“Building Upon a Long Tradition” - Remarks before the Ceres Investor Briefing
April 12, 2022
Thank you. It’s good to be with Ceres for today’s investor briefing. As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.
As you all likely know by now, in March, the Commission voted on a proposal to mandate climate-risk disclosures by public companies.
A Long Tradition
Let me put the proposal into the context of our long tradition of disclosures.
The 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.
Over the generations, the SEC has stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions.
The first disclosures revolved around companies’ financial performance, who runs the company, and how much of a company’s resources were dedicated to paying those executives.
In addition to such historical information, though, investors want to assess potential risks. Risk, by its definition, often involves events that have not yet occurred.
In 1964, the SEC started to offer guidance about disclosure of risk factors. The agency later adopted disclosure requirements related to Management’s Discussion and Analysis in Form 10-K. The existing environmental-related disclosure requirements date back to the 1970s. The Commission elaborated on these requirements repeatedly in subsequent decades. This includes the SEC’s guidance from 2010 regarding climate-related disclosures.
Across all of these disclosures, the same principles apply: Again, investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures.
Further, the SEC has a role to play in terms of bringing some standardization to the conversation happening between issuers and investors, particularly when it comes to disclosures that are material to investors.
In making decisions about disclosure requirements under the federal securities laws—including decisions about the proposed climate-related disclosures—I am guided by our three-part mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. I also am guided by the concept of materiality. As the Supreme Court has explained, information is material if “there is a substantial likelihood that a reasonable shareholder would consider it important” in making an investment or voting decision, or if it would have “significantly altered the total mix of information made available.” Forward-looking statements, such as forecasts and risks, also can be material, as standards by both the Supreme Court and the Commission have articulated.
I believe the proposed rule would build on that long tradition. It would provide investors with consistent, comparable, and decision-useful information for their investment decisions and would provide consistent and clear reporting obligations for issuers.
And here’s the thing. Climates disclosures are already happening.
Today, investors are already making investment and voting decisions using information about climate risk.
Today, hundreds of companies are already disclosing this information. That conversation is already going on. Many of the existing disclosures build upon the Task Force on Climate-related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol.
The TCFD was formed in 2017, reporting to the Financial Stability Board of the Group of Twenty (G20). The task force comprises 30-plus market folks (not government officials) who came together to create a climate disclosure reporting framework.
Five years later, this TCFD framework has been used by thousands of companies across the globe as the basis for reporting climate-risk information. Beyond that, many countries already have started to develop reporting regimes that build on or incorporate the TCFD framework, too, including Brazil, the European Union, Hong Kong, Japan, New Zealand, Singapore, Switzerland, and the United Kingdom.
One report found that 70 percent of companies in the Russell 1000 Index published sustainability reports in 2020 using various third-party standards, which include information about climate risks. SEC staff, in reviewing nearly 7,000 annual reports submitted in 2019 and 2020, found that a third included some disclosure related to climate change.
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. For example, investors with $130 trillion in assets under management have requested that companies disclose their climate risks. That information could influence shareholders’ evaluations, risk management, or investment decisions to buy or sell a security and how to vote on a merger or other proxy vote.
Companies and investors alike would benefit from the clear rules of the road in the release, particularly as those rules reflect what is becoming widely accepted across the globe.
It makes sense to build on what so many companies are already doing to enhance the consistency, comparability, and decision-usefulness of these disclosures for investors.
Proposal Building upon the Traditions
The proposal thus draws on the SEC’s long tradition and what is currently happening in this arena.
These disclosures would be filed in the 10-K, rather than solely on a company website or elsewhere. Why? Investors look for relevant information in filings like the 10-K when assessing an investment decision. That was true when I was on Wall Street. It’s true of the MD&A sections; it’s true of the risk factors; it’s true of the environmental disclosures starting in the 1970s. It’s true for other key disclosures today.
It is important that investors be able to find consistent, comparable, and decision-useful information in one place rather than having to piece together information from different locations that might, in turn, differ from one issuer to another.
Further, placing disclosures in filings also benefits investors because there are more controls around those disclosures, with a framework required from Section 302 of the Sarbanes-Oxley Act of 2002.
There are some costs to this, but on balance, I believe this consistency, along with the enhanced control environment, brings greater benefits and efficiencies to these disclosures.
A few days after the SEC’s proposal came out, the International Sustainability Standards Board (ISSB) made its own proposal on global climate-related disclosure requirements. It, too, proposes climate disclosures as a part of general purpose financial reporting, among other similarities with the SEC proposal.
Disclosures—Strategy, Governance, Risk Management, and Targets
I’d like to touch on the main components of the proposal.
The first is bringing consistency and comparability to how a management team discloses a company’s strategy, governance, and risk management with respect to climate-related risks, building upon the TCFD framework.
The second is disclosure for companies that set targets or use internally developed target plans, transition plans, scenario analyses, or carbon pricing as part of their risk management process.
