What We Told the SEC About Climate-Related Risk Disclosures

Back in March, the U.S. Securities and Exchange Commission proposed a major new rule that would require public companies to report on climate-related risks. The rule aims to enhance and standardize the disclosure of climate-related risks and opportunities by public companies.

We view this rule as timely and necessary. Climate and carbon risks have increasingly become material for many companies within various industries, and as such, disclosures in this area are financially material and key aspects of investor decision-making.

Our comment letter was one of the longest we have ever filed, coming in at more than 55 pages. The length of our response does not indicate that we dislike the proposed rule. The SEC appropriately asked a variety of technical questions, and we tried to help the commissioners think through the contours of the final rule.

Comprehensive, Consistent, and Comparable Information on Climate-Related Risks

We believe that investors need comprehensive, consistent, and comparable information on climate-related risks and that the proposal will greatly advance the availability of such information. In particular, we were very pleased to see the SEC require disclosure of scope 1 and scope 2 emissions.

We also support the commission’s decision to leverage terminology and definitions from the Task Force on Climate-Related Financial Disclosures, or TCFD. We encourage further alignment of TCFD-based terminology and definitions where possible to maximize comparability, integration, and understanding of the new climate disclosures. The TCFD’s framework has been widely and globally adopted, and as a result, TCFD-aligned disclosures are already available in many corporate disclosures.

We Think the Disclosures Are Generally Tailored to Minimize Burdens

The SEC is contemplating a major shift in what companies disclose, and these disclosures will be new for most issuers. In general, we think the SEC has struck a good balance between ensuring that investors have what they need to assess climate risk and reducing burdens on issuers.

For example, we agree that scope 3 emissions should only be disclosed by registrants with a scope-3-emissions reduction target, as well as for companies for which those emissions are material. That said, we do believe that the SEC should provide guidance on industry standards for firms to reference.

Similarly, we support the SEC’s approach to scenario-analysis disclosures regarding climate-related impacts on strategy, business models, and outlook. Morningstar further agrees with the commission that scenario analysis should not be mandated for all registrants at this time.

The Timelines Seem Reasonable, but May Need to Be Revisited

A key change the SEC proposed is that companies will need to disclose their emissions data in conjunction with annual financial filings. We know many issuers will be concerned about industry readiness for this requirement, since most climate disclosures currently lag financial disclosures, but we think temporal alignment is an important goal to make the climate information as useful as possible. Without a mandate, we do not think these disclosures will ever be completed at the same time. However, we cautioned the commission to monitor progress on alignment in case parts of the rule need to be delayed or adjusted while firms put systems in place to make these disclosures available on time.

In general, we support the SEC’s proposed timeline and would also be comfortable with the commission adjusting deadlines based on a registrant’s preparedness and giving small amounts of additional time to registrants that have not previously disclosed emissions data and to smaller reporting companies.

Moving Toward a Final Rule

Given the length of our comment letter, we expect the SEC to receive thousands of pages of commentary from hundreds of distinct commentators. Like us, many commentators will offer detailed suggestions for adjustments to the language or requirements of the rule and point out areas for more guidance. But the bottom line is that investors want climate-risk-related information, and the proposal represents an enormous step in the right direction.