SEC Issues Guidance on Climate Risk Disclosures

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The Securities and Exchange Commission (SEC) issued non-binding guidance on Sept. 22  on how companies within its jurisdiction should disclose risks related to climate change under current standards. The guidance comes as the SEC is preparing proposed regulations – expected by early next year – on anticipated climate reporting mandates that will likely impact all issuers of securities, including real estate companies. 

Why It Matters 

  • The Sept. 22 guidance amplifies the Commission’s 2010 Climate Change Guidance. It explains that companies should include in their formal SEC filings the same kinds of climate and ESG-related disclosures that they provide in their annual corporate social responsibility reports.
     
  • The latest guidance advises companies to disclose information (deemed to be “material”) on topics such as:

    • Whether climate-related local, state, or federal laws or regulations – or international accords – impact the company’s finances or operations;
    • Past or future capital expenditures for “climate-related projects”;
    • Increased demands for renewable energy generation and transmission;
    • Reputational risks from corporate operations that produce greenhouse gas emissions;
    • Whether floods, fires, hurricanes, and other “extreme weather events” affect thye company; and
    • Purchases or sales of carbon offsets or credits. 

Guidance Portends New Rule

SEC Chairman Gary Gensler

  • The Sept. 22 guidance portends a proposed rule from the Commission that will likely lead to mandated climate change disclosures.
  • SEC Chair Gary Gensler, above, remarked on Sept. 22 that its proposed rule on climate disclosures will be released by early 2022. A proposed rule would then kick-off a process for public comments from industry stakeholders.
     
  • Earlier this year, the Commission inquired about what kinds of updated climate and ESG-related information may be “material” to investors – and whether such information should be included in annual reports, proxy statements, and other SEC filings. (SEC’s March 15, 2021 “Public Statement” welcoming input on climate change disclosures.) 
  • The Real Estate Roundtable responded in June to the SEC’s “pre-rulemaking” statement.  The Roundtable developed its comments  in close coordination with Nareit, and recommends a “principles-based” approach to corporate climate risk disclosures as opposed to a prescriptive “one size fits all” reporting mandate. (Roundtable Weekly, June 11, 2021) 

A final rule from the SEC on climate risk reporting could be issued by the end of 2022, after conclusion of the public comment process on any forthcoming proposal. 

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Environmental, Social and Governance (ESG) Risk Disclosure Gaining Interest Among Policymakers

A recent hearing by a House Financial Services subcommittee reflects a growing interest among policymakers regarding environmental, social, and governance (ESG) reporting by public companies.  (” Building a Sustainable and Competitive Economy: An Examination of Proposals to Improve Environmental, Social and Governance (ESG) Disclosures ,” July 10 hearing) 

Rep. Carolyn Maloney (D-N.Y.) – chairwoman of the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets – stated during the July 10 hearing, “Investors overwhelmingly want companies to disclose ESG information, especially because there’s now considerable evidence that companies that perform better on ESG metrics, also perform better financially.”  

  • ESG disclosures generally address issues in the areas of environmental sustainability (e.g., climate change); social (e.g., human rights and labor practices); and governance (e.g., executive- and board-level diversity) matters.  ( Financial Services Committee memorandum , July 5)  Nareit’s ESG Dashboard  identifies and tracks key performance indicators to better measure and quantify best ESG practices for the U.S. REIT industry.  
  • Rep. Carolyn Maloney (D-N.Y.) – chairwoman of the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets – stated during the hearing, “Investors overwhelmingly want companies to disclose ESG information, especially because there’s now considerable evidence that companies that perform better on ESG metrics, also perform better financially.” 
  • She added, “I believe the best way to improve the quality and consistencies of these disclosures is for the Securities and Exchange Commission (SEC) to establish standards for ESG Disclosure that would apply to all public companies in the United States.” (Video of entire hearing, July 10) 
  • During the hearing, policymakers considered the merits of five draft bills that would require public companies to disclose information on several ESG topics – including climate change risk, political expenditures and human rights risk.  ( DavisPolk , July 11)   
  • Issues raised included whether the draft bills would mandate this type of disclosure for all public companies. Other issues included:

• Whether mandated disclosure is necessary given current voluntary disclosure practices; 

•  The potential increased regulatory burden of these disclosures, which could negatively impact U.S. IPO markets; and 

•  Whether ESG issues qualify as material information for investors.  

  • In the Senate, the Committee on Banking, Housing and Urban Affairs held a hearing in April 2019 on the application of ESG principles in investing. 
  • Regulators also are considering ESG topics. The Commodity Futures Trading Commission last month voted to establish a Climate-Related Market Risk Subcommittee to address climate-related financial risks. (CFTC, July 10)
  • SEC Chairman Jay Clayton in a recent interview said that not all ESG matters are created equally. “Matters considered to be in the G category tend to be a lot closer to the core governance issues that investors have come to expect in terms of disclosure from our public companies. In contrast, matters considered to be in the E category, such as regulatory risk, and risk to property and equipment vary widely from industry to industry and country to country,” Clayton said.  (Directors & Boards, July 22) 

According to a recent report by  US|SIF , ESG factors in the United States continue to play an increased role in investment decisions. Total US-domiciled assets under management using ESG strategies grew from $8.7 trillion at the start of 2016 to $12 trillion at the start of 2018, a 38 percent increase.  This represents 26 percent-or 1 in 4 dollars-of the total US assets under professional management.  (US|SIF,  2018 Report on US Sustainable, Responsible, and Impact Investing Trends ).