- The SEC has proposed rule changes that would require registered companies to disclose climate risk.
- SEC Chair Gary Gensler told us how they would help investors and how they fit in a "long tradition."
- This article is part of the "Financing a Sustainable Future" series exploring how companies take steps to set and fund sustainable goals.
As chair of the Securities and Exchange Commission, the MIT and Goldman alum Gary Gensler has taken on special-purpose acquisition companies and set the agency's sights on cryptocurrency. Now, he's trying to make financial filings greener.
In an exclusive interview with Insider, Gensler explained a proposed rule change at the agency that would require registered companies to disclose in financial filings how they're meeting publicly stated sustainability goals, how climate change affected their business strategy and their direct and indirect greenhouse gas emissions. To make it an official rule, the SEC will need to receive comments from investors and companies and draft a final rule with consideration of that public commentary. If adopted, it will become an official rule that governs the securities industry.
The proposal would require companies to include details on how climate-related risks influence financial performance, as well as the company's strategy, business model, and outlook. It would also mandate targets and reported data on greenhouse-gas emissions, whether they're direct, from purchased sources, or in the supply chain. And it would demand timelines and progress reports on publicly stated climate goals.
Proponents of the rule change say the rule would protect investors by giving them more consistent information and hold companies accountable to their public promises, while critics say the agency is overstepping its authority and trying to enact what's essentially climate policy.
"I believe the SEC has a role to play when there's this level of demand for consistent and comparable information that may affect financial performance," Gensler said in the announcement. "Today's proposal thus is driven by the needs of investors and issuers."
The following is an edited transcript from our interview with Gensler, which took place on Thursday.
How do you respond to critics who say that the proposal is an overreach of the SEC's role and that climate policy should best be left to lawmakers?
I think this is in our long tradition. The SEC is a disclosure-based agency, and the basic bargain of the 1930s was investors get to decide what they want to invest in. But companies raising money from them have to have full and fair disclosure and not lie to them.
For the first time, in the 1960s we added disclosure about risk factors. In the 1970s, we addressed an emerging piece of disclosure called environmental disclosures. Late in the '70s and early '80s, we added management discussion and analysis.
I give a little bit of that history to say that this is just very much in line with what we've done for these eight or nine decades.
We [in March] put a proposal out also on cyber risk disclosure, separate from the climate risk. Because think of the times we're living in the 2020s.
Investors are already making decisions based on climate-risk disclosures. Hundreds of companies in the US, thousands of companies around the globe, are making disclosures around climate risk. We can play a role in helping bring some standardization to that, or what we like to call consistency, comparability, and decision usefulness.
To your point that so many companies are voluntarily disclosing, isn't the market naturally pushing companies in this direction already?
Mandatory versus voluntary has a lot of economics behind it. It's about standardization, and it actually helps lower the cost to issuers.
If the issuers are looking left and looking right at their competitors that are making the disclosures in a different way than they're making them, and investors are looking at these various issuers and seeing a different [standard] — or voluntary, so some aren't even making it — that's actually less efficient for the overall capital markets than if there's some consistency and, yes, making it mandatory.
We have other standardization in society, and you can think of it around how we measure things. We Americans talk about mph, not in kilometers. But imagine if somebody said, "I want to measure things, not in miles or kilometers, but I want to measure it in — just however you and I decide to measure something."
So there's a lot of efficiency in it. We're a disclosure-based regime. That which we're mandating here is, in many cases, how to make disclosures if you have something.
If a company has a target that they've said publicly that they're going to have to lower their greenhouse gas emissions or have some other science-based target, then we say, "Well, here's how. You have a mandate to disclose how you're measuring against the target, how you're managing against that target." But there's no mandate to have a target.
Transition plans are another thing. If you have a transition plan, here's some disclosures about it, but we don't mandate you have it.
Similarly on scenario analysis, similarly on if you use carbon prices or internal carbon prices.
We do mandate disclosure of Scope 1 and Scope 2 greenhouse gas emissions. [Editor's note: Scope 1 emissions are direct greenhouse emissions from sources controlled by an organization, and Scope 2 are indirect greenhouse emissions that "occur at the facility where they are generated."] We propose various ways to make that consistent and comparable. But that again, it's built on what companies are already doing.
But similarly, we mandate that you disclose risk factors. We mandate that you disclosed management-discussion analysis and executive compensation. [These] are things that investors today have come to rely upon, which have been mandated in the past.
Is there a chance that companies with relatively low climate risk will be unduly burdened by the rule?
We're trying to bring some consistency there, but we've taken a bit of a tailored approach in phasing the timing of when the disclosures would happen. Or, for instance, with regard to greenhouse gas emissions, we've said that the Scope 3 would only be if it's material or if you've set a target — but not the small reporting companies.
On Scope 1 and 2, there's an additional attestation requirement. You might call it an audit or assurance requirement but, again, not on the small reporting companies.
Scope 3 includes indirect emissions not controlled by a company. Would the materiality of those emissions disclosures be something that the companies would determine, or would those underpinnings be set by the SEC?
Well, materiality has long been enshrined in the securities laws and by the Supreme Court and the SEC, but the actual determination is fact- and company-specific: The substantial likelihood that a reasonable investor finds the information significant in the total mix of information when they make an investment decision.
That's laid out by the Supreme Court and by the SEC over the decades, but the individual circumstance is fact- and company-specific.
What are the top priorities for investors from your point of view?
Last year, Allison Lee, as acting SEC chair, put out a questionnaire, technically a request for comment, and we got about 600 unique comments. A lot of investors shared their thoughts on that.
There was significant support for disclosures around the topics we put in the final release. That if [a company] has a target plan, a transition plan, a scenario analysis, to know about it.
If somebody makes a public pronouncement that they're going to achieve some goal, to have disclosures about how you're making progress and how you might change your business strategy related to that, that public statement, and around greenhouse gas.
Today, investors are making decisions based on climate-risk disclosures that companies are making now. It is about consistency and comparability, but it's also the usefulness of the information. So we tried to build on the framework of what companies are already doing and this global framework called TCFD.
We look forward to hearing from investors and chief investment officers running significant portfolios to individual investors — we need that public input.
It's impossible right now for topics like this not to get politicized. How do you hope to engender bipartisan dialogue and consensus?
Our role at the SEC is defined by Congress. It's got the foundation of building on what's already happening in the disclosure regime on climate risk, and even this TCFD was put together by 30 or so private-sector actors.
We do it through good economic analysis. We do it through conversations like this with the media. We do it through the notice and comment process.
I'm not going to prejudge if and how and when we adopt something but to take that public input and, as I say, lead some consistency and reliability on the dialogue that's already going on.
Here is a link to the SEC's full proposal, a fact sheet, and instructions on how to send the SEC a comment. The deadline for submitting feedback is May 20.