What the SEC has in store

EU calls on U.S, China to step up.
Global warming set to pass 1.5°C.
Low-emission cement tech gets boost.

The U.S. Securities and Exchange Commission has decided to take a different tack on climate-risk disclosures than its counterparts in Europe. Instead of targeting investment managers, the SEC is focusing on the companies they invest in—and the executives who run them.

SEC Chairman Gary Gensler is expected to propose a series of new disclosure requirements for companies by the end of 2021, said Sonia Barros, a partner at the law firm Sidley Austin LLP and a veteran of the SEC's Division of Corporation Finance, which reviews corporate disclosures.

"It all starts at the corporate issuer level," Barros said. Gensler "will want to do something now rather than wait for the perfect moment" since investors are already demanding more details from companies, she said.

Gary Gensler, chairman of the U.S. Securities and Exchange Commission, appeared before the Senate Banking, Housing and Urban Affairs Committee in Washington on Sept. 14.

Photographer: Evelyn Hockstein/Reuters

Gensler provided some insight into the SEC's deliberations in July, according to Barros. These are what she sees as likely components of the SEC's climate-related reforms:

Consistent and comparable disclosures that are mandatory and " decision-useful" for investors.
A possible requirement that such details be formally included in Form 10-K securities filings.
Qualitative disclosures, such as how company leaders manage climate-related risks and opportunities and how those feed into corporate strategy.
Quantitative disclosures, such as metrics related to greenhouse gas emissions, financial impacts of climate change and progress towards climate-related goals. These could include:
1. Scope 1 emissions (produced directly by a company).
2. Scope 2 emissions (associated with the purchase of electricity, steam, heat or cooling).
3. Though less likely, the regulator is considering disclosure rules on Scope 3 emissions (produced by a company's supply chain and customers).

Barros added that the SEC is also likely to lay out requirements for industry-specific metrics, including scenario analyses on how a business might adapt to a range of possible physical, legal, market and economic-related changes.

Those would include physical risks associated with climate change as well as transition risks associated with a company's stated climate commitments, or legal requirements in the jurisdictions in which they operate, Barros said.

And speaking of commitments, she said the SEC is likely to want more transparency when it comes to:

Disclosures supporting forward-looking commitments, such as:
1. "Net-zero" commitments or other climate pledges or commitments required by jurisdictions in which companies operate.
2. The SEC is also considering which data or metrics companies might use to inform investors about how they meet those commitments.

Meanwhile, to clamp down on greenwashing, the SEC has set up the 22-person Climate and ESG Task Force to look for misstatements and material gaps in climate-risk disclosures under current rules. This increased focus will likely result in additional disclosure proposals for the fund-management industry in the spring of next year, Barros said.

"Europe is definitely moving forward more aggressively on this front than the U.S.," she said. Based on Gensler's comments, she said, the SEC will focus solely on what's appropriate for the local U.S. market.

If Gensler's testimony this week before the Senate Banking Committee is any sign, there's no mistaking the fact that he's planning to bring significant scrutiny to financial industry claims.

The SEC has "seen a growing number of funds market themselves as 'green,' 'sustainable,' 'low-carbon,' and so on," Gensler said Tuesday. "I've asked staff to consider ways to determine what information stands behind those claims, and how we can ensure that the public has the information they need to understand their investment choices among these types of funds."

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Photographer: Bloomberg

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