Insight & Analysis

SEC sets scene for more climate disclosure

Published: Aug 2021

Speaking at a recent PRI webinar, Securities and Exchange Commission Chair Gary Gensler said that companies need to prepare for more mandatory, consistent and comparable, climate disclosure.

Industrial TV show background, setting the scene

The pressure on companies to publicly disclose the impact of climate change in their financial statements is set to grow. The US Securities and Exchange Commission will publish findings later this year on how it plans to update the way it regulates climate-related disclosures. Mandatory climate disclosure in the public filings companies make to the SEC and demands for much more consistent climate data from corporates is on the cards.

Climate change isn’t really factored into accounts today, particularly financial statements but this could be about to change, said SEC Chair Gary Gensler, speaking during a recent webinar for the Principles of Responsible Investment, the 4,000-signatory investor organisation. Gensler said the SEC is increasingly compelled to act in the interests of investors, clamouring for more information on how companies are preparing for climate change. “Investors are raising their hand and asking regulators for more,” said Gensler, who described the push-pull of corporate obligation to disclose and investors’ ability to decide what risks they want to take as crucial to the smooth working of financial markets.

Novel at the time, it is now hard to imagine investors ever making decisions without knowing the details of a company’s financial performance, said Gensler. Fast forward to the 1990s when a lively debate on whether to include stock compensation in corporate financial statements pushed the boundaries around disclosure. Meanwhile it has become normal for investors to have sight of the finer details of executive pay. Now the disclosure debate has shifted gear once again, and the focus is on climate.

Gensler said the upcoming proposal will likely call for businesses to provide qualitative and quantitative information to investors. This could include details around how executives manage climate-related risks, as well as more granular details about greenhouse gas emissions and the financial impact of global warming.

Corporate disclosure should be consistent, said Gensler, who added that the SEC’s call for input has revealed an overwhelming (75% of respondents) demand for mandatory climate disclosure to alleviate key challenges around comparing ESG data, the lack of publicly available information and corporate unwillingness to provide information.

He said the current level of disclosure doesn’t allow investors to compare corporate climate preparedness, and that much of the data is inconsistent. Add to this boilerplate and generic language, bereft of real detail. The SEC should step in and bring greater clarity, and mandatory disclosure would bring broad consistency, he said. Only then will investors be able to see a company’s vulnerability to physical climate risk and transition risk, as well as the extent to which companies are standing behind their climate commitments.

Gensler said the SEC should be in a position to “move forward” later in the year on new rules around climate disclosure. Adding that the SEC is working with other regulators around the world and its research is “informed and inspired” by the international community.

While the SEC moves to beef up climate disclosure, other initiatives are also under way. The IFRS Foundation, parent of the International Accounting Standards Board, has proposed setting up a body to develop sustainability standards. The rules created by that new body, the International Sustainability Standards Board (ISSB), would likely be adopted by the more than 140 countries that use international accounting standards. The initiatives are moving quickly enough that companies could use them in their 2023 financial year reporting.

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