The Securities and Exchange Commission in March published its long-awaited proposed rule requiring U.S.-listed companies and foreign private issuers to provide more in-depth and standardized climate-related information in their registration statements and annual reports. The regulator has received about 11,000 comments on the proposal—far more than usual—and continues to get submissions nearly a month after the close of the official review period. Our analysis shows that while there was overwhelming investor support for climate disclosure regulation in general, comments diverge significantly on the recommended regulatory path ahead.
Comment Perspectives
ISS Corporate Solutions examined a representative range of comments from investors (both asset owners and managers) and investor groups, such as CalSTRS, BlackRock, The Council of Institutional Investors; non-profits and consumer protection groups, such as As You Sow and Ceres; former SEC chairs and commissioners; legal and academic scholars; corporations, such as Occidental Petroleum, Hewlett-Packard and United Airlines; banks, including Norges Bank and Citigroup; associations, such as the Society for Corporate Governance and the Business Roundtable; and auditing firms such as EY. Comments from different parties did not always fall along corporates vs. investors, though some did. The Business Roundtable and the Chamber of Commerce described the proposed disclosures as completely unworkable.
Key Findings
Comments and questions revolved around eight key topics:
- Strong Support for the proposal’s alignment with the Task Force on Climate-related Financial Disclosures (TCFD)
- Support for proposal’s alignment with the Sustainability Accounting Standards Board (SASB) and the International Sustainability Standards Board (ISSB) frameworks
- Corporate concerns over compliance costs and burdens in terms of time and money
- Questions over material relevance of the SEC proposals, including Scenario Analyses and whether data should be furnished or filed (the latter describing inclusion in a company’s filed financial accounts)
- Diverse views on mandating Scope 3 (indirect emissions) disclosures
- Concerns over the speculative nature of greenhouse gas (GHG) disclosures/risks
- Broad support for board oversight of climate risks, but differences over granular disclosure requirements
- Disagreement over the SEC’s authority to require such disclosures
The most common form letter comments (6,254) expressed full support for the rules, saying that the disclosures are essential for investors to understand data about the impact on assets and the long-term climate outlook. They said that corporations had ignored climate issues for too long and downplayed the inherent risk to investors. A further 3,000 form letter comments were supportive, referencing climate change disasters and suggesting the U.S. be brought in line with other countries’ disclosure regimes, particularly those in Europe. A substantial number supported full disclosure of Scope 3 emissions and stressed the need to have reliable information in order to make forward-looking investment decisions.
Many of the form letter comments objecting to the rules cited burdensome requirements and the high cost of collecting the data. Ironically, many of these came from ranchers and farmers who probably won’t be affected by the rules. A small number stated that it was “un-American to socially ostracize or punish companies because they don’t adopt a radical leftist or environmentalist outlook,” according to the SEC’s summaries. Another substantial minority alleged that the SEC had no authority to require such disclosures; a claim that had not been made in relation to other proposed disclosures.
Rold of TCFD and SASB/ISSB
There was significant support for alignment with TCFD/SASB/ISSB disclosure frameworks among both investors and corporations. For example, California public pension fund CalSTRS said these guidelines and standards should form the foundation of the proposed rules, and asset manager Allianz Group said that alignment would be particularly useful for international comparisons. Fidelity Investments specifically asked that foreign issuers filing reports in the U.S. be allowed to follow ISSB standards. State Street Corporation called for the new rules to be as flexible as TCFD, which uses a so-called “comply or explain” standard. ExxonMobil and Wells Fargo also noted the SEC’s attempt to stay as close to TCFD as possible. The National Association of Manufacturers (NAM) stated that many of its members already follow TCFD’s recommendations on Scope 1 and 2 emissions regardless of materiality. The Institute for International Finance cited the benefits of a global alignment incorporating TCFD accepted frameworks into governance, strategy, risk, and metrics disclosures.
