Over the last nine decades, the Commission, pursuant to authority granted by Congress, has amended its disclosure requirements on dozens of occasions. Commissions from both political parties have modernized existing rules, or adopted new ones, to adapt to changing market conditions and to meet investor demand for improved disclosure of material information. In the process, the Commission has done what it does best: protect investors by empowering them to make informed investment and voting decisions.
The climate-related disclosures we are advancing today are no different from many of the Commission’s existing disclosure requirements, including those related to: material litigation proceedings, risk factors, management’s discussion and analysis (MD&A) of its financial condition and results of operations, mining resources and reserves, market risks for derivatives and other market-sensitive instruments, human capital resources, cyber governance and incident disclosures, and many others.
Our securities laws are dynamic and adaptable. Our capital markets, the most resilient in the world, have benefited from the Commission’s efforts to respond to investor needs and to market change.
Today’s reforms respond to investor demand for standardized and comparable information on climate-related risks and impacts. Investors view this information as relevant to a company’s bottom line and as material to their investment and voting decisions. It can also assist with investors’ analysis as to whether hedging or diversifying of their portfolio is warranted.
The connection between climate-related risks and a company’s fundamental value is well-established, as highlighted by studies cited in the Commission’s release. These risks play out through differences in revenues, operating income and expenses, cash flows, capital structures, asset prices, debt performance, and investment policies.
Investor demand for climate risk disclosures has already had an impact on the market. For example, in the past few years we’ve seen roughly:
- 60 percent of Russell 3000 companies and 90 percent of Russell 1000 companies provide some form of climate-related information; and
- Nearly 60 percent of Russell 1000 companies disclose Scopes 1 and 2 greenhouse gas (GHG) emissions.
But under the status quo, investors would continue to face a patchwork of disclosures, with a limited ability to conduct apples-to-apples comparisons.
In the extensive comment process that preceded the proposal and the adoption of this final rule, commenters expressed concerns with the wide variability of voluntary climate-related disclosures, and with the lack of reliable, consistent, and comparable information.
By requiring registrants to provide standardized climate risk-related disclosures in Commission filings, market participants will benefit from being able to more efficiently analyze information that will be integrated with other important disclosures, such as a full description of the company, other disclosed risks, and the company’s financial statements.
The final rule will also provide investors with more liability protections than they receive today. In contrast to voluntary disclosures, the Commission will treat climate risk information in registrants’ annual reports and registration statements as “filed.” This means that registrants can be liable under Section 18 of the Exchange Act, or Section 11 of the Securities Act, for any materially false or misleading statements. Such treatment will prevent greenwashing and place climate risk disclosures on the same footing as other information that registrants disclose under Regulations S-X and S-K.
As is customary in the rulemaking process, and consistent with the law, the Commission considered a wide range of commenters’ feedback in its deliberations. Commission staff undertook a thorough analysis of this feedback and crafted a final rule that appropriately balances all of the input with the rule’s policy goals.
Some commenters argued that the Commission’s proposed rule is unnecessary because climate risks are already subject to current disclosure rules if registrants deem those risks to be material.
The Commission’s 2010 guidance indeed emphasized that Regulations S-K and S-X may require disclosures related to climate-related risks, including in the description of business, legal proceedings, risk factors, and MD&A.
But many commenters indicated that the 2010 Guidance is insufficient for the current state of the market. These commenters advocated for standardized disclosures that facilitate comparability across registrants. That is what today’s final rule attempts to do.
Several changes to the rule between proposal and adoption also demonstrate the Commission’s careful analysis of stakeholder input.
Mindful of concerns expressed around data collection, as well as possible indirect burdens on entities outside of the Commission’s purview, the final rule does not require disclosure of Scope 3 GHG emissions.
Large accelerated and accelerated filers, however, are required to disclose Scopes 1 and 2 GHG emissions, if material. The final rule requires attestation for these disclosures at the limited assurance level, and after a phase-in period, at a higher standard of reasonable assurance for large accelerated filers.
Attestation must be provided by an expert in GHG emissions that is independent of the registrant and subject to the anti-fraud provisions of our securities laws. As a result, investors will have greater confidence about the accuracy and reliability of these disclosures than they do under the current voluntary framework.
Smaller reporting companies and emerging growth companies will not be required to disclose Scopes 1 and 2 GHG emissions and will have a longer compliance phase-in period for other required disclosures.
With respect to financial statement disclosures, the final rule streamlines the requirements to focus on discrete costs and expenditures incurred from severe weather events and natural conditions, which are already captured in a registrant’s financial statements. At the same time, the final rule requires material expenditures to be disclosed in Reg S-K if incurred as a direct result of a registrant’s mitigation or adaptation activities.
Even though some registrants have voluntarily chosen to adopt a transition plan, or climate-related targets and goals, or to conduct scenario analysis, or come up with an internal carbon price, the Commission is not, and does not intend to be, a climate or merit regulator. However, for companies that take such actions to manage a material risk or impact, investors should have access to meaningful information to evaluate whether greenwashing is occurring. That said, to ensure such requirements are not unduly burdensome the final rule provides a safe harbor for such forward-looking statements.
Overall, the final rule is a product of the Commission’s standard exercise of its basic authority to require full and fair disclosure by public companies to investors.
It embodies a time-tested approach based on traditional notions of materiality familiar to the Commission’s registrants and to market participants.
The Commission’s actions reflect investors’ views that climate risks can be material to their investment and voting decisions, and that these risks can have a material impact on a company’s bottom line.
In short, the Commission is doing what it was designed to do: protect investors and foster transparent capital markets by improving the reliability, consistency, and comparability of material climate risk disclosures for investors.
Chair Gensler and Commissioner Crenshaw: thank you for engaging so constructively with me in finalizing this rule.
Commissioners Peirce and Uyeda: you may end up having a different view than my own, but I respect your perspectives and appreciate your contributions to our deliberations.
With the broad interest this rulemaking has received, inevitably, some will view it as having gone too far, while others will see it as not having gone far enough.
An old, familiar saying comes to mind: we must not let the perfect be the enemy of the good. In my judgment, this final rule, while not perfect, strikes the appropriate balance and is sufficiently robust to warrant the Commission’s approval. I am pleased to support it.
