A Risk by Any Other Name: Statement on the Enhancement and Standardization of Climate-Related Disclosures
March 6, 2024
I. Introduction
Good morning and welcome. I want to start by thanking the hard-working staff of the Securities and Exchange Commission. Your professionalism, expertise, and dedication are surpassed by none, and it is a privilege to work with you in service of the public. You are all making your way through our regulatory agenda with poise, thoughtfulness, and creative problem-solving. Thank you.
I also want to thank former Acting Chair Lee for beginning this project in 2021 with a request for information, which was instrumental in initiating this process.[1]
There has been an intense media glare on our proposal and robust public dialogue. Conversations have been myriad; discourse has been at times heated; opinions have been diverse. And, speculation on the substance of the rule – what is in and what is out – has reached a fever pitch.
I have observed a tendency in these discussions to let the dialogue steer away from the true purpose of our proposal: we proposed this rule to benefit investors who, at the end of the day, are people. That includes people who have put in a lifetime’s worth of labor, and who invest their savings with the promise of a better future for themselves and their families. With luck, some are able to build stability, and create incremental progress toward their financial goals. Investors are at the heart of today’s rulemaking, and it is critical that we give them the information they need to properly assess the risks that underlie the value of their hard-earned savings. They are entitled to consistent, comparable, and reliable climate risk disclosures – and many investors have been calling for such disclosures for years.[2]
Notwithstanding that strong and consistent demand, investors continue to face costly, inconsistent, disparate, and, at times, unreliable data without clearly disclosed methodologies for how these data are calculated.[3] Today’s rule finally begins to change that. As you have heard from the staff, it establishes a floor for a disclosure framework that will provide investors with climate risk information, help inform investors’ investment decisions, and be subject to the rigor of Commission filings.
That floor includes:
First, a requirement for larger companies to disclose material Scope 1 and Scope 2 Greenhouse Gas (“GHG”) emissions as a quantitative metric to gauge transition risk or a company’s publicly stated target or goal.[4] Investors have made clear that GHG emissions disclosures are necessary to understand the current and future risks to the financial condition of companies. These data may be classified by some as non-financial, but commenters emphasized that emissions disclosure is an invaluable proxy for financial risk. These disclosures serve such an important role because, among other things, they are quantitative and comparable across companies.
Second, a level of third-party review subject to attestation standards of those emissions data to increase their veracity and reliability.[5] In short, companies will have to disclose a quantitative dataset of GHG emissions subject to a gatekeepers’ review. These gatekeepers must follow certain widely-accepted attestation standards, which includes a requirement that the gatekeepers be independent from the company. Moreover, companies will have to disclose if they dismissed or fired a gatekeeper over disagreements related to GHG emissions disclosures, making it harder to hide deceptive or irregular practices.
Third, a quantitative disclosure about certain expenditures associated with activities to mitigate or adapt to climate-related risks, transition plans, targets, and goals so that investors can assess any progress or cash allocated for those purposes.[6] Disclosure of these expenditures provides fundamentally important insight into how a company is managing risk and whether and how expenditures align with qualitative disclosures and stated plans, targets, and goals. Investors will have a new avenue to ensure that companies are doing what they say they’re doing and consider what the impacts of those activities.
Fourth, a disclosure of material impacts on financial estimates and assumptions.[7] This will enable investors to assess the reasonableness of the estimates and assumptions being made by companies.
These requirements, among others laid out in the rule, move a haphazard potpourri of public company disclosures into the Commission’s well-developed and standardized filing ecosystem. Commission filings come with a greater disclosure review process, heightened liabilities for material misstatements and omissions from both our enforcement program and private lawsuits, a level of reliability and year-over-year reporting that is conspicuously absent from climate risk information today, and being able to access those disclosures in one location. Investors made clear to my colleagues and me that these provisions are of key importance. Investors need insight into a company’s business, its results, and its financial condition, including material risks it faces.
To be crystal clear, though, this is not the rule I would have written. While these are important steps forward, they are the bare minimum. Ultimately today’s rule is better for investors than no rule at all, and that is why it has my vote. But, while it has my vote, it does not have my unencumbered support. And, although I am loath to leave for future Commissions those obligations that I see as our responsibilities today, I’m afraid that is precisely what we are doing.
