Released March 23, 2022 | SUGAR LAND
en
Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--A divided U.S. Securities and Exchange Commission (SEC) (Washington, D.C.) voted 3-1 along party lines on March 21 to issue a lengthy draft rule mandating greenhouse gas (GHG) emissions disclosures for all publicly traded companies. The three Democratic commissioners supporting the rule all issued statements, and the lone Republican commissioner opposing the rule, Commissioner Hester Peirce, issued a stinging, lengthy, and heavily footnoted statement explaining why she felt the new rule was unnecessary.
The commission will accept public comment on the proposed rule for up to 60 days after its March 21 posting on the SEC website. The draft rule, "The Enhancement and Standardization of Climate-Related Disclosures for Investors," took over a year to develop. As proposed, the rule would require all publicly traded companies in any industry to disclose information about:
Jay Timmons, president and chief executive of the National Association of Manufacturers (NAM) (Washington, D.C.), blasted the draft rule, saying it was too broad and could be counter-productive. "The SEC should focus on requiring disclosure of material information, and the NAM looks forward to working with the SEC to ensure that its proposed climate reporting rule enables smart, company-specific disclosures that are tailored and targeted," he said in a statement.
The U.S. Chamber of Commerce (Washington, D.C.) suggested the rule was overly prescriptive, unnecessary and failed the commission's own "materiality" standard. "As a result of marketplace dynamics, the current state of ESG (Environmental, Social and Governance) reporting is strong," Tom Quaadman, executive vice president of the group's Center for Capital Markets Competitiveness, said in a statement. "The Chamber is concerned that the prescriptive approach taken by the SEC will limit companies' ability to provide information that shareholders and stakeholders find meaningful while at the same time requiring that companies provide information in securities filings that are not material to investors."
On the other hand, the draft rule was praised by U.S. Senator Chris Van Hollen (D-Md.), chair of the Senate Appropriations Committee's subcommittee on Subcommittee on Financial Services and General Government: "For too long, many big corporations have failed to disclose to shareholders & the public how the climate crisis puts their assets at financial risk. But with this action, we're closer to providing all stakeholders with much needed transparency."
The Environmental Defense Fund (EDF) (New York, New York) also supported the draft rule. In a statement, Michael Panfil, the group's director of climate risk strategies, said it was a "long overdue step that would help ensure investors have the relevant information they need to make prudent financial decisions. Climate-related financial risks are already significant and growing every day. In the last two years alone, the United States has suffered from more than 40 weather and climate disasters that each caused at least one billion dollars in economic damages. Investors need to understand the size and scope of climate risk, and today's proposal is a welcome step toward that goal."
The draft SEC rule applies to Scope 1 (direct emissions from operations) and Scope 2 emissions, which are indirect emissions from purchased electricity or other forms of energy. Reporting of Scope 3 emissions, released by those who consume a company's product, would be required of large companies if those emissions were "material" or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions. The overwhelming majority of greenhouse gas emissions in the Oil & Gas sector come from burning refined products such as gasoline, diesel fuel and aviation jet fuel. Those emissions are categorized as Scope 3.
Many electric utilities have taken steps to decarbonize their operations, either by closing their coal-fired power plants and turning to non-emitting energy generation resources like solar or wind, or by switching their power plant fuel to natural gas from coal. When combusted, natural gas emits about half the carbon dioxide (CO2) as coal.
The draft rule also would require publicly traded companies to disclose their greenhouse gas emissions according to a standardized regimen. Many companies disclose their Scope 1 and 2 emissions, though measuring and reporting Scope 3 emissions is less common.
The idea behind the draft rule is that a scientific consensus exists that greenhouse gas emissions are warming the planet, and a warmer planet creates risks that investors need to know in order to make informed investment decisions.
SEC Chair Gary Gensler, speaking in support of the draft rule, said if it were adopted, "it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers. Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions."
That's not at all the way dissenting Commissioner Peirce saw it. "Many people have awaited this day with eager anticipation," she said in a 6,400-word dissent that contained 74 footnotes. "I am not one of them. Contrary to the hopes of the eager anticipators, the proposal will not bring consistency, comparability, and reliability to company climate disclosures. The proposal, however, will undermine the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures. We cannot make such fundamental changes to our disclosure regime without harming investors, the economy, and this agency."
"We are not the Securities and Environment Commission -- at least not yet," she said.
One of the reasons Peirce said she opposed the draft rule is that it undermined the concept of "materiality" on which SEC rules relied. "Existing rules already cover material climate risks," she said. "Under these existing rules, companies already are disclosing matters such as the risk of wildfires to property, the risk of rising sea levels, the risk of rising temperatures, and the risk of climate-change legislation or regulation, when those risks are material to the company's financial situation."
