'Long Overdue Step': SEC Unveils Historic Climate Risk Disclosure Proposal

Environmental advocates celebrated Monday after the U.S. Securities and Exchange Commission released a draft rule that would require publicly traded companies to assess how their activities contribute to the fossil fuel-driven climate crisis and disclose how worsening extreme weather and efforts to mitigate and adapt to it are likely to affect profitability--though they emphasized the need for further improvement.

"Protecting our financial system from climate-induced risk protects us all."

The SEC's proposed amendments to its existing disclosure framework would enhance and standardize how corporations measure and communicate their climate-related financial risks to investors and the public--a move that, according to David Shadburn, government affairs advocate at the League of Conservation Voters, "will level the playing field and limit companies' ability to greenwash and make unsubstantiated emissions reduction pledges."

Under the new rule, companies would be compelled to reveal the amount of greenhouse gas pollution they produce--excluding some indirect, but substantial, parts of their supply chains--detail how the climate emergency and clean energy transition might affect their bottom lines, and share their plans for meeting carbon emissions reduction targets.

"This new SEC rule is an important step toward recognizing that rising heat-trapping emissions and rapidly worsening climate impacts pose a significant risk to our financial and economic system and that accounting for those risks can help businesses and shareholders to proactively safeguard their investments," Kathy Mulvey, accountability campaign director for the Climate and Energy Program at the Union of Concerned Scientists, said in a statement.

Howard Crystal, legal director at the Center for Biological Diversity's energy justice program, also applauded what he called "the SEC's much-needed, commonsense proposal for companies, including electric and gas utilities, to disclose the full suite of their climate risks and harms."

Describing the SEC's proposal to better regulate mounting and undisclosed ecological and economic threats as a "long-overdue step," Ben Cushing, campaign manager for the Sierra Club's Fossil-Free Finance Campaign, said that it is "especially important" for investors and the public "to know the climate-related risks that companies face and how they are being addressed" because so many "have made commitments to address their climate impact without disclosing the full scope of their emissions, the risks their own businesses face from climate change, or the relevant business plans to achieve their climate pledges."

"Understanding and mitigating growing climate risks is critical to building a stronger financial system and protecting investors and communities from climate-related shocks," said Cushing. "We look forward to closely reviewing this proposal and offering suggestions to strengthen it, and we urge the SEC to move quickly to finalize the strongest rule possible."

The public will have up to 60 days to provide feedback on the proposed rule, the SEC announced.

One of the SEC proposal's weaknesses, progressive critics argue, is its treatment of so-called "Scope 3 emissions," which are the result of activities that "indirectly" contribute to a firm's value chain but don't use assets owned or controlled by the reporting organization--including business travel and employees' commutes, the consumption of goods and services, and waste disposal.

In its current form, the SEC's proposed rule "appears to set up a perverse incentive for firms to escape reporting requirements by not voluntarily mentioning Scope 3 in climate transition plans," said Moira Birss, climate and finance director at Amazon Watch, who added that "advocates will certainly be engaging with the SEC on this issue during the comment period."

"The Great Recession showed us what can happen when government regulators and Wall Street ignore risks and don't disclose them to the public."

According to Erika Thi Patterson, campaign director for Climate and Environmental Justice at the Action Center on Race and the Economy, letting issuers determine the materiality of Scope 3 emissions shields them "from liability for providing false information and allows firms to potentially omit disclosures for upwards of 75% of climate emissions and as much as 88% of the oil and gas sector's greenhouse gas emissions."

On the positive side, Birss said that "we are especially pleased to see a requirement for disaggregated reporting of carbon offsets, the use of which has long been rife with evidence of fraud, double-counting, dubious emissions-reductions claims, land rights violations, and other problems."

"Climate-related financial risks continue to increase, and market participants--including individuals, pension fund managers, and asset management firms--need to know how companies are approaching questions of supply chain emissions reductions, claims of avoided emissions via offsets, approaches to forest and biodiversity loss, how companies are interacting with communities defending ecosystems, and related issues," she added.

Crystal, meanwhile, said that "by closing all remaining reporting loopholes, the commission can ensure that its final rule requires companies to disclose the full extent of their greenhouse gas emissions."

Mike Litt, U.S. PIRG's Consumer Campaigns director, pointed out that "the Great Recession showed us what can happen when government regulators and Wall Street ignore risks and don't disclose them to the public."

Mulvey echoed Litt's assessment, saying that "from the 2008 financial crisis to the recent economic downturn related to the Covid-19 pandemic, economic crises touch everyone from Wall Street titans to pensioners to hourly wage workers, but--like environmental crises--often hit households of color and low-income households the hardest."

"Standardizing disclosure requirements will also help businesses meet the demands of international capital markets and ensure investors have consistent and comparable data to make fully informed decisions and hold corporations accountable for their response to climate change," she said. "Protecting our financial system from climate-induced risk protects us all."

Correction: An earlier version of this story misspelled the last name of Moira Birss, climate and finance director at Amazon Watch.