II. GHG Emissions and Expenditures
Important disclosures remain absent from this final rule. On March 21, 2022, we proposed a rule that, among other things, included: 1) a more robust GHG emissions reporting requirement and 2) transition-related expenditure disclosure in the financial statements. There is clear legal authority to update our disclosure regime to require reporting of these metrics, and robust public demand (as demonstrated by the public comments) showing that investors actively use those metrics for their investment and voting decisions. Further, reporting companies themselves voiced support for these disclosures.[8] The final rule leaves this out.
GHG Emissions – Materiality Qualifiers. Today we require certain companies to report Scopes 1 and 2 GHG emissions—emissions directly produced by the company or that come from the energy the company purchases and uses—only if the company determines that such emissions would be material to a reasonable investor. However, users of the disclosures expressed clear support for mandatory reporting for all public issuers with no materiality qualifier.[9]
GHG Emissions – Scope 3. Moreover, today’s final rule excludes requirements to disclose Scope 3 GHG emissions, despite comments making it abundantly clear that they represent a key metric for investors in understanding climate risk, particularly transition risk.[10] Today we remove any Scope 3 requirement—even one with a safe harbor that would have shielded issuers from liability for good faith estimates in reporting.[11] Indeed, comments from investment advisers, pension funds, and the SEC’s Investor Advisory Committee, among many others, highlight that Scope 3 remains an invaluable metric for investors. It is a comparable, quantitative metric that allows investors to measure that risk across companies, sectors, and their portfolios.
Overall, investor commenters described how they use GHG emissions data to inform their financial decisions to buy, sell, or hold securities. For example, one large pension fund expressed clear support for mandatory reporting of Scope 1, Scope 2, and Scope 3 (subject to a materiality qualifier) and described how climate-risk information permeates their investment analysis and decision-making across their $450 billion portfolio of state employee retirement funds. They noted that assessing the climate-related risks of their portfolio is conducted across active, passive, fundamental, quantitative, and factor-based strategies and within each of these strategies climate risk is assessed at the individual security level as well as at the aggregated portfolio level.[12] In other words, the use of these data mirrors the use of other key risk metrics and are fundamentally important to investors.
Expenditures. Also absent from the rule is expenditure reporting. The initial proposal contained requirements to provide line item disclosures in the financial statements related to, and financial estimates and assumptions impacted by, transition activities.[13] These proposed provisions were met with overwhelming investor support as they would provide better transparency and disclosure in the financial statement reporting.[14] These disclosures would provide: insight into publicly stated targets, goals, or plans that hundreds of US public companies have made;[15] a reference for investors to gauge whether qualitative discussions on climate risks are reflected in expenditures, estimates, and assumptions;[16] and, generally, they provide a degree of visibility into financial reporting for which investors have been advocating in this context, and in others, for years.[17] Today’s recommendation adopts an unnecessarily limited version of these disclosures.
III. Statutory Authority
And why? One posited critique of the proposed rule was that the Commission lacks the authority to enact a rule requiring the disclosure by public issuers of climate risk. I disagree.[18]
The Commission has clear authority under the Securities Act and the Exchange Act to require disclosures that are in the public interest and for the protection of investors, as today’s rule is. This well-established authority has been consistently relied upon, and affirmed and reaffirmed across dozens of disclosure rulemakings over multiple decades.[19] And, this authority would have supported a more robust rule. The adopting release (as well as the comment file) details our numerous statutory authorities and the many disclosures we have promulgated based upon those authorities. I will not re-hash in great detail the work the staff has already done, but there are two noteworthy points I would like to highlight.
First, our public company disclosure regime is meant to be updated as markets innovate and investor demand changes.[20] For example, in response to calls from investors, the Commission has updated disclosure requirements through rulemaking to include information about executive compensation,[21] environmental protection law compliance and related litigation risk,[22] legal proceedings,[23] the background and qualifications of directors and how the board monitors and oversees risks,[24] more detailed plans of operations for companies issuing securities for the first time,[25] and a description of the registrant’s human capital resources which was enacted in 2020,[26] among other disclosures.[27] It is our obligation to respond to investors as the information needed to better assess the fundamental value of the securities they research, buy, sell and hold evolves or changes. The Commission today is moving forward with a disclosure rule in response to well-demonstrated need for consistent, comparable, and reliable information. This rule responds to demands presented by investors and the market, in a manner consistent with our practices in the past.
