Mar 21, 2022 - Economy

SEC poised to unveil much-anticipated climate disclosure rule

Illustration of a stock trend line drawing on the screen and then melting.

Illustration: Brendan Lynch/Axios

The U.S. on Monday is poised to take a big step toward requiring that publicly traded companies disclose their climate risk exposure.

Driving the news: The Securities and Exchange Commission (SEC) is expected to take up the proposed rule Monday morning. The rule, which has been under discussion since last year, aims to provide some clarity for investors by enabling them to determine the climate risks lurking in their portfolio.

The big picture: In proposing climate risk disclosure rules, the SEC will effectively be trying to set a floor for companies to meet or exceed when reporting how prepared they are for the consequences of a warming world.

  • SEC chairman Gary Gensler has said he favors strong disclosure rules that educate investors about the climate change-related risks embedded in their investments.
  • “Today investors want to better understand the climate risk of companies whose stock they might own or might buy,” Gensler said in a video released on Twitter last October.

The intrigue: Climate activists hope the rules will impose reporting requirements on all types of emissions, including Scope 3 emissions that come from the use of a firm’s products.

  • However, given that relatively few companies even account for Scope 3 emissions in their emissions targets, it’s more likely that any provision in this area would either be voluntary or phased in over time.
  • In crafting the new rule, the SEC has had to grapple with the near certainty that it will be challenged in court, which could result in a more cautious approach.

What they’re saying: According to Daniel Firger, managing director of Great Circle Capital Advisors, the proposed rule should not be interpreted as the SEC extending its reach into climate, but rather as the agency exercising its congressional mandate.

  • Firger worked on the Task Force on Climate-Related Financial Disclosures, which aims to provide consistent disclosure measures across companies, such as banks.
  • "The SEC, its job is to protect investors and make sure capital markets are operating efficiently," Firger told Axios. "This is now one of many risks that investors need to know about."
  • "I think the SEC writing a proposed rule will will send a huge and powerful signal to the markets and really help to clarify things."

Yes, but: From a political standpoint, it was only last week that Sarah Bloom Raskin had to withdraw her nomination for a powerful Fed position due to her views on the financial risks of climate change.

  • Any weaknesses in the proposed SEC rules could add to environmentalists’ growing frustration with the Biden administration over the pace and scope of climate action.
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