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Shelter from the Storm: Helping Investors Navigate Climate Change Risk[1]

March 21, 2022

This is a watershed moment for investors and financial markets as the Commission today addresses disclosure of climate change risk – one of the most momentous risks to face capital markets since the inception of this agency. The science is clear and alarming,[2] and the links to capital markets are direct and evident.[3]

Thus, I’m very pleased to support today’s proposal and I want to extend my sincere thanks to staff across the agency for their hard work in crafting the proposing release.[4] I also want to thank Chair Gensler for his focus and commitment to this issue, and his counsel, Mika Morse, whose talents have been integral to finalizing this proposal. Today’s proposal is extremely well done, skillfully leverages widely-accepted market-driven solutions including those created by the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas (GHG) Protocol, and responds to longstanding demand for Commission action to enhance climate-related disclosures for investors and markets.

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Maintaining an effective disclosure regime for public companies is among the most important and foundational roles of the Commission. We have broad authority to prescribe disclosure requirements as necessary or appropriate in the public interest or for the protection of investors.[5] Importantly, with that authority comes responsibility. We have a responsibility to help ensure that investors have the information they need to accurately price risk and allocate capital as they see fit. We have a responsibility to millions of families with retirement savings and college funds whose economic well-being is linked to our financial markets. And we have a responsibility to stay firmly focused on facts and science and their implications for financial markets.  

The pandemic provided a timely reminder that a crisis with roots outside financial markets can, and often will, send shock waves directly through our markets. When the pandemic hit two years ago, the Commission sprang into action, issuing guidance, providing targeted relief, and advancing numerous other initiatives designed to alleviate many of the market stresses this public health crisis created, and to get decision-useful information about these financial stresses into the markets.[6] Those initiatives were largely implemented on an emergency basis. However, if we had had more concrete warning of the coming disaster, we could have taken steps in advance to increase transparency around company preparedness for some of the most foreseeable risks in order to get investors the information they needed in a timely manner. 

With climate change, we have ample, well-documented warning of potentially vast and complex impacts to financial markets. Physical and transition risks from climate change can materialize in financial markets in the form of credit risk, market risk, insurance or hedging risk, operational risk, supply chain risk, reputational risk, and liquidity risk, among others.[7] Indeed, we have more than just warning as many of those risks have already materialized.[8]

Climate change thus poses a pressing and urgent risk – for investors, companies, capital markets, and the economy. It is no surprise then that investors representing tens of trillions of dollars – more than the combined GDP of the top five ranked countries in the world – have been clear that they need more and better climate-related disclosure.[9]

We see this in shareholder proposals, we see this in public campaigns and initiatives, we see it in direct demands on companies, and we see it in demands that the Commission take action to require climate-related disclosure. And, while investors are the principal drivers of demand and the principal users of disclosure, the support for enhanced disclosure requirements is far broader.[10] The overwhelming majority of comments received in response to last year’s request for public input favored enhanced climate disclosure. Comments from investors, issuers, academics, accounting firms, third party standard setters, lawmakers, our own advisory committees[11] – a broad and diverse coalition of market participants and commentators agree on the need for the Commission to propose climate-related disclosure requirements.[12]  

This proposal is responsive to that feedback, as well as to those who raise valid concerns about the challenges of these disclosures. It takes a measured and balanced approach to climate disclosure, building upon current market practices, including proposed accommodations for smaller companies, balancing principles-based requirements with the need for climate-related metrics, phasing in certain requirements over time, and even providing a safe harbor for the disclosure of Scope 3 emissions.  