Scope 3 Emissions
Scope 3 emissions are “the result of activities from assets not owned or controlled by the reporting organization…’’ including “all sources not within an organization’s scope 1 and 2 boundary,” according to the U.S. Environmental Protection Agency. Scope 3 emissions are frequently referred to as value-chain emissions and often represent the majority of an organization’s total GHG emissions.
Corporations and their trade organizations have often disagreed with investors about whether Scope 3 emission disclosures should be made at all. While some investors, such as CalSTRS and Boston Trust Walden, requested that all Scope 3 emission data be disclosed in financial filings, many large corporate issuers and institutional investors expressed reservations about the availability of accurate Scope 3 data. Consequently, they suggested amendments to the SEC’s Scope 3 policy that ranged from making the disclosure fully voluntary to creating stronger safe harbors and longer implementation dates for companies to furnish or file the data.
ExxonMobil asked for a better measurement of indirect emissions than Scope 3. Amazon called for these disclosures to be furnished and that a “‘better” safe harbor be provided than was indicated in the proposed rules. General Motors asked for a delayed disclosure date for Scope 3, while Wells Fargo—already committed to Scope 3 disclosures as a member of the Net Zero Banking Alliance– asked for increased flexibility for banks.
On the other hand, CalSTRS requested that all companies, even smaller reporting corporations which the SEC has so far excluded, be required to disclose their GHG emissions. It said the requirement to audit Scope 3 emissions should be phased in and that the Scope 3 disclosures should be mandatory.
Sustainability investor Boston Trust Walden agreed, while State Street and BlackRock—corporations as well as investors—requested flexibility on Scope 3 emissions. Asset manager Fidelity said such disclosures were not necessary. The Council of Institutional Investors (CII) said that material Scope 3 disclosure would be helpful to understand transition risks, but was concerned about the challenges in calculating and reporting these emissions. It suggested the following solutions:
- Allow a transition period
- Create a liability safe harbor (also popular among corporations)
- Limit disclosures to material value chain emissions
- Remove the quantitative threshold for materiality
- Exempt smaller reporting companies (SRCs)
- Set a compliance date one year later than the other requirements
Shareholder groups including As You Sow, Ceres and Interfaith Center for Corporate Responsibility (ICCR) all supported mandatory reporting of Scope 3. As You Sow also called for an end date to any safe harbor provisions related to the disclosures.
The American Petroleum Institute trade association fully opposed mandatory Scope 3 disclosures, while NAM—also opposed—suggested that a strict materiality standard be applied if such disclosures were part of the final rule. Auditor Ernst & Young (EY) expressed concern that the current proposal requires registrants to calculate Scope 3 before assessing materiality and wanted the SEC to align mandatory disclosure with specific Scope 3 or total emission goals. The firm also supported excluding the data from the assurance requirement and requested safe harbor provisions for corporate issuers and their assurance providers.
Disclosure Costs
Many market players expressed concern over the time and expenditure that would result from the current iteration of the SEC disclosure. General Motors cited undue costs and burden, saying that even for its developed systems, a 1% threshold would result in much larger costs than the SEC estimates. The 1% threshold refers to the expenditures related to mitigating the risk of severe weather events and other natural conditions and transition activities. The rules propose that if such amounts exceed 1% of the total amount expensed or capitalized, this should be the threshold for disclosure.
The Society of Corporate Governance agreed with other commentators that the SEC underestimated the compliance costs. Wells Fargo said that including climate risk data in financial statements would increase expenses. NAM warned of particularly high costs for IPOs. Meanwhile, both State Street and BlackRock indicated that increased costs would constrain climate disclosure for corporate issuers.
CalSTRS, on the other hand, noted that the rules will reduce the cost of data analysis and comparisons on climate issues for investors, and the Consumer Federation of America agreed. Though CII felt it would be: “Necessary to provide accommodations to lessen the cost of the collection and reporting of Scope 3 emissions.”
Material Relevance of SEC Proposals
Many comment letters emphasized that the SEC should focus on the Supreme Court’s precedent of requiring financial material disclosure as the determinative factor for their rulemaking. While disagreement remains over what information is material, certain disclosure requirements from the proposed rule were critiqued as being beyond the bounds of financial materiality.
