The adage “you can’t manage what you don’t measure” is a sound argument for measuring and assessing climate risks, which cost the world over $313 billion in 2022 alone. Investors have expressed their resounding support, including more than 600 investors who signed the 2022 Global Investor Statement urging governments to address climate risks through mandatory disclosure.

If you looked at the information companies disclosed 15 years ago in financial filings, you would see few mentions of climate risks or greenhouse gas (GHG) emissions. The international recognition of a need for climate-related financial disclosures has matured dramatically and rapidly in response to the ever-increasing climate risks facing the global economy.

Internationally, the disclosure movement began with the development of a voluntary framework from the Global Reporting Initiative (GRI), followed by CDP and others. In the last five years, the work of the Task Force on Climate-related Financial Disclosures (TCFD) led to regulatory momentum to establish consistent and comparable reporting methods that provide investors with valuable information.

In January, the European Union’s Corporate Sustainability Reporting Directive became effective, mandating disclosures affecting U.S. companies with significant business in the EU. Soon the International Sustainability Standards Board will finalize its sustainability disclosure standards, which will be compatible with the International Financial Reporting Standards Board widely used Accounting Standards.

In the United States, while the SEC issued interpretive guidance in 2010 on climate change, we are just now catching up with our global counterparts, including Canada, Japan, New Zealand, Sweden and the United Kingdom, which have already mandated TCFD-aligned climate-related financial disclosures.

In March 2022, the SEC proposed a rule – The Enhancement and Standardization of Climate-Related Disclosures for Investors – that would require U.S. publicly traded companies to disclose annually how their businesses are assessing, measuring and managing climate-related financial risks. The proposal is TCFD-aligned and adapts established, respected standards such as the GHG Protocol. The SEC proposal responds to the need by investors for consistent and comparable corporate reporting to produce useful investment insights.

Climate change poses major risks to companies in every sector of the economy, their supply chains and their investors. Threats include physical risks to real assets from increasing frequency and severity of extreme weather events and transition risks posed by changes in regulation, technology and market preferences as the economy adapts. The rule’s disclosure requirements vary based on a company’s size and include disclosures on governance, strategy, risk management and metrics and targets, including Scopes 1, 2 and 3 GHG emissions.

Thousands of companies worldwide already disclose this type of information. A January 2022 study by The Conference Board found that more than half of S&P 500 companies already disclose climate risks in annual reports, and 71 percent disclose GHG emissions in annual reports or another location.

However, these voluntary disclosures are resulting in fragmented and inconsistent information across companies. This lack of comparability and completeness can lead to the mispricing of climate risk and prevent investors looking to invest capital in innovative and resilient firms from identifying opportunities. Investors bear significant costs to find the information they need, and some of that information is simply not available.

The status quo of voluntary disclosure is confusing for both issuers and investors and hinders efficient investment decision-making and capital investments. A clear SEC rule standardizing climate disclosure would alleviate these burdens.

During the comment period, the SEC received over 14,000 responses. Comments from investors showed overwhelming support for many of the key provisions of the proposal, including these disclosures in financial filings, requiring GHG data and aligning with the TCFD and the GHG Protocol. A final rule is expected to come out in the first half of 2023.

In addition to addressing climate risk concerns, the SEC proposed two rules in 2022 focused on preventing greenwashing and other misleading fund practices. The ESG Disclosure proposal would require greater disclosures for funds and advisers claiming use of ESG strategies and/or criteria. The Fund Names proposal would expand the current naming policy, which requires 80 percent of a fund’s assets to be invested in accordance with the category suggested by its name, to include strategies such as ESG investing in the scope of its requirements. Both proposals are expected to be finalized later this year.

Steven M. Rothstein
Managing Director, Ceres Accelerator for Sustainable Capital Markets

Becca Johnson
Associate, Ceres Accelerator for Sustainable Capital Markets