"Materiality" is not defined by the agency or the accounting profession, though a rough rule of thumb holds that anything that increases or decreases a company's financial results by 10% or more is considered "material."
Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.
The commission will accept public comment on the proposed rule for up to 60 days after its March 21 posting on the SEC website. The draft rule, "The Enhancement and Standardization of Climate-Related Disclosures for Investors," took over a year to develop. As proposed, the rule would require all publicly traded companies in any industry to disclose information about:
- The company's governance of climate-related risks and relevant risk management processes
- How any climate-related risks identified by the company have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term
- How any identified climate-related risks have affected or are likely to affect the company's strategy, business model and outlook
- The impact of climate-related events (such as severe weather events and other natural conditions) and transition activities on the line items of a company's consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements
Jay Timmons, president and chief executive of the National Association of Manufacturers (NAM) (Washington, D.C.), blasted the draft rule, saying it was too broad and could be counter-productive. "The SEC should focus on requiring disclosure of material information, and the NAM looks forward to working with the SEC to ensure that its proposed climate reporting rule enables smart, company-specific disclosures that are tailored and targeted," he said in a statement.
The U.S. Chamber of Commerce (Washington, D.C.) suggested the rule was overly prescriptive, unnecessary and failed the commission's own "materiality" standard. "As a result of marketplace dynamics, the current state of ESG (Environmental, Social and Governance) reporting is strong," Tom Quaadman, executive vice president of the group's Center for Capital Markets Competitiveness, said in a statement. "The Chamber is concerned that the prescriptive approach taken by the SEC will limit companies' ability to provide information that shareholders and stakeholders find meaningful while at the same time requiring that companies provide information in securities filings that are not material to investors."
On the other hand, the draft rule was praised by U.S. Senator Chris Van Hollen (D-Md.), chair of the Senate Appropriations Committee's subcommittee on Subcommittee on Financial Services and General Government: "For too long, many big corporations have failed to disclose to shareholders & the public how the climate crisis puts their assets at financial risk. But with this action, we're closer to providing all stakeholders with much needed transparency."
The Environmental Defense Fund (EDF) (New York, New York) also supported the draft rule. In a statement, Michael Panfil, the group's director of climate risk strategies, said it was a "long overdue step that would help ensure investors have the relevant information they need to make prudent financial decisions. Climate-related financial risks are already significant and growing every day. In the last two years alone, the United States has suffered from more than 40 weather and climate disasters that each caused at least one billion dollars in economic damages. Investors need to understand the size and scope of climate risk, and today's proposal is a welcome step toward that goal."
The draft SEC rule applies to Scope 1 (direct emissions from operations) and Scope 2 emissions, which are indirect emissions from purchased electricity or other forms of energy. Reporting of Scope 3 emissions, released by those who consume a company's product, would be required of large companies if those emissions were "material" or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions. The overwhelming majority of greenhouse gas emissions in the Oil & Gas sector come from burning refined products such as gasoline, diesel fuel and aviation jet fuel. Those emissions are categorized as Scope 3.
Many electric utilities have taken steps to decarbonize their operations, either by closing their coal-fired power plants and turning to non-emitting energy generation resources like solar or wind, or by switching their power plant fuel to natural gas from coal. When combusted, natural gas emits about half the carbon dioxide (CO2) as coal.
The draft rule also would require publicly traded companies to disclose their greenhouse gas emissions according to a standardized regimen. Many companies disclose their Scope 1 and 2 emissions, though measuring and reporting Scope 3 emissions is less common.
The idea behind the draft rule is that a scientific consensus exists that greenhouse gas emissions are warming the planet, and a warmer planet creates risks that investors need to know in order to make informed investment decisions.
SEC Chair Gary Gensler, speaking in support of the draft rule, said if it were adopted, "it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers. Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions."
That's not at all the way dissenting Commissioner Peirce saw it. "Many people have awaited this day with eager anticipation," she said in a 6,400-word dissent that contained 74 footnotes. "I am not one of them. Contrary to the hopes of the eager anticipators, the proposal will not bring consistency, comparability, and reliability to company climate disclosures. The proposal, however, will undermine the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures. We cannot make such fundamental changes to our disclosure regime without harming investors, the economy, and this agency."
"We are not the Securities and Environment Commission -- at least not yet," she said.
One of the reasons Peirce said she opposed the draft rule is that it undermined the concept of "materiality" on which SEC rules relied. "Existing rules already cover material climate risks," she said. "Under these existing rules, companies already are disclosing matters such as the risk of wildfires to property, the risk of rising sea levels, the risk of rising temperatures, and the risk of climate-change legislation or regulation, when those risks are material to the company's financial situation."
"Materiality" is not defined by the agency or the accounting profession, though a rough rule of thumb holds that anything that increases or decreases a company's financial results by 10% or more is considered "material."
Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.