Second, SEC rules have consistently required disclosure of risks, even when the metrics related to those risks are labeled by some as not strictly financial, such as the GHG emissions discussed above.[28] Yet here too we have heard the argument that this agency does not have authority to require disclosure of information related to greenhouse gases because such data are not financial metrics. Once again, our actions are entirely consistent with existing precedent. Executive compensation, environmental protection law compliance, governance disclosures risk, and other disclosures mentioned above, are prime examples of this. Cumulatively, these non-financial metrics provide investors with information that they can use to assess the overall state of an issuer.[29] Likewise, disclosure of GHG emissions provides information that helps investors understand the current and potential financial risks a company faces.
Given our clear authority, rolling back the proposal is a missed opportunity. It remains my great hope that a future Commission will rise to the occasion and enact more fulsome disclosure requirements, in furtherance of our mandate and investor demand.
IV. Looking Ahead
Looking ahead, the Commission should also issue an order to recognize alternative regimes that would satisfy compliance with the rule we finalize today. Commenters noted that standard setters for other regulatory bodies, such as the International Sustainability Standards Board (ISSB),[30] are implementing their own climate-risk reporting regimes. An order recognizing such a regime would not only respond to investors, but also to the many corporate commenters who favored such an approach. Although we leave it to the future, it would be an easy and meaningful step for the Commission to take in order to avoid a patchwork of reporting obligations and potentially conflicting demands.[31] This idea was overwhelmingly popular in the comment file and mirrors other areas of the securities laws where there are comparable cross-border regimes.[32]
Once implemented, the Commission should also carefully review the effectiveness of this disclosure regime. Should we find that requiring materiality qualifiers in Scope 1 and Scope 2 GHG emissions reporting, or other changes from the proposal, result in insufficient information to adequately assess climate-related risk, we could consider guidance, 21A reports, FAQs, or other Commission actions to ensure that investors have the tools necessary to make informed investment decisions and allocate their hard-earned money as they see fit.
V. Conclusion
I have sat on this virtual dais before and cited Romeo and Juliet by William Shakespeare.[33] And perhaps I need a new well from which to draw literary references. But at the risk of sounding repetitive, I think it bears relevance today. “What’s in a name?” Juliet asks Romeo. “That which we call a rose by any other name would smell as sweet; so Romeo would, were he not Romeo call’d.” Ultimately, the last names of Romeo and Juliet dictated their outcomes.
The critiques that I have heard about our rulemaking attempt to disguise our authority as something that it is not. It is said that we are not an environmental agency and that we should not be in the business of supporting green agendas or setting pollution standards. Those statements are true. But, we are in the business of requiring public company disclosure about risk. We have done it myriad times without having our authority questioned. We require of our public company registrants disclosures of risks related to interest rates,[34] commodity prices,[35] how a board is informed of risks,[36] changes of ownership,[37] merger transactions,[38]– the list goes on. That the term “climate” has become a buzz word should be of no moment to a clear-eyed Commission. It should not compel us to shy away from our duties and obligations to investors. Indeed, a risk by any other name of such import to public company investors would be worthy of Commission rulemaking, and so too is this.
Our disclosures cannot remain stagnant; we must provide investors the information they need to understand the risks associated with their public company investments in today’s world. A different outcome would harm the markets and investors. It would harm the safe-keeping of hard-earned retirement funds, college funds, and savings of individual people and their families. Dollars that represent a lifetime of savings, financial stability, quality of life, and comfort. We owe it to investors to ensure that they can adequately assess financial risk. Today we take a step in that direction. And while important, this rule could have been more.
Thank you to all the commenters who took the time to give us your thoughts, data, and views.
I also want to thank the expert staff at the Commission one more time, including those in the Division of Corporation Finance, Office of the Chief Accountant, Office of the General Counsel, Division of Economic Risk and Analysis and all those who worked on this rule.
[1] See Acting Chair Allison Herren Lee, Public Input Welcomed on Climate Change Disclosures (Mar. 15, 2021).