The proposal broadly contains the following provisions:

  • It would create new requirements for the disclosure of climate-related risks and impacts based on the TCFD disclosure framework, including information about material impacts of climate risk on a company’s business, and information about a company’s governance, risk management, and strategy related to climate risk.
  • It would include a requirement to disclose in a company’s financial statements disaggregated metrics on climate-related impacts, expenditures, and estimates and assumptions.
  • It would require the disclosure of a company’s greenhouse gas emissions, drawing on the GHG Protocol, and including Scopes 1, 2, and, for all but the smallest companies, Scope 3 emissions.[13]

The proposal would require these disclosures to be filed with the Commission, phase reporting requirements in over time based on a company’s size, and importantly, includes a phased-in requirement for verification or “reasonable assurance” of GHG Scopes 1 and 2 for larger filers to help ensure the reliability of these disclosures.[14]

I look forward to what I know will be detailed, data-driven, and robust comments on all aspects of the proposal. I’m especially interested to hear from commenters in a few specific areas:

Reliability of GHG Emissions Disclosures

A company’s internal controls. Greenhouse gas emissions in many respects resemble financial statement disclosures, involving as they do significant estimates and assumptions and providing critically important insight into a company’s operations. As proposed, these disclosures are required under Regulation S-K rather than under Regulation S-X with financial statement disclosures. If emissions disclosures were required under Reg S-X and located in the financial statements, they would generally be subject to a company’s internal control over financial reporting (ICFR).[15] In Reg S-K, there is no such requirement. Would GHG emissions be better placed within Reg S-X and subject to the rigors of ICFR? Alternatively, should we leave emissions disclosure in Reg S-K as proposed but add a new requirement to establish ICFR-like internal controls for GHG wherever they reside?

Third-party verification. The location of GHG in Reg S-K would also mean that the required assurance may be provided by third-party verifiers that are not PCAOB-registered audit firms. On the one hand, will this help to improve competition in this space and thus create better outcomes? On the other hand, PCAOB-registered audit firms are subject to oversight and inspection whereas other types of third-party verifiers are not. Will this difference substantially affect the quality of, or confidence in, the verification?

Reasonable vs. limited assurance. I hope commenters will weigh in on whether to keep the proposal’s requirement to subject GHG Scopes 1 and 2 to reasonable assurance attestation after an interim period of limited assurance. Reasonable and limited assurance are terms of art in the auditing world with significant differences. Broadly, limited assurance is a form of negative assurance that the attester is unaware of any material issues.[16] Reasonable assurance, by contrast, is an affirmative attestation that the information is fairly presented in all material respects.[17] Consider, for example, parachuting from a plane. Would you be content to hear that a review shows nothing to indicate a problem with the chute, or would you instead want to know that the chute has been examined and found to be sound in all material respects? Given what many view as the centrality of GHG emissions in analyzing a company’s climate risk,[18] the difference between limited and reasonable assurance may be no trifling distinction, and it will be critically important to hear from commenters on this issue.  

Scope 3 Emissions

Specificity. Scope 3 disclosures are often vitally important to understanding a company’s overall greenhouse gas emissions and therefore overall climate-related risks. As proposed, Scope 3 emissions must be reported if they are material – either quantitatively or qualitatively. Does the release contain sufficient specificity regarding how companies should undertake this analysis? Also, should companies be required to provide the basis for any determination that their Scope 3 emissions are not material in order for investors assess whether they agree with the determination, especially in light of Supreme Court precedent stating that doubts about materiality should be resolved in favor of disclosure?[19]

Assurance Carve-out. The proposal would not require any type of verification or assurance over Scope 3 emissions disclosures. Given the overall significance of such data, would it be more prudent to phase in an assurance requirement over time for Scope 3? Would a phase-in period be consistent with an expectation that Scope 3 disclosures are likely to mature over time with across-the-board disclosure of Scopes 1 and 2 emissions?  

Safe Harbor. The proposal contains a broad safe harbor for Scope 3 emissions disclosures unless they are made without a reasonable basis or not in good faith. Should the safe harbor also or instead be conditioned upon the use of specific methodologies such as the Partnership for Carbon Accounting Financials (PCAF) Standard if the registrant is a financial institution, or the GHG Protocol Scope 3 Accounting and Reporting Standard for other types of registrants? 

On these and the many other important questions raised by the proposal, I hope commenters will weigh in with their views and supporting data.

