SEC proposes broad climate rules as Chair Gensler says risk disclosure will help investors

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Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), at the SEC headquarters office in Washington, D.C., U.S., on Thursday, July 22, 2021.

Melissa Lyttle | Bloomberg | Getty Images