SEC Proposes Rule to Force Companies to Disclose Climate Risks

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On Monday, US regulators gave a green light to what many corporate accountants see as a red flag.

For the first time ever, the Securities and Exchange Commission said it plans to make businesses disclose the risks climate change poses to their business. A headache of (recyclable) paperwork ensues.

One Rule to Green Them All

There’s no doubt investors have developed a green thumb. Last year, a record $649 billion was poured into environmental, social, and governance-focused funds around the world, up from $542 billion in 2020, according to Refinitiv Lipper.

But many investors and activists argue that parsing through corporate climate data is a fraught endeavor, with differing reporting standards making it hard to compare one company to the next. By introducing climate rules, the SEC could fix that, though some firms warn of new, unintended risks:

  • The SEC’s proposal will require companies to disclose in regulatory findings their direct and indirect greenhouse gas emissions, called Scope 1 and 2 emissions, as well as exposure to risks like carbon taxes. Auditors will review the disclosures, though their role will be phased in.
  • The more contentious point is the SEC wants large companies to disclose emissions generated by their suppliers and partners, called Scope 3 emissions. Regulating Scope 3 emissions has received significant pushback from industry — fearing bloated accounting costs and the risk of getting sued if a supplier provides incorrect information — and the SEC is bracing for legal challenges.

“We do have information,” Isabel Munilla, a director at the DC-based Ceres Accelerator for Sustainable Capital Markets, told Reuters. “The problem is that it’s a hot mess.”

Nodding Along: Many firms already agree disclosures are a good thing, especially as investors demand more data on climate-related factors like emissions, water security, and forest impact. Over 13,000 companies voluntarily made standardized climate information public last year through The CDP (formerly the Carbon Disclosure Project), an international non-profit dedicated to environmental disclosures. The number of participating companies was just 3,500 a decade ago.