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Climate change has broader implications than those within the Commission’s remit that we address today. Other regulators or lawmakers may consider or take action based on their own jurisdictions and responsibilities. However, our responsibility to help ensure accurate and complete disclosure of risks for investors and markets is long-standing and central to our mission. Climate risk is not unique in this regard. It is not unlike similarly pressing concerns for investors such as cybersecurity threats, or risks related to supply chains and worker safety brought to the fore by the pandemic. And with climate, we have the benefit of an extensive body of research on this risk and how it will impact financial markets, years of work and analysis by market participants trying to improve disclosure of the risk, and a clear record of quite rational investor demand for better disclosure of climate risk information. Today’s proposal reflects a commitment to remaining focused on these facts and to data-driven policymaking.

One final thanks again to the dozens of staff all across the agency who have worked so hard on this proposal, and a special thanks to my counsel, Katherine Kelly, who has worked tirelessly and with deep commitment on this effort. Thank you.

[1] Bob Dylan, Shelter from the Storm (Ram’s Horn Music 1974).

[2] Recent scientific data from the United Nations Intergovernmental Panel on Climate Change (IPCC) report, drawing from some 34,000 studies around the world, contains a dire message that has been called a “Code Red for humanity.” See United Nations, Secretary-General, Press Release 20847, Secretary-General Calls Latest IPCC Climate Report ‘Code Red for Humanity,’ Stressing ‘Irrefutable’ Evidence of Human Influence (Aug. 9, 2021); see also IPCC, Climate change: a threat to human wellbeing and health of the planet. Taking action now can secure our future (Feb. 28, 2022) (“Human-induced climate change is causing dangerous and widespread disruption in nature and affecting the lives of billions of people around the world, despite efforts to reduce the risks. . . People’s health, lives and livelihoods, as well as property and critical infrastructure, including energy and transportation systems, are being increasingly adversely affected by hazards from heatwaves, storms, drought and flooding as well as slow-onset changes, including sea level rise.”).

[3] See Swiss Re Institute, The economics of climate change: no action not an option (April 2021) (“The world stands to lose close to 10% of total economic value by mid-century if climate change stays on the currently anticipated trajectory, and the Paris  Agreement and 2050 net-zero emissions targets are not met.”); Managing Climate Risk in the U.S. Financial System, Report of the Climate-Related Market Risk Subcommittee, Market Risk Advisory Committee of the U.S. Commodity Futures Trading Commission (Sept. 9, 2020) (“Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy. Climate change is already impacting or is anticipated to impact nearly every facet of the economy, including infrastructure, agriculture, residential and commercial property, as well as human health and labor productivity. Over time, if significant action is not taken to check rising global average temperatures, climate change impacts could impair the productive capacity of the economy and undermine its ability to generate employment, income, and opportunity.”); Financial Stability Board, The Implications of Climate Change for Financial Stability (Nov. 23, 2020) (“The manifestation of physical risks – particularly that prompted by a self-reinforcing acceleration in climate change and its economic  effects – could lead to a sharp fall in asset prices and increase in uncertainty. This could have a destabilising effect on the financial system, including in the relatively short term. Market and credit risks could also be concentrated in certain sectors of the real economy and geographies. Disruption could also occur at national level. Some emerging market and developing economies (EMDEs) that are more vulnerable to climate-related risks, especially those in which mechanisms for sharing financial risk are less developed, may be particularly affected. A disorderly transition to a low carbon economy could also have a destabilising effect on the financial system.”).

[4] The Enhancement and Standardization of Climate-Related Disclosures for Investors, Release No. 33-11042 (March 21, 2022) [Proposing Release].

[5] See 15 U.S.C. 77g(a)(1) (“Any such registration statement shall contain such other information, and be accompanied by such other documents, as the Commission may by rules or regulations require as being necessary or appropriate in the public interest or for the protection of investors.”); see also 15 U.S.C. 78m(a); 15 U.S.C. 78l(b); 15 U.S.C. § 78o(d).