If you, the reporting company, have a target, under the proposal you would need to disclose your plans to get to that target. If you have a transition plan, you would need to provide disclosure about that plan. If you employ scenario analysis or use internal carbon pricing as part of your risk management, then you would disclose those too. It’s up to a company to determine whether to have a target, transition plan, scenario analysis, or carbon pricing. If a company chose not to make those statements or use those tools, no disclosure would be required. The decision on whether to make these statements or use these tools, though, remains entirely up to you as the company.
To the extent that the proposed disclosures would include some forward-looking statements, such as projections of future risks or plans related to targets or transitions, the forward-looking statement safe harbors pursuant to the Private Securities Litigation Reform Act would apply, assuming certain conditions were met.
We have a disclosure-based regime, not a merit-based one.
Thus, the design of the proposal is consistent with those long traditions and the law; with concepts of investor decision-making and related materiality; and with what companies are already doing based on the TCFD and GHG Protocol frameworks.
Disclosures—Financial Statement Metrics
The proposed rules also would require a company to disclose “certain disaggregated climate-related financial statement metrics that are mainly derived from existing financial statement line items” in a note to its financial statements. This would include the impact of the climate-related events and transition activities on the company’s consolidated financial statements.
Disclosures—Greenhouse Gas Emissions
In addition, the proposal addresses disclosure of greenhouse gas emissions. Greenhouse gas emissions data are increasingly being used as a quantitative metric to assess a company’s exposure to—and the potential financial effects of—climate-related transition risks. Those risks could include regulatory, technological, and market risks driven by a transition to a lower greenhouse gas emissions economy, with potential financial impacts on revenues, expenditures, and capital outlays.
All filers would disclose their Scope 1 and Scope 2 greenhouse gas emissions—emissions that “result directly or indirectly from facilities owned or activities controlled by a registrant.” Thus, these data should be reasonably available to issuers.
Under the proposed rules, some registrants also would be required to disclose Scope 3 emissions—the emissions from upstream and downstream activities in a company’s value chain—if such emissions were material or if the company had made a commitment that referred to Scope 3 emissions.
So if you’ve made a commitment, or if the information is material, it makes sense to measure and report it.
The Commission proposed different requirements for Scopes 1 and 2 as opposed to Scope 3, as methodologies for determining Scope 3 emissions currently aren’t as well developed as the others are just yet.
The proposal would phase in Scope 3 disclosures after Scopes 1 and 2; a new liability safe harbor would be available for Scope 3 disclosures; and smaller reporting companies would be exempt from Scope 3 disclosures.
Feedback from the Public
Since the proposal has been released, we’ve already gotten a lot of feedback. Some are for the proposal, some against. That’s what we need to hear, and we need to hear the reasons, too. We need to hear all sides of this. We consider all of those comments in determining whether and how to adjust the release as we move forward.
We look forward to and will benefit from your public comment on all the key areas of the proposal, including but not limited to how it approaches disclosure regarding strategy, governance, risk management, targets, financial statement metrics, and greenhouse gas emissions.
I know some aspects of the proposal might interest certain commenters more than others, but I’ll be clear: We are seeking feedback on every line item, and we benefit from all of those comments.
It would be good to hear from issuers and investors of all sizes, from all corners of the U.S. and segments of the marketplace. That includes those who are involved in conversations between issuers and investors, like investor relations departments, chief executive officers, and chief financial officers. What are investors asking of you? How do you and your competitors decide what disclosures to make? What would help bring greater consistency, comparability, and decision-usefulness for investors’ decisions? What are the economics here?
We encourage a wide range of investors, from individual to institutional, to weigh in. What helps you and facilitates your making decisions? Which components of this proposal work? What needs adjustment? How are you using the disclosures that you’re already getting today?
That begs the question: How do you comment? Go to www.sec.gov. Under the Regulation menu, click on Proposed Rulemaking, scroll down to the proposal on March 21, 2022. There, you can find the release and the comments form. I’ll also link to the form in the footnotes of this speech on sec.gov as well.
Thank you, and I look forward to your questions—and your feedback.
 Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (quotation marks omitted).
 Id. at 238-39.
 See, e.g., 17 CFR 229.303(a); Release No. 33-10890, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information (Nov. 19, 2020), [86 FR 2080, 2089 (Jan. 11, 2021)].
 See Governance & Accountability Institute, Sustainability Reporting in Focus, 2021, available at https://www.gainstitute.com/fileadmin/ga_institute/images/FlashReports/2021/Russell-1000/G_A-Russell-Report-2021-Final.pdf?vgo_ee=NK5m02JiOOHgDiUUST7fBRwUnRnlmwiuCIJkd9A7F3A%3D.
 See CDP, Request Environmental Information, available at https://www.cdp.net/en/investor/request-environmental-information#d52d69887a88f63e15931b5db2cbe80d.
 See “ISSB delivers proposals that create comprehensive global baseline of sustainability disclosures” (March 31, 2022), available at https://www.ifrs.org/news-and-events/news/2022/03/issb-delivers-proposals-that-create-comprehensive-global-baseline-of-sustainability-disclosures/.
 See The Enhancement and Standardization of Climate-Related Disclosures for Investors, Release No. 34-94478 (Mar. 21, 2022) [87 FR 21334 (Apr. 11, 2022)], available at https://www.sec.gov/rules/proposed/2022/33-11042.pdf.