Many corporate commenters disliked the 1% threshold proposed by the SEC, suggesting that it was too low to be material. Those included Amazon and HP, as well as IT companies Alphabet, Autodesk, Dropbox, eBay, Hewlett Packard Enterprise, Intel, Meta, PayPal, and Workday. General Motors said the 1% threshold would result in the disclosure of immaterial data. Many companies and trade associations, as well as EY, said the SEC should work with the Financial Accounting Standards Board to develop a more appropriate materiality standard aligned with the Supreme Court’s view.
Many socially responsible investors, on the other hand, commented that everything to do with climate risk is material to a company’s bottom line, while the asset managers that are were also corporations said the proposed materiality standard is too low. The CII, in addition to BlackRock and State Street indicated that the proposed rule was inconsistent with the Supreme Court ruling and recommended a more traditional materiality threshold rather than the 1% bright line. Sustainability investor Calvert recommended a 5% threshold as being more likely to set forth material risk data. Most investors called for the data to be filed, albeit often after a delay to allow data collection to stabilize.
Some of the comments voiced concerns that key terms such as “severe weather event” lacked definition. Both Occidental and Amazon criticized the proposals for this reason.
Speculative Nature of Greenhouse Gas (GHG) Disclosures
Occidental also criticized disclosures that it believes would be judgmental and subjective, while Exxon claimed the GHG disclosures required an overwhelming amount of speculative information. The same criticisms were made by General Motors, which added that the required disclosures would contain business-sensitive information. NAM claimed that the prescriptive nature of the disclosures will actually discourage companies from setting ambitious climate goals due to concerns about legal liability.
By contrast, although a few banks expressed concern that the rules would lead to insignificant disclosures, most investors and many corporate issuers were fully supportive of maximum disclosure requirements for Scopes 1 and 2 emissions.
Board Oversight
Several market players took issue with the SEC’s decision to require disclosure of time spent discussing climate, as well as specific board members’ climate qualifications and responsibilities. Commenters including BlackRock, ICI, SIFMA, IIF and State Street said the SEC proposal overemphasized the role of individual members, while climate risk should be overseen by the whole board, even if it may include a climate expert. The CII supported the SEC’s requirement that companies disclose whether any board member has expertise in climate-related risks as well as the nature of that expertise. That represented the view of most investors.
SEC Authority to Require Such Disclosures
Commenters differed over whether the SEC’s disclosure requirements go beyond information that would materially help investors, and instead delve into policy issues that should be determined by Congress. Some trade association commenters claimed that the SEC exceeded its mandate because it has no authority to require disclosures that are not directly material. The same view was expressed in a letter written by a group of former SEC chairs and commissioners, as well as one sent by a group of House Republicans. Other commenters argued that climate issues are important material information for investors, and, therefore, fall within the SEC’s bounds. Moreover, academics such as Lucian Bebchuk, John Coates and Jill Fisch, along with a further 30
securities law professors, argued that the SEC’s legislation is working within their legal jurisdiction. Most of the legal arguments distil down to three statements:
- Congress has given the agency the authority to do just this.
- The proposed rule is disclosure, not policy driven.
- None of the SEC-promulgated disclosure rules have been challenged in court on materiality grounds.
Solutions and Suggestions, Not Just Criticisms
Most commenters did not simply offer criticism or support of the rules, many also proposed solutions to perceived problems or asked for additional disclosures.
BlackRock was the only commenter we noted that called for the same disclosure requirements for both private and public companies. As noted earlier, many commenters encouraged the SEC to work with the ISSB and some suggested that the requirement for attestation and mandatory assurance be delayed until global best practices are more firmly established. The Investment Company Institute suggested that the SEC adopt the TCFD file-and-furnish framework rather than require everything to be filed or everything to be furnished. A number of companies, including General Motors and as auditor EY, asked that emissions disclosures be released 90-120 days after financial reports are filed to account for the extended time needed to collate the data. Other commenters encouraged the SEC to exempt small, mid-size and newly-acquired companies from the requirements.
