SEC’s Proposed Climate Regulation Draws Support and Criticism

The extended public comment period for the Securities and Exchange Commission’s proposed climate impact disclosure regulations has ended, and the regulator is hard at work digesting the more than 5,000 comments filed by individuals, institutional investors, asset managers and many other stakeholders in the financial services ecosystem.

Given the volume of commentary, it will take time for the full scope of the public feedback to be appreciated by SEC observers and the regulator’s own staff. However, even a cursory review of the published letters shows the comments come from a wide variety of perspectives and positions, with commenters ranging from anonymous individuals to midsize advisory shops to some of the biggest and most influential asset managers in the world. 

Some of the letters voice outright opposition to the notion of the federal government mandating the disclosure of climate-change-related information of any kind. On the other hand, many more of the letters appear to acknowledge the increasing importance of climate-related data and insights when it comes to individual and institutional investors’ decisions. That said, while many of the letters argue the SEC is the appropriate regulator to be addressing this issue, others see the ambitious regulatory package proposed earlier this year as a step beyond the SEC’s traditional purview.

The Investment Consultants Sustainability Working Group – United States, a collaboration among 17 investment consulting firms including Aon, Cambridge Associates, Callan, Meketa Investment Group, Mercer, NEPC, Russell Investments, WTW and Verus, submitted comments supporting the proposed rule.

The ICSWG-US said it believes the SEC’s proposed rule “can help ensure that investors have access to consistent, comparable, reliable, and decision-useful information on financially material risks and opportunities related to climate change.”

The comments continue: “In the absence of standardized disclosures, investors seeking climate-related information collect this data from numerous sources, including companies’ voluntary disclosures that are unverified and often difficult to compare, and rely on third party estimates in the absence of reported data,” which is a burden on debt and equity issuers and results in market inefficiencies, the organization wrote.

They also said it is important that the proposed rule is based on the Task Force on Climate Related Financial Disclosures and the Greenhouse Gas Protocol, of the Financial Stability Board, because it will align with global standards on such disclosures. “The TCFD climate disclosure framework is widely used across the largest capital markets and regulators have begun mandating TCFD-aligned reporting in jurisdictions including the UK, Brazil, the EU, Hong Kong, Japan, New Zealand, Singapore, and Switzerland,” the group wrote.

Alternatively, the American Securities Association, which represents wealth management and capital markets interests of regional financial services firms, said that it opposes the proposed rule because it “represents a dramatic and unwarranted turn away from this regime. The Commission is proposing to adopt a prescriptive approach to disclosures—one that mandates numerous disclosures the Commission alleges will protect the environment, not investors.”

The ASA’s comment letter outlines how they believe the proposed rule “exceeds the Commission’s statutory authority, (2) is arbitrary and capricious, and (3) raises serious First Amendment concerns. As a result, the ASA urges the Commission to drop this rule and refrain from fundamentally transforming the securities laws in this way without express Congressional authorization.”

The Investment Company Institute and several asset management firms, including BlackRock, Fidelity and Dimensional Fund Advisors, were critical of the proposed regulation for using a different definition of “materiality” than the SEC has used in other rules.

The ICI wrote: “We urge the Commission to adopt a final rule that requires a company to file certain climate-risk related information which the company determines is material in annual reports and registration statements (SEC filings) and, to the extent that the company determines this information is not material, to furnish such information and any additional SEC-mandated information in a new climate report.”

Two other groups that publicly filed supportive comment letters about the SEC’s ambitious regulations are the Consumer Federation of America, which advocates for the rights and fair treatment of U.S. consumers, and the Investment Adviser Association, which advocates on behalf of the fiduciary investment adviser industry. The two organizations operate under a very different set of goals and principles, but their comments regarding the SEC’s climate regulations share some key similarities—including offering broad support for the direction in which the SEC is heading.

In its letter, the IAA says it agrees with the SEC that the provision of “more consistent, comparable and reliable ESG disclosures” of material information by registrants will allow investment advisers to better serve their clients by improving transparency for investors and facilitating apples-to-apples analysis and comparison of registrants.

“We also believe that this will in turn lead to better and more accurate pricing of risks, and thus largely support the proposal,” the letter states. “We agree with the Commission that these rules should require presentation of climate-specific financial information on a separate basis and not specify particular time periods for time horizons but instead issue guidance. In addition, we recommend that any rules that the Commission adopts balance flexibility for registrants and standardization of disclosures; eliminate certain proposed prescriptive board oversight requirements; and provide additional examples of physical and transition risks.”

The IAA’s letter states that the organization agrees with the proposed requirement that registrants disclose Scopes 1 and 2 greenhouse gas emissions data, which involves the emission of greenhouse gases more or less directly by the company in question. The IAA also voices is support for the requirement that larger reporting company registrants obtain attestation for Scopes 1 and 2 greenhouse gas emissions. However, the IAA voices opposition to the requirement that registrants disclose Scope 3 emissions data. As commonly defined, Scope 3 emissions are those produced as a result of activities from assets not owned or controlled by the reporting organization, but that the organization impacts in its value chain and business operations.

“We recommend that the Commission not require registrants to disclose their Scope 3 GHG emissions at this time due to data gaps and the absence of agreed-upon measurement methodologies,” the letter states. “Should the Commission nevertheless require disclosure of Scope 3 GHG emissions, we recommend that it only require disclosure of Scope 3 GHG emissions when they are material, and not require disclosure if the registrant has set an emissions target or goal that includes those emissions.”

With respect to all required climate-related disclosures, the IAA recommends that the SEC clarify the standard for materiality to be used. The letter also recommends that the SEC require GHG emissions attestation providers to have familiarity with the specific industry of the registrant for which the attestation report is being provided.

The Consumer Federation of America’s comment letter speaks directly to the question of the SEC’s authority to pursue these regulations.

“Taking these steps is not only well within the Commission’s authority, but also essential if the Commission is to fulfill its public interest mission to protect investors, promote fair, orderly and efficient markets, and facilitate capital formation,” the letter states. “We encourage the adoption of the proposed amendments without undue delay.”

According to the CFA, factors driving demand for better climate-related disclosures can vary, but of principal significance is the growing consensus that climate change may present a systemic risk to financial markets.

“This concern is detailed in the recent report of the Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee of the Commodity Futures Trading Commission,” the CFA letter points out. “The report was unanimously approved by the subcommittee’s 34 members, who represent banks, asset managers, agribusiness, the oil and gas sector, academia and environmental organizations. This concern is widely acknowledged across virtually all segments of the economy in general and the financial system in particular.”

The CFA’s letter further notes that both retail and institutional investors are demanding better climate-related disclosures that can inform better investment decisionmaking.

“First, institutional investors are explicitly demanding enhanced climate-related disclosures because they know that climate-related risks and opportunities can affect returns,” the letter continues. “Second, they are demanding enhanced climate-related disclosures so that they can offer investment products and services that meet their clients’ needs and goals.”

The CFA letter suggests that while investor focus is appropriately centered on the downside financial risks of climate change, it is equally important to highlight the benefits that investors seek via better climate-related information.

“Where markets and economies are decarbonizing, both retail and institutional investors need reliable information to determine the effects of this process on registrants,” the CFA letter concludes. “Investors have demonstrated that they need climate-related information when making decisions about how best to allocate their capital—whether to buy, hold or sell a company’s shares, and how to vote their proxies. To do so, they need information about companies’ plans related to climate change and the potential cost of those plans.”