[6] See SEC Coronavirus (COVID-19) Response (setting forth dozens of agency actions responsive to the pandemic, including exemptive relief for issuers and registered entities from certain regulatory requirements, guidance on regulatory responsibilities including disclosure obligations, temporary amendments to rules to facilitate capital formation for small businesses, and other initiatives responsive to the effects of the public health crisis on the capital markets).

[7]  See Bank for International Settlements, Basel Committee on Banking Supervision, Climate-related risk drivers and their transmission channels (April 2021) (identifying credit, liquidity, market, operational, and reputational risks as impacts for banks from physical and transition risks of climate change); Nahiomy Alvarez, Alessandro Cocco, Ketan B. Patel, A New Framework for Assessing Climate Change Risk in Financial Markets, Chicago Fed Letter, No. 448, Nov. 2020 (discussing supplying chain risk flowing from physical climate risk and other impacts from physical, transitional, and liability risks); Managing Climate Risk in the U.S. Financial System, Report of the Climate-Related Market Risk Subcommittee, Market Risk Advisory Committee of the U.S. Commodity Futures Trading Commission (Sept. 9, 2020) (identifying market, credit, policy, legal, technological, and reputational risks arising from transition risk, as well as operational disruptions arising from physical risks).

[8] See, e.g., Russell Gold, PG&E: The First Climate-Change Bankruptcy, Probably Not the Last, The Wall Street Journal (Jan. 18, 2019); Christopher Flavelle, Climate Change is Bankrupting America’s Small Towns, The New York Times (Sept. 2, 2021).  

[9] The combined GDP for the top five ranked countries in the world by GDP is approximately $45.69 trillion. See GDP Ranked by Country 2022. By comparison, Climate Action 100+ includes investors representing $65 trillion dollars in assets under management. See also comment letters in support of enhanced climate disclosure requirements from BlackRock (June 11, 2021) ($9 trillion); Ceres (June 10, 2021) ($37 trillion); Council of Institutional Investors (June 11, 2021) ($4 trillion); Investment Adviser Association (June 11, 2021) ($25 trillion); Investment Company Institute (June 4, 2021) ($30.8 trillion); SIFMA (June 10, 2021) ($45 trillion); and Vanguard Group, Inc. (June 11, 2021) ($7 trillion).

[10] Indeed the proposal would present significant potential benefits for market participants other than investors, particularly for issuers who are grappling with competing and sometimes conflicting demands for climate-related information under various standards and/or in response to bespoke questionnaires. This proposal would help level the playing field for issuers by providing much-needed certainty and a uniform disclosure standard. Further, I note that climate risks likely “disproportionately impact groups that have traditionally faced higher barriers to participating in the economy than the general population, including low-income communities, communities of color, and Tribal populations.” Elizabeth Mattiuzzi and Eileen Hodge, Federal Reserve Bank of Chicago, Climate-Related Risks Faced by Low- and Moderate-Income Communities and Communities of Color: Survey Results (Dec. 2021). In that regard, the proposal has potential implications for capital formation in those communities.

[11] See, e.g., comment letters in support of enhanced climate disclosure requirements from Ceres (June 10, 2021); State Street (June 14, 2021); Microsoft (June 14, 2021); Gina-Gail S. Fletcher, et al. (on behalf of the Regenerative Crisis Response Committee) (June 14, 2021); PWC (June 10, 2021); Sustainability Accounting Standards Board (now Value Reporting Foundation) (May 19, 2021); and Senator Elizabeth Warren and Representative Sean Casten (June 11, 2021). See also Recommendation from the Investor-as-Owner Subcommittee of the SEC Investor Advisory Committee Relating to ESG Disclosure (May 14, 2020) and Asset Management Advisory Committee Recommendations for ESG (July 7, 2021). Among unique comment letters in response to the request for public input, those favoring Commission adoption of enhanced climate disclosure requirements outnumbered those in opposition by a margin of approximately four-to-one. See Comments on Climate Change Disclosures. The margin is considerably larger if the thousands of form letters favoring enhanced disclosure requirements are taken into consideration.