Conclusion
The comment period closed in June and the SEC is currently assessing the views of its constituents. SEC Gary Gensler said the purpose of the proposed rule is to “provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.” The agency has also indicated that it will release the final rules before the end of the year.
SEC Climate Disclosure Comments Reveal Diversity of Views
More from: Karina Karakulova, Noam Cherki, Paul Hodgson, Subodh Mishra, Institutional Shareholder Services Inc.
Subodh Mishra is Global Head of Communications at Institutional Shareholder Services, Inc. This post is based on an ISS Corporate Solutions publication by Paul Hodgson, Senior Editor at ISS Corporate Solutions, Noam Cherki, Regulatory Affairs Intern, and Karina Karakulova, Director of Regulatory Affairs and Public Policy, at Institutional Shareholder Services.
Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.; and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita.
The Securities and Exchange Commission in March published its long-awaited proposed rule requiring U.S.-listed companies and foreign private issuers to provide more in-depth and standardized climate-related information in their registration statements and annual reports. The regulator has received about 11,000 comments on the proposal—far more than usual—and continues to get submissions nearly a month after the close of the official review period. Our analysis shows that while there was overwhelming investor support for climate disclosure regulation in general, comments diverge significantly on the recommended regulatory path ahead.
Comment Perspectives
ISS Corporate Solutions examined a representative range of comments from investors (both asset owners and managers) and investor groups, such as CalSTRS, BlackRock, The Council of Institutional Investors; non-profits and consumer protection groups, such as As You Sow and Ceres; former SEC chairs and commissioners; legal and academic scholars; corporations, such as Occidental Petroleum, Hewlett-Packard and United Airlines; banks, including Norges Bank and Citigroup; associations, such as the Society for Corporate Governance and the Business Roundtable; and auditing firms such as EY. Comments from different parties did not always fall along corporates vs. investors, though some did. The Business Roundtable and the Chamber of Commerce described the proposed disclosures as completely unworkable.
Key Findings
Comments and questions revolved around eight key topics:
The most common form letter comments (6,254) expressed full support for the rules, saying that the disclosures are essential for investors to understand data about the impact on assets and the long-term climate outlook. They said that corporations had ignored climate issues for too long and downplayed the inherent risk to investors. A further 3,000 form letter comments were supportive, referencing climate change disasters and suggesting the U.S. be brought in line with other countries’ disclosure regimes, particularly those in Europe. A substantial number supported full disclosure of Scope 3 emissions and stressed the need to have reliable information in order to make forward-looking investment decisions.
Many of the form letter comments objecting to the rules cited burdensome requirements and the high cost of collecting the data. Ironically, many of these came from ranchers and farmers who probably won’t be affected by the rules. A small number stated that it was “un-American to socially ostracize or punish companies because they don’t adopt a radical leftist or environmentalist outlook,” according to the SEC’s summaries. Another substantial minority alleged that the SEC had no authority to require such disclosures; a claim that had not been made in relation to other proposed disclosures.
Rold of TCFD and SASB/ISSB
There was significant support for alignment with TCFD/SASB/ISSB disclosure frameworks among both investors and corporations. For example, California public pension fund CalSTRS said these guidelines and standards should form the foundation of the proposed rules, and asset manager Allianz Group said that alignment would be particularly useful for international comparisons. Fidelity Investments specifically asked that foreign issuers filing reports in the U.S. be allowed to follow ISSB standards. State Street Corporation called for the new rules to be as flexible as TCFD, which uses a so-called “comply or explain” standard. ExxonMobil and Wells Fargo also noted the SEC’s attempt to stay as close to TCFD as possible. The National Association of Manufacturers (NAM) stated that many of its members already follow TCFD’s recommendations on Scope 1 and 2 emissions regardless of materiality. The Institute for International Finance cited the benefits of a global alignment incorporating TCFD accepted frameworks into governance, strategy, risk, and metrics disclosures.
