the US Securities and Exchange Commission (SEC) has ordered the agency to review how publicly traded companies have been disclosing climate-related risks in their filings.

In a 24 February statement, SEC Acting Chairwoman Allison Herren Lee ordered the agency's corporation finance division to "enhance its focus" on which companies are complying with the 2010 guidance, which was the first time the SEC acknowledged that climate-related impacts can have a material effect on a company's bottom line.

"As part of its enhanced focus in this area, the staff will review the extent to which public companies address the topics identified in the 2010 guidance, assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks," Lee said.

Although the decade-old guidance was seen at the time as a significant action, it did not establish any metrics or standards for reporting risk. This omission on SEC's part gave rise to a variety of voluntary frameworks and standards that have since resulted in a patchwork of climate risk reporting regimes and incomplete and inadequate disclosures from companies.

The SEC isn't the only federal financial regulatory agency that's taking on climate risk issues. On 28 January, the Office of the Comptroller of the Currency (OCC) under Biden put on hold a Fair Access Rule finalized a few months earlier by the Trump OCC, which would have prohibited denial of credit services to certain classes of customers, such as oil companies; the rule was seen as a response to US banks saying they will not lend for Arctic oil development.

Also, the Commodities Futures Trading Commission this week is holding a meeting of its Climate-Related Market Risk Advisory Committee and is expected to soon approve the first-ever report on climate risk from that agency.

Acknowledging Climate Risk

Since 2010, the SEC has acknowledged that companies face physical risks from the harmful effects of climate change that manifest themselves in the form of the direct economic costs of repairing facilities damaged by rising waters, hurricanes, and wildfires, and indirect impacts such as increased insurance premiums. The SEC also said companies face transitional risks such as changing clean energy technology, changes in international, national, and local climate policies, and related litigation, among others.

The agency's acknowledgment, though, has never translated into the quality of disclosures that investors such as BlackRock and institutional investors have been demanding. Neither are the prior disclosures sufficient for companies that are making their own investment decisions for transitioning to a low carbon-future.

The SEC did not monitor the impact of its interpretive guidance on company filings as part of its disclosure review program, as it promised in 2010.

The agency remained on the sidelines until the election of President Joe Biden in November 2020, who, unlike his predecessor, pledged to take a government-wide approach to addressing the threat of climate change.

Lee's order came less than a month after Biden's climate blueprint highlighted the need for climate risk disclosures to avoid what he called "the most catastrophic effects of that crisis."

"The federal government must drive assessment, disclosure, and mitigation of climate pollution and climate-related risks in every sector of our economy, marshaling the creativity, courage, and capital necessary to make our nation resilient in the face of this threat," Biden's 27 January order addressing the climate crisis said.

Updated guidance expected in Q3

IHS Markit Head of Americas Regulatory Affairs Salman Banaei was not surprised by the substance or the timing of Lee's 24 February order, as the acting chairwoman has made no bones about the need and the urgency for improving climate risk disclosures.

Two days after the US presidential election, Lee told a group of the nation's leading securities and corporate legal experts that the SEC, as a key regulator, must understand, and where appropriate, address systemic risks to our economy posed by climate change."

To assess systemic risk, "we need complete, accurate, and reliable information about those risks. That starts with public company disclosure and financial firm reporting, and extends into our oversight of various fiduciaries and others," she added.

Banaei said he expected the SEC would respond to the presidential order by looking to do "something quick in the interim," such as updating the decade-old guidance around the third quarter of this year.

"The updated guidance will precede a more ambitious rulemaking (proposal will likely be published by end of year) that is the likely next step 'along the path to developing a more comprehensive framework that produces consistent, comparable, and reliable climate-related disclosures,'" Banaei said.

The new and improved guidance will almost certainly expand the scope of disclosures by interpreting "materiality" to include specific kinds of disclosures, he added.

The 2010 guidance currently covers climate risk disclosures related to transition risk, which include the impact of legislation and international agreements as well as physical risks. "I could see the new guidance focus on concepts that have become more refined over time, such as climate-related financial risks and, very importantly, initiatives undertaken to mitigate climate risk in its various forms," Banei said.

Banei said the ensuing rulemaking will most probably build on the updated guidance and define specific disclosures in a manner consistent with the widely used voluntary climate risk reporting framework like the one developed by the Task Force for Climate-Related Financial Disclosures, which require a reporting format and cadence.

'Really important first step'

The SEC's action was seen as a welcome first step by the Center for American Progress (CAP), which in a 19 February report, urged the agency to mandate certain climate risk disclosures as a line item in financial filings.

Under a voluntary system, CAP had concluded it is impossible to assess risk across companies or ascertain systemic risk because the disclosure is neither standardized nor mandatory.

Alexandra Thornton, CAP senior director on tax policy and coauthor of the climate risk report, saw the SEC directive as a "really, really important first step."

Since it issued its guidance a decade earlier, the SEC has not reviewed how companies are disclosing climate related risks, according to Thornton who said the agency could have done a lot more.

"This is an appropriate time for the SEC to take stock of where companies stand in terms of disclosing climate-related risks before moving forward with any mandates," she said. "After years of leaving companies and investors in the dark, this is a strong signal that the Commission intends to move forward on enforcing existing guidance with respect to climate-related risk disclosures."

The nonprofit Environmental Defense Fund and New York University School of Law's Institute for Policy Integrity also have called on the SEC to mandate climate risk disclosure because they said data shows companies are not reporting climate risk at the same level as other types of risk they routinely report.

Posted 25 February 2021 by Amena Saiyid, Senior Climate & Energy Research Analyst, IHS Markit

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