[12] Disclosure is also supported by the public at large. See Jennifer Tonti, Just Capital, Survey Report: Americans Want to See Greater Transparency on ESG Issues  and Support Federal Requirements for Increasing Disclosure (Feb. 2022) (finding that, among a nationally representative, geographically diverse, and probability-based web panel reaching respondents in all 50 states, 87 percent of respondents supported the federal government requiring large companies to publicly report climate information).

[13] The proposal would require the disclosure of GHG emissions data in gross terms, excluding any use of purchased or generated offsets. Companies, except for smaller reporting companies, would be required to disclose Scope 3 emissions if material or if they have set a GHG emissions reduction target or goal that includes Scope 3 emissions. See Proposing Release 168-70. In addition to the exemption for smaller reporting companies, the Scope 3 compliance date would be delayed (i.e., the reporting requirement would start one-year after reporting Scopes 1 and 2), and the proposal includes a safe harbor from liability for disclosure of Scope 3 emissions. See Proposing Release at 232.

[14] The assurance requirement for Scopes 1 and 2 emissions would apply to large accelerated and accelerated filers, which together make up approximately 95 percent of market capitalization among registrants that file annual reports. See Proposing Release at 396 (“Large accelerated filers constitute approximately 31% of the universe of registrants that filed annual reports during calendar year 2020 (1,950 out of 6,220), but account for 93.6% of market cap within the same universe. Accelerated filers constitute approximately 10% of the universe of registrants that filed annual reports during calendar year 2020 (645 out of 6,220) and account for 0.9% of market cap within the same universe.”). The proposal would require reasonable assurance over Scopes 1 and 2 emissions disclosures after a three-year transition period, with an interim requirement of limited assurance. See id. at 238.

[15] See 15 U.S.C. 7262(b).

[16] See PCAOB AS 4105: Reviews of Interim Financial Information (Describing an opinion that, “[b]ased on our review and the report of other accountants, we are not aware of any material modifications that should be made to the accompanying interim financial information (statements) for it (them) to be in conformity with accounting principles generally accepted in the United States of America.”).

[17] See PCAOB AS 3101: The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (Describing an “opinion that the financial statements present fairly, in all material respects, the financial position of the company as of the balance sheet date and the results of its operations and its cash flows for the period then ended in conformity with the applicable financial reporting framework.”).

[18] See, e.g., comment letters from Wellington Management Company (June 11, 2021) (“GHG Emissions information serves as the starting point for transition risk analysis because it is quantifiable and comparable across companies and industries. Ranking companies within industries based on their GHG Emissions intensity helps us prioritize companies for engagement to better assess transition risk exposure, as well as encourage better management through a climate transition plan and time-bound emissions reductions targets.”); BlackRock (June 11, 2021) (“We recommend GHG emissions as an appropriate starting point for issuers to provide mandatory quantitative disclosure, recognizing that Scope 3 and any other quantitative disclosures may require a phased approach and appropriate safe harbor where data and methodologies are still developing. However, we support the SEC mandating disclosure of these additional metrics as soon as practicable.”); Ceres (Dec. 15, 2021) (“As noted by investors, Scope 3 data is the highest source of emissions for critical industries to investors and the economy, such as banking (financed emissions) and oil and gas (used of sold products). The Commission and the investors protected within its mandate cannot adequately evaluate issuers’ climate-related financial risk exposure without accurate, comparable, consistent, complete and mandatory Scope 3 disclosure in these and other industries with significant Scope 3 emissions.”).

[19] TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438, 448 (1977) (recognizing there could be doubts about the materiality of information, but explaining that, “particularly in view of the prophylactic purpose” of the securities laws,” and “the fact that the content” of the disclosure “is within management’s control, it is appropriate that these doubts be resolved in favor of those the statute is designed to protect,” namely investors.).

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