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US SEC should consider sector-specific climate disclosure rule: Commissioner Roisman

17 August 2021 Amena Saiyid

The US Securities and Exchange Commission (SEC) should consider requiring sector-specific climate disclosures from publicly traded companies rather than a blanket requirement as it crafts a rule to mandate such reporting, Commissioner Elad Roisman said.

"When we are thinking about these new disclosure requirements, it's very important for us to consider differences amongst industries. I think that would be a more prudent approach than blanket requirements," Roisman told Net-Zero Business Daily in an exclusive interview.

Roisman, a Republican, is one of five SEC commissioners who will vote on the climate change disclosure proposal when it is presented to the commission at the year's end.

Announcing the timing of the proposal's release, SEC Chairman Gary Gensler in late July said the agency action responds to investors clamoring for material information about the risk that a changing climate poses to companies whose debt or stock they own or wish to buy.

The SEC asked for public comment in late March on how it can improve the current process of reporting climate risks by public holding companies after investors complained about the inconsistent nature of these largely voluntary disclosures.

Climate poses material risk

In 2010, the regulator deemed climate impacts caused by torrential rains, flooding, droughts, and wildfires to be a "material" risk to investors and encouraged companies to report them, but stopped short of mandating the reporting.

As the SEC embarks on the path to its rulemaking, Roisman said the agency's staff should ensure that carbon-intensive companies, such as oil and natural gas firms, have different reporting requirements than say a "brick and mortar" retail store, or even a software company.

"I think it makes a lot of sense to have sector-specific reporting rather than requiring disclosure for all companies when it comes to some of the potential environmental disclosures being discussed,'" Roisman added.

In Roisman's opinion, the SEC staff need to be mindful that any climate disclosure mandate they write should result in information that is material to the investor, scaled to lighten the burden on small companies, and phased in over time with an extended implementation period.

"I can understand why investors may see greater risk associated with climate change for an oil company than there is for a software company, or a brick-and-mortar retail chain, but when we are thinking about these new disclosure requirements, it's very important for us to consider differences amongst industries," he said.

"Intuitive sense"

Attorneys and financial experts well-versed in the SEC's way of working agree in part with Roisman's push for a sector-specific mandate. They note that Gensler already has asked the SEC staff that is writing the rule to consider the reporting format as well as separate metrics for specific industries, such as banking, insurance, or transportation.

Elizabeth Dawson, counsel with Crowell & Moring's environment and natural resources group, agrees with Roisman that a sector-specific climate disclosure rule would make more "intuitive sense," but she also agrees with others who say a sector-specific rule would take too much time.

"My thinking there is it makes intuitive sense that the more specific and targeted disclosure requirements are, the more likely it is that the requirements will yield information allowing investors to make meaningful comparisons in their analysis and decision-making processes," Dawson told Net-Zero Business Daily.

However, she added, "sector-specific rules may take more time to promulgate than a general purpose rule and that could further delay what investors have been requesting for some time, which is systematic requirements for climate change disclosures."

Sector-specific disclosures not unique

Presently, the SEC has annual and quarterly filing requirements that are standard for all reporting companies, but also has specific guides based on various industry sectors. These filings include audited financial statements, a listing of potential material risks that companies face along with manager expectations for the coming year.

Pursuing a sector-specific approach is not a novel concept for the SEC, according to Dawson.

In December 2020, the SEC issued a resource-extraction industry regulation, which required oil, gas, and mining companies to disclose payments made to US and foreign governments.

Moreover, the Financial Standards Accounting Board, which the SEC recognizes as the designated accounting standard setter for public companies, already provides yearly updates on a sectoral basis to help with financial disclosures, according to Steven Rothstein, Ceres Accelerator for Sustainable Capital Markets managing director.

As the SEC considers how it may proceed, Dawson said, it can look to the two-pronged approach developed by the Task Force on Climate-related Financial Disclosures (TCFD), which starts with generally applicable recommendations that are supplemented by more sector-specific guidance.

The TCFD approach, which is voluntary and unevenly subscribed to by US companies, includes a reporting framework that allows for a gradual, accretive approach in tracking, reporting, and managing climate risk through GHG emissions accounting.

Gensler has acknowledged that the TCFD approach has found near-universal support among the 500 unique responses the SEC received, but said the agency would leverage this approach to write a rule tailored to US requirements, an approach Roisman said he supports.

Baseline for reporting

Tyler Gellasch, a former senior SEC attorney who now serves as a fellow with the Duke Law Global Financial Markets Center, is of the opinion the SEC can issue a general rule that establishes a baseline of reporting requirements for all companies regardless of industry.

Once that baseline of reporting requirements is established for revenue, income, human capital, among others, "then the SEC can drill down deeply for some industries where exposures may be more significant," Gellasch told Net-Zero Business Daily.

Gellasch's call for a baseline of reporting requirements echoes Sustainability Accounting Standards Board (SASB) recommendations to the SEC to establish a baseline of consistent, comparable, and reliable climate disclosure by requiring companies to make qualitative and quantitative climate risk disclosures in a manner that leverages existing voluntary disclosure frameworks and standards.

SASB is a nonprofit that established industry-specific disclosure standards for reporting on environment, social and governance (ESG) issues to the SEC after its 2010 guidance was issued.

Roisman emphasized that any rule the SEC staff writes should require that climate disclosure reports be "furnished" or submitted—and without any degree of precision as that would open them up to strict liability—rather than be filed as part of required annual or quarterly reports. Roisman also expressed concerns about the lack of standardized metrics for reporting climate risk, as there are differences of opinions on the reporting methodology for GHG emissions.

Reliable and accurate disclosures

Although agreeing with Roisman on the need for a standardized reporting format, Gellasch said the SEC needs to make these reports mandatory.

"The point of making disclosures is having them be reliable and accurate, and letting them be furnished as opposed to filed directly undermines that goal," he said.

Climate change's impact is being felt by all businesses, and not just because of how substantial their GHG emissions are, Ceres' Rothstein said.

A retail store or a software company may not have as significant an impact as an oil firm, but operations may be affected by location, supply chain exposure, and where its customers are based, he added.

The US National Oceanic and Atmospheric Administration on 13 August deemed July to be the hottest month around the globe since recordkeeping began 142 years ago. "We are having more floods, fires, and droughts," Rothstein said.

Climate impacts are a systemic risk

There is no question climate impacts are a systemic risk to the global economy, much like the COVID-19 pandemic and cybersecurity, "posing grave threats to investors, our capital markets, and our country," Ceres, a nonprofit network of institutional investors that has been pushing for mandatory climate disclosure, told the SEC in 10 June comments.

"It is a priority to have a strong and bold corporate climate disclosure rule in place as soon as possible," which accounts for direct GHG emissions as well as those released across the value chain, Rothstein said.

Underscoring his point, Rothstein drew attention to an 13 April SASB bulletin, which said 68 out of 77 industry sectors are likely to be affected significantly by climate risk. This equates to 89% of market capitalization of the S&P Global 1200 or roughly $45.2 trillion.

"I think over time it would be a very good to have information by industry sectors," but right now "we do not think the SEC should wait or it should only have disclosures for the fossil fuel or heavy industry," Rothstein said.

Posted 17 August 2021 by Amena Saiyid, Senior Climate & Energy Research Analyst, IHS Markit

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