[2] See, e.g., The Enhancement and Standardization of Climate-Related Disclosures for Investors, Release Nos. 33-11275; 34-99678, at nn.40-41 and accompanying text (March 6, 2024) (hereinafter Adopting Release). Other examples of this demand were the promulgation of the 2010 Interpretative Guidance issued nearly 15 years ago, the creation of widely used and accepted voluntary frameworks such as the Task Force of Climate Related Disclosures, the promulgation of international reporting standards by the International Financial Reporting Standards Foundation, and a 2007 petition filed by state treasurers, pension fund managers, and others calling for disclosure of climate-related information. See Commission Guidance Regarding Disclosure Related to Climate Change, Release No. 33-9106 (Feb. 2, 2010) [75 FR 6290 (Feb. 8, 2010)]; Task-Force on Climate-Related Financial Disclosures (last visited March 6, 2024); International Financial Reporting Standards Foundation; ISSB: Frequently Asked Questions; Petition for Interpretive Guidance on Climate Risk Disclosure File No. 4-547 (Sept. 18, 2007).
[3] See, e.g., Adopting Release at n.38 and accompanying text (“[T]he current state of climate-related disclosure has resulted in inconsistent, difficult to compare, and frequently boilerplate disclosures, and has therefore proven inadequate to meet the growing needs of investors for more detailed, consistent, reliable, and comparable information about climate-related effects on a registrant’s business and financial condition to use in making their investment and voting decisions.”).
[4] See Adopting Release at Section II.H.3.a. More specifically, the disclosure of Scope 1 and/or Scope 2 is required of Accelerated Filers and Large Accelerated Filers who cannot claim Small Reporting Company or Emerging Growth Company status. See id.
[5] See Adopting Release at Section II.I.1.c.
[6] See Adopting Release at Sections II.C.1.c., II.D.1.c., & II.D.2.c. These disclosures seek to elicit material expenditures related to material impacts of activities to mitigate or adapt to climate-related risks, transition plans adopted to manage a material transition risk, and targets or goals that materially affected or is reasonably likely to materially affect the business, results of operations, or financial condition. See id.
[7] See Adopting Release at Section II.D.
[8] See BP America, Inc. Comment Letter at 8 (“We support disclosure of GHG emissions data, including Scope 3 emissions data, where that information is decision-useful for investors due to materiality or the information is the subject of a company’s targets.”); Chevron Corporation Comment Letter at 4 (supporting Scope 1, Scope 2, and Scope 3 emissions disclosure with suggested modifications to attestation and phase-in periods to provide reporting companies accommodations for the collection and disclosure of that data); Etsy Inc. Comment Letter at 2 (supporting “disclosure of an issuer’s Scope 3 GHG emissions, if material, or if the issuer has set a GHG emissions reduction target or goal that includes its Scope 3 emissions”); United Parcel Service, Inc. Comment Letter at 2 (“In our view, requiring Scope 3 emissions disclosures is essential for investors to be able to obtain a complete understanding of a registrant’s GHG emissions and we generally agree with the requirements included in the Proposed Rules, but recommend they go further. We strongly recommend that the Commission adopt a requirement mandating that all registrants disclose Scope 1, 2 and 3 GHG emissions.”).
[9] For example, a trade group representing fiduciary investment advisers, supported mandatory disclosure of Scope 1 and Scope 2 GHG emissions information, noting that GHG emissions information “serves as the starting point for transition risk analysis because it is quantifiable and comparable across registrants and industries.” See Investment Adviser Association Comment Letter at 14-15 (“[A]n investment adviser may use GHG emissions disclosures as an input in its proprietary scoring system. In addition, its voting decisions may focus on encouraging disclosure of GHG emissions. These voting practices would likely evolve as the disclosure landscape improves and more consistent reporting of comparable data allows for an analysis of a registrant’s reported GHG emissions versus intended targets. IAA members use GHG emissions data from registrants to conduct carbon footprinting of investment portfolios to see when and whether to buy and appropriate weighting of portfolio companies.”).
Pension funds, which are the stewards of retirement savings for state employees, also weighed in to note that mandatory Scope 1 and Scope 2 emissions disclosures would greatly improve funds’ ability to assess exposure to risk and to track progress against publicly disclosed targets, plans, or goals. See, e.g., New York State Common Retirement Fund Comment Letter at 1 (“The disclosures mandated by the proposed rule will greatly improve the Fund’s ability to assess its exposure to investment risks and opportunities.”); Minnesota State Board of Investment Comment Letter (focusing on the need of enhanced disclosures relating to physical risks and incorporating by reference letters from the Council of Institutional Investors, Ceres, and Principles for Responsible Investment, which supported mandatory Scope 1 and Scope 2 reporting.).