Scope 3 Emissions
Scope 3 emissions are “the result of activities from assets not owned or controlled by the reporting organization…’’ including “all sources not within an organization’s scope 1 and 2 boundary,” according to the U.S. Environmental Protection Agency. Scope 3 emissions are frequently referred to as value-chain emissions and often represent the majority of an organization’s total GHG emissions.
Corporations and their trade organizations have often disagreed with investors about whether Scope 3 emission disclosures should be made at all. While some investors, such as CalSTRS and Boston Trust Walden, requested that all Scope 3 emission data be disclosed in financial filings, many large corporate issuers and institutional investors expressed reservations about the availability of accurate Scope 3 data. Consequently, they suggested amendments to the SEC’s Scope 3 policy that ranged from making the disclosure fully voluntary to creating stronger safe harbors and longer implementation dates for companies to furnish or file the data.
ExxonMobil asked for a better measurement of indirect emissions than Scope 3. Amazon called for these disclosures to be furnished and that a “‘better” safe harbor be provided than was indicated in the proposed rules. General Motors asked for a delayed disclosure date for Scope 3, while Wells Fargo—already committed to Scope 3 disclosures as a member of the Net Zero Banking Alliance– asked for increased flexibility for banks.
On the other hand, CalSTRS requested that all companies, even smaller reporting corporations which the SEC has so far excluded, be required to disclose their GHG emissions. It said the requirement to audit Scope 3 emissions should be phased in and that the Scope 3 disclosures should be mandatory.
Sustainability investor Boston Trust Walden agreed, while State Street and BlackRock—corporations as well as investors—requested flexibility on Scope 3 emissions. Asset manager Fidelity said such disclosures were not necessary. The Council of Institutional Investors (CII) said that material Scope 3 disclosure would be helpful to understand transition risks, but was concerned about the challenges in calculating and reporting these emissions. It suggested the following solutions:
Shareholder groups including As You Sow, Ceres and Interfaith Center for Corporate Responsibility (ICCR) all supported mandatory reporting of Scope 3. As You Sow also called for an end date to any safe harbor provisions related to the disclosures.
The American Petroleum Institute trade association fully opposed mandatory Scope 3 disclosures, while NAM—also opposed—suggested that a strict materiality standard be applied if such disclosures were part of the final rule. Auditor Ernst & Young (EY) expressed concern that the current proposal requires registrants to calculate Scope 3 before assessing materiality and wanted the SEC to align mandatory disclosure with specific Scope 3 or total emission goals. The firm also supported excluding the data from the assurance requirement and requested safe harbor provisions for corporate issuers and their assurance providers.
Disclosure Costs
Many market players expressed concern over the time and expenditure that would result from the current iteration of the SEC disclosure. General Motors cited undue costs and burden, saying that even for its developed systems, a 1% threshold would result in much larger costs than the SEC estimates. The 1% threshold refers to the expenditures related to mitigating the risk of severe weather events and other natural conditions and transition activities. The rules propose that if such amounts exceed 1% of the total amount expensed or capitalized, this should be the threshold for disclosure.
The Society of Corporate Governance agreed with other commentators that the SEC underestimated the compliance costs. Wells Fargo said that including climate risk data in financial statements would increase expenses. NAM warned of particularly high costs for IPOs. Meanwhile, both State Street and BlackRock indicated that increased costs would constrain climate disclosure for corporate issuers.
CalSTRS, on the other hand, noted that the rules will reduce the cost of data analysis and comparisons on climate issues for investors, and the Consumer Federation of America agreed. Though CII felt it would be: “Necessary to provide accommodations to lessen the cost of the collection and reporting of Scope 3 emissions.”
Material Relevance of SEC Proposals
Many comment letters emphasized that the SEC should focus on the Supreme Court’s precedent of requiring financial material disclosure as the determinative factor for their rulemaking. While disagreement remains over what information is material, certain disclosure requirements from the proposed rule were critiqued as being beyond the bounds of financial materiality.
