The Opportunity for SEC Regulation of Climate Disclosures

Corporate risk exposure to climate change is becoming ever more central to companies’ bottom lines. As a result, investors, governments and the public increasingly expect information from companies on climate risks, strategies and scenario planning.

To help mitigate long-term risks, companies are adopting aggressive sustainability targets and considering environmental, social and governance (ESG) criteria to better evaluate the impact of their activities and investments. The potential allocation of ESG funds to renewable energy investment presents an opportunity to enhance the growth of climate-friendly energy resources.

However, the requirements of existing, voluntary frameworks for corporate climate disclosure are sometimes inconsistent, and the quality of reporting uneven. Sustainability investments, therefore, do not necessarily result in direct greenhouse gas (GHG) emission reductions. Investors need more consistent, comparable, transparent and forward-looking corporate disclosures they can evaluate objectively.

The Biden administration has taken note. On May 20, the President signed an Executive Order directing a whole-of-government approach to climate-related financial risk. In June, the House passed legislation that would require companies to disclose their climate risks to the Securities and Exchange Commission (SEC).

The SEC can play an instrumental role by requiring corporate filing of climate disclosures. Climate transition and physical risks, in particular, have become established corporate data points that many expect the Commission to regulate.

The SEC put out a request for public input on corporate climate disclosures in March. ACORE responded on June 11, outlining our perspective on this important issue informed by the deliberations of our ESG working group. Key aspects of these comments are summarized below.

Require Disclosure of Greenhouse Gas Emissions

The SEC should require disclosure of Scope 1-2 GHG emissions, and Scope 3 as appropriate, based on the Greenhouse Gas Protocol’s framework. Scope 1 and 2 emissions reporting is well-developed and already disclosed by many market participants. Investors increasingly request corporate disclosures on Scope 3 emissions, but collecting information on suppliers’ GHG emissions remains a work in progress for some companies. Nonetheless, Scope 3 emissions are an increasingly important data point for investors, and companies should develop processes to formalize collection of this information.

Build from the Widely Used TCFD Framework

The Commission should consider lessons learned from existing frameworks and create alignment around one set of standards that assess forward-looking and material corporate information on climate.

The widely used Task Force on Climate-related Financial Disclosures (TCFD) framework is a good place to start. The TCFD has emerged as a leading framework for investors and companies seeking to identify climate-related risks and opportunities. In addition, voluntary disclosure frameworks, governments, and other participants in the climate disclosure landscape are beginning to align with the TCFD’s recommendations, demonstrating a willingness for further collaboration around one set of generally accepted guidelines on climate disclosure.

ACORE recommends the SEC use the TCFD’s recommendations related to corporate climate risk exposure, strategies and scenario planning to guide mandatory climate disclosures.

Develop Industry-Specific Standards through a Standard-Setting Process

The TCFD recommendations are intentionally general with the expectation that industry leaders will tailor implementation to fit their specific needs. SEC reporting standards should include industry-specific metrics to address how sectors are uniquely impacted by climate change.

The development of industry-specific metrics is best suited for a standard-setting process, overseen by the Commission, that allows for evolution and nuance rather than a static rulemaking process. An independent body overseen by the SEC, in a manner similar to how the Commission oversees the Financial Accounting Standards Board, should lead a standard-setting effort with industry-specific metrics, rather than the SEC rulemaking process. Industry associations may also help inform the Commission’s efforts to set sector-specific guidance.

The standard-setting process is ideal because these areas are continuing to rapidly evolve. The static nature of the rulemaking process runs the risk of not providing the flexibility needed to iterate on standards over time. In the effort for greater transparency, the Commission or a regulated body should lead this process rather than complete delegation to a third party.

Optimize ESG Disclosure and Reporting

The Commission should not delay climate disclosure regulations for the more complicated process of optimizing ESG disclosure and reporting. Whereas climate disclosures tend to focus on highlighting climate-related risk, ESG investing can and should go further to incorporate activities that proactively provide durable climate solutions and mitigate climate harm. In that regard, ACORE believes ESG data collection and reporting regime should embrace the following methods for reporting renewable energy use and investment.

• Within Scope 1 and 2 emissions, disclosure of energy use should be broken down by generation type. Corporate sustainability reports and ESG surveys can be inconsistent and lack details regarding renewable energy use in the context of companies’ overall energy consumption and total GHG emissions. The climate value associated with renewable energy procurement should vary depending on two key attributes: (1) carbon reductions and (2) a company’s impact on driving new renewable energy generation.
• Companies should also have the option to disclose the avoided emissions associated with their Scope 3 renewable energy investments in a way that avoids giving rise to compliance confusion or concerns around double-counting. The investments of banks and capital providers extend beyond the operational carbon footprint of the investing company and contribute to GHG reductions in other sectors of the economy. One solution is to revise and appropriately weigh a company’s Scope 3 emissions to reflect the carbon impact of its downstream activities.

To mitigate the worst impacts of climate change, the time is now for the Commission to act on climate-related disclosures. Meanwhile, ACORE will continue to engage its members to increase standardization, transparency and use of material indicators in ESG disclosure and scoring methodologies through specific recommendations and regular outreach to the ESG community.