These investor commenters, along with the numerous others cited below, substantiate what has been clear for years: investors find this dataset per se valuable to their investment analysis, decision-making, and voting. The Commission could have provided them with this more fulsome set of information. See, e.g., CFA Institute Comment Letter at 10, 19, and 31 (GHG emissions may be a non-financial metric—that some perceive as an impact-only metric—but they are a “barometer, albeit a blunt instrument,” for investors to understand the current transition exposure); PIMCO Comment Letter at 4 (“PIMCO supports the mandatory disclosure of Scope 1 and Scope 2 emissions. This approach would ensure a baseline disclosure requirement across public companies and improve the accuracy, completeness, and comparability of information for investors.”); California State Teachers’ Retirement System (“CalSTRS”) Comment Letter at 1 (“The requirement for Scopes 1 and 2 greenhouse gas emissions disclosure will generate the reliable and comparable data we need to replace the expensive estimates investors have been forced to rely on.”); New York State Insurance Fund Comment Letter at 4 (“NYSIF strongly supports the Proposal because it would require companies to provide detailed and decision-useful data on direct and indirect emissions up and down their value chain. . . . The Proposal’s much-needed transparency will mitigate abusive greenwashing and carbon offsetting practices. It will also reduce investor reliance on third-party data providers, cutting unnecessary costs and helping investors make informed investment and voting decisions appropriate to their risk profiles.”); UAW Retiree Medical Benefits Trust Comment Letter (noting that the proposed rule responded to “strong and persistent investor demand for climate-related information for use in investment and stewardship decisions” and also noting that “GHG emissions disclosure would also improve investors’ understanding of a company’s liquidity and capital resources, given the commitments financial institutions have made to restrict financing of emissions intensive activities. GHG data is valuable for transition risk analysis because it is quantifiable and comparable across companies and industries.”); Generation Investment Management LLP Comment Letter at 3 (“We also strongly support the SEC’s inclusion of a GHG emissions reporting requirement in the proposal. The proposal correctly identifies Scope 1 and 2 emissions as readily reportable and financially material, primarily as a proxy for transition risk. We support the view that Scope 1 and 2 emissions disclosures are high quality, concrete and auditable reporting requirements and welcome the provisions for requiring assurance of them.”); Wellington Management Company LLP Comment Letter at 5 (“With clear and comparable Scope 1 and Scope 2 GHG Emissions, as would be required under the Proposal, investors can better assess current operational efficiency, particularly within peer groups, to identify issuers who are more insulated from (or more exposed to) transition risks. With this information, investors can identify which companies within carbon-intensive industries would be most resilient in terms of margin impact to the introduction of a carbon price, other transition-oriented policy, or structural shifts from carbon-based energy production.”); Morningstar Comment Letter at 3 (“We agree with the Commission that Scope 1 and Scope 2 greenhouse gas, or GHG, emissions should be disclosed by all registrants.”).