Many corporate commenters disliked the 1% threshold proposed by the SEC, suggesting that it was too low to be material. Those included Amazon and HP, as well as IT companies Alphabet, Autodesk, Dropbox, eBay, Hewlett Packard Enterprise, Intel, Meta, PayPal, and Workday. General Motors said the 1% threshold would result in the disclosure of immaterial data. Many companies and trade associations, as well as EY, said the SEC should work with the Financial Accounting Standards Board to develop a more appropriate materiality standard aligned with the Supreme Court’s view.
Many socially responsible investors, on the other hand, commented that everything to do with climate risk is material to a company’s bottom line, while the asset managers that are were also corporations said the proposed materiality standard is too low. The CII, in addition to BlackRock and State Street indicated that the proposed rule was inconsistent with the Supreme Court ruling and recommended a more traditional materiality threshold rather than the 1% bright line. Sustainability investor Calvert recommended a 5% threshold as being more likely to set forth material risk data. Most investors called for the data to be filed, albeit often after a delay to allow data collection to stabilize.
Some of the comments voiced concerns that key terms such as “severe weather event” lacked definition. Both Occidental and Amazon criticized the proposals for this reason.
Speculative Nature of Greenhouse Gas (GHG) Disclosures
Occidental also criticized disclosures that it believes would be judgmental and subjective, while Exxon claimed the GHG disclosures required an overwhelming amount of speculative information. The same criticisms were made by General Motors, which added that the required disclosures would contain business-sensitive information. NAM claimed that the prescriptive nature of the disclosures will actually discourage companies from setting ambitious climate goals due to concerns about legal liability.
By contrast, although a few banks expressed concern that the rules would lead to insignificant disclosures, most investors and many corporate issuers were fully supportive of maximum disclosure requirements for Scopes 1 and 2 emissions.
Board Oversight
Several market players took issue with the SEC’s decision to require disclosure of time spent discussing climate, as well as specific board members’ climate qualifications and responsibilities. Commenters including BlackRock, ICI, SIFMA, IIF and State Street said the SEC proposal overemphasized the role of individual members, while climate risk should be overseen by the whole board, even if it may include a climate expert. The CII supported the SEC’s requirement that companies disclose whether any board member has expertise in climate-related risks as well as the nature of that expertise. That represented the view of most investors.
SEC Authority to Require Such Disclosures
Commenters differed over whether the SEC’s disclosure requirements go beyond information that would materially help investors, and instead delve into policy issues that should be determined by Congress. Some trade association commenters claimed that the SEC exceeded its mandate because it has no authority to require disclosures that are not directly material. The same view was expressed in a letter written by a group of former SEC chairs and commissioners, as well as one sent by a group of House Republicans. Other commenters argued that climate issues are important material information for investors, and, therefore, fall within the SEC’s bounds. Moreover, academics such as Lucian Bebchuk, John Coates and Jill Fisch, along with a further 30
securities law professors, argued that the SEC’s legislation is working within their legal jurisdiction. Most of the legal arguments distil down to three statements:
Solutions and Suggestions, Not Just Criticisms
Most commenters did not simply offer criticism or support of the rules, many also proposed solutions to perceived problems or asked for additional disclosures.
BlackRock was the only commenter we noted that called for the same disclosure requirements for both private and public companies. As noted earlier, many commenters encouraged the SEC to work with the ISSB and some suggested that the requirement for attestation and mandatory assurance be delayed until global best practices are more firmly established. The Investment Company Institute suggested that the SEC adopt the TCFD file-and-furnish framework rather than require everything to be filed or everything to be furnished. A number of companies, including General Motors and as auditor EY, asked that emissions disclosures be released 90-120 days after financial reports are filed to account for the extended time needed to collate the data. Other commenters encouraged the SEC to exempt small, mid-size and newly-acquired companies from the requirements.
Conclusion
The comment period closed in June and the SEC is currently assessing the views of its constituents. SEC Gary Gensler said the purpose of the proposed rule is to “provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.” The agency has also indicated that it will release the final rules before the end of the year.