[10] See, e.g., Investor Advisory Committee Recommendation on Climate-Related Disclosure Rule Proposal at 3 (“We also support the Proposal to have large companies disclose Scope 3 GHG emissions if they are deemed material using existing materiality standards. 90% of institutional investors commenting on Scope 3 in a response to the Proposal supported disclosing Scope 3 information. Without this aspect of the Proposal, critical data needed to evaluate climate and operational risks for a company whose business is, for example, focused on energy production would not be available to investors. A company’s mix of Scope 1, Scope 2 and Scope 3 GHG emissions can vary significantly based on its operating model, and we believe Scope 3 emissions data is a necessary supplement to Scope 1 and Scope 2 emissions data. We recognize the concerns that some have raised about the implementation costs of these proposed rules but believe that registrants have rapidly increasing access to a growing community of both experts and tools that will allow this to be done very cost effectively. Moreover, given evolving methodologies relating to Scope 3 emissions data, we support applying a safe harbor to this disclosure.”); AllianceBernstein L.P. Comment Letter at 6 (“Scope 3 Emissions disclosures should be triggered if they are material to the registrant, and focus on those emissions categories that are material to the registrant.”); UAW Retiree Medical Benefits Trust Comment Letter at 2 (“GHG data is valuable for transition risk analysis because it is quantifiable and comparable across companies and industries”); CFA Institute Comment Letter at 8 (“We support disclosure of all three scopes of emissions and GHG intensity metrics—recognizing the many challenges, and high degree of estimation, associated with gathering Scope 3 emissions and with the understanding that assessing the materiality of Scope 3 emissions requires they be collected. Our support is informed by investors advising us that Scope 3 emissions will likely be the most significant emission category. . . . As such, excluding them will not appropriately convey the transition risk faced by a registrant. For similar reasons, we do not support voluntary disclosure of Scope 3 emissions.”); Generation Investment Management LLP Comment Letter at 4 (emphasizing that Scope 3 reporting should be mandatory because “Scope 3 emissions typically represent the largest proportion of the overall emissions of the companies in which we invest and are absolutely material to our investment and stewardship decisions. Our experience is that companies who have analysed their Scope 3 emissions for public disclosure, following our investor engagement, have found that it delivers useful insight into where the most significant emissions are in their value chain and into potential measures that they should incorporate into their climate strategy. We do not find that companies experience Scope 3 disclosure as unduly onerous. We typically see companies engage some consultancy support for the process and there are now useful software tools available for smaller companies. We therefore think it would be cleaner, and clearer, to phase in requirements for Scope 3 disclosure by all registrants, with as much of a safe harbour as possible.”)(emphasis in original); Domini Impact Investments LLC Comment Letter at 8 (“We support the mandatory disclosure of Scope 3 emissions for all registrants, due to the significance and relevance of this information for investors.”).
[11] Further, the proposed rule’s regulatory text expressly provided for the use of reasonable estimates presented in a range. See The Enhancement and Standardization of Climate-Related Disclosures for Investors, Release Nos. 33-11042, 34-94478 at 472-473, proposed regulatory text Item 1504(e)(4) (Mar. 21, 2022) [87 FR 21334] (Apr. 11, 2022)] [hereinafter Proposing Release].
[13] See Proposing Release at section II.F.3.
[14] See, e.g., Arjuna Capital Comment Letter at 3 (“Inclusion of climate-related disclosures in the financial statements (Reg S-X) and in accompanying (Reg S-K) disclosures regarding company strategies, financial impacts, risk management, GHG emissions data, offsets, etc. will offer greater accessibility and assurance of this information to investors.“); BMO Global Asset Management Comment Letter at 4-5 (expressing support for transition-related, physical impact expenditures along with financial estimates and assumptions impacted by climate-related events and transition activities); Boston Trust Walden Comment Letter at 4 (asserting that it is “appropriate that reporting of climate related financial risks should parallel reporting on traditional financial metrics. . . . We support the Commission’s decision to include both Regulation S-K and S-X requirements”); CalPERS Comment Letter at 16 (“The Commission should require financial statement reporting, and it is appropriate that the Commission move forward with having registrants present such information in a note and have that information audited. We expect that the regular auditor will do the audit. This will yield the best result for investors. The Commission has the authority to require the disclosure. The Regulation S-X requirement is the most significant in the Proposal.”); CalSTRS Comment Letter at 2 (“CalSTRS supports the provision of climate-related information within SEC filings and under S-K and S-X regulations as the Commission proposed. . . . Climate-related information is fundamental to understanding the nature of a company’s operating prospects and financial performance.”); Church Investment Group Comment Letter at 2 (“CIG is supportive of the proposal’s inclusion of disclosures on companies’ Scope 1, 2 and 3 greenhouse gas emissions, all of which are necessary for investors to understand the full extent of a company’s exposure to climate risks. The inclusion of climate-related disclosures in the financial statements (Reg S-X) and in accompanying Reg S-K disclosures regarding company strategies, financial impacts, risk management, and GHG emissions data will offer greater accessibility and assurance of this information for our investment assessments.”); International Corporate Governance Network Comment Letter at 11 (“We are supportive of separate and specific, rather than aggregated, disclosure of the physical and transition impacts (whether expenditure related or otherwise) to facilitate interpretation of the information in investment and voting decisions, and enable a better understanding of cross-cutting portfolio risks by ensuring these are not hidden. Where a registrant cannot disaggregate these impacts, it would be useful to understand why.” ); Inherent Group, LP Comment Letter at 1 (“because climate-related impacts or risks can materially affect a company’s financial position and operations, we support the inclusion of selected climate-related information in a company’s financial statements; this also promotes consistency in information across a company’s reporting.”); Mercy Investment Services, Inc. Comment Letter at 2 (“Inclusion of climate-related disclosures in the financial statements (Reg S-X) and in accompanying (Reg S-K) disclosures regarding company strategies, financial impacts, risk management, GHG emissions data, offsets, etc. will offer greater accessibility and assurance of this information to investors. Additionally, this data will enable asset managers to create more investment product that fits our values and holistic views of risk.”); Morningstar Comment Letter at 8-9 (“Morningstar believes that the expenditure metrics should be separated into capitalized versus expensed metrics, while applying the same threshold as for impact metrics in order to promote consistency in reporting. These metrics should be subject to third-party verification. Disclosure of material capitalized and expensed amounts would be helpful and may be provided in a supplement, which would integrate impact and expenditure metrics to avoid overlap, and separated into physical versus transition-related expenditures. A narrative would also be useful for understanding material line items.“); State of New York Office of the State Comptroller Comment Letter at 2 (expressing support for the “impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as the financial estimates and assumptions used in the financial statements”); Parnassus Investments Comment Letter at 2 (“In furtherance of our interests as active investors, we urge the SEC to include in the final rule. . . . Mandatory disclosure of the financial impacts of severe weather events, other natural conditions, and transition activities on the consolidated financial statements, unless the aggregated impact of the events and activities is less than one percent of the total line item for the relevant fiscal year.”).
[15] See Adopting Release at IV.A.5.d (“[A]s of August 2023, 5,728 companies had established climate targets. Of these companies, 710 were located in the United States, about half of which were Commission registrants. The trend in companies disclosing other climate-related targets has also been increasing over time.”).
[16] See, e.g., CalPERS Comment Letter at 15.
[17] See e.g., CFA Institute Comment Letter to the Financial Accounting Standards Board on the Disaggregation of Income Statement Expenses at 2 (Oct. 31, 2023) (“disaggregated financial information is investors’ top priority for the Board and has been for many years. We believe information technology advances since the 1980s – such as the personal computer, enterprise resource planning software, and the internet – have reduced the cost of producing and disclosing disaggregated financial information significantly, though preparers’ objections to disaggregation (and to all other new reporting standards) on the grounds of cost remain unchanged. The Board should take the time that it needs to craft a final standard that truly delivers for investors.”).
[18] Based on how courts have interpreted the Securities Act and the Exchange Act over the past 90 years.
[19] See 15 U.S.C. §§ 77g(a)(1) (Section 7(a)(1) of the Securities Act), 78l(b), 78l(g), 78m(a), 78m(b)(1), and 78(o) (Sections 12(b), 12(g), 13(a), 13(b)(1), and 15 of the Exchange Act). See also Adopting Release at nn.179-202 (providing extensive discussion of precedents where the Commission has amended its disclosure requirements dozens of times since its inception upon determining that information is necessary for investors’ voting and investment decision making).
[20] See e.g., id.
[21] See 17 CFR 229.402; Adopting Release at n.194.
[22] See infra n. 28.
[23] See 17 CFR 229.101(c)(2)(i); Adopting Release at n.192.
[24] See 17 CFR 229.407(h).
[25] This development was in response to “hot issues” or a response to a period of general optimism and speculative interest in certain IPOs without fulsome disclosure. See, e.g., U.S. Securities and Exchange Commission, Report of the Securities and Exchange Commission Concerning the Hot Issues Market(1984) (“The amendments to the registration and periodic reporting forms required more meaningful disclosure regarding management, the status of new product development, general competitive conditions, the position of the issuer in the industry in which it operated, and, in the case of certain registrants offering securities for the first time, a description of their plan of operation. Particular emphasis was placed on the disclosure of such plans relating to new ventures.”).
[26] Notably, I voted on these amendments under former Chairman Jay Clayton. See Modernization of Regulation S-K Items 101, 103, and 105, Release Nos. 33-10825, 34-89670 (adopted Aug. 26, 2020).
[27] See Adopting Release at Section II.B.
[28] For example, in 1971, we issued an interpretive release alerting registrants to the potential disclosure obligations that could arise from material environmental litigation and the material effects of compliance with environmental law. See Disclosures Pertaining to Matters Involving the Environment and Civil Rights, Release Nos. 33-5170, 34-9252 (July 19,1971) [36 FR 13989 (July 29, 1971)]. Then in 1973, we adopted amendments to several of our registration forms under the rationale that it is not just the fact of potential litigation or litigation that is material, but that information about a company’s potential compliance or non-compliance with existing laws and regulations is informative about wider financial risks to a company. See Disclosure With Respect to Compliance With Environmental Requirements and Other Matters, Release Nos. 33-5386, 34-10116 (Apr. 10, 1973) [38 FR 12100 (May 9, 1973)]. (Depending on the substance of the laws, these would now be categorized as transition risks, though the term did not yet exist when these amendments were adopted 51 years ago.) In 1976, we adopted further amendments that required registrants to disclose material estimated capital expenditures for environmental control facilities. See Conclusions and Final Action on Rulemaking Proposals Relating to Environmental Disclosure, Release Nos. 33-5704, 34-12414 (May 5,1976) [41 FR 21632 (May 27, 1976)]. (As the title indicates, these amendments were adopted in response to a rulemaking petition and 15,000 pages of comments, testimony, memoranda and data. That is, not only does the Commission have a long history of requiring disclosure of these issues, but its activity in this space has also been in response to consistent investor demands for such disclosures.) In 1979, we published an interpretive release to assist registrants in complying with the requirements we had adopted and noted our “longstanding concern about the adequacy of disclosure with respect to environmental protection requirements.” See Environmental Disclosure, Release Nos. 33-6130; 34-16224 (Sept. 27, 1979) [44 FR 56924 (Oct. 3, 1979)]. (This guidance identified areas where the disclosures produced by the above referenced disclosure rulemakings were being under-disclosed by companies and sought to provide interpretative guidance to specify where more disclosure would be appropriate); Proposing Release at n.30 & accompanying text. Far from being unprecedented, the recommendation we consider today is completely consistent with the Commission’s history, with its place in the statutory scheme, and with previous interpretations of the relevant statutory language.
[29] Further, there are elements of today’s rule that do provide investors insight into the transactions recorded in a company’s financial statements. See, e.g., Adopting Release at Section II.K. In particular, the capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions. See id. As well as the capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (“RECs”) if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals. See id.
[30] The ISSB was formed by the International Financial Reporting Standards Foundation – a non-profit that sets the financial reporting standards that international jurisdictions use, similar to our Generally Accepted Accounting Principles, or US GAAP. See International Financial Reporting Standards Foundation, ISSB: Frequently Asked Questions.
[31] For example, an issuer could choose to report under the ISSB standard and, to the degree it must disclose more information under ISSB requirements than under the SEC rule, there would be a safe harbor for that additional information.
[32] See Order Recognizing the Resource Extraction Payment Disclosure Requirements of the European Union, the United Kingdom, Norway, and Canada as Alternative Reporting Regimes that Satisfy the Transparency Objectives of Section 13(q) under the Securities Exchange Act of 1934, Release No. 34-90680 (Dec. 16, 2020) [86 FR 4726 (Jan. 15, 2021)].
[33] See, e.g., Caroline A. Crenshaw, A Rose By Any Other Name: Statement on Proposed Amendments to the Names Rule (May 25, 2022).
[34] See 17 CFR 229.305 (Item 305 of Regulation S-K) (generally requiring market risk disclosures regarding interest rate risk, commodity price risk, and other relevant market risks).
[35] See id.
[36] See 17 CFR 229.407(h) (“In addition, disclose the extent of the board's role in the risk oversight of the registrant, such as how the board administers its oversight function, and the effect that this has on the board's leadership structure.”).
[37] See Full Disclosure of Corporate Equity Ownership and in Corporate Takeover Bids: Hearing Before the Subcomm. on Securities of the S. Comm. on Banking & Currency, 90th Cong. 134 (1967) ((statement of Manuel F. Cohen, Chairman, Securities and Exchange Commission) (“We believe that the provisions of the present bill . . . will fulfill the need of public stockholders to be fully informed about the control and potential control of the company in which they have invested.”).
[38] See 17 CFR 229.901-915 and 1000-1016 (in particular Item 904 which requires disclosure of the potential risks, adverse effects, and benefits of the roll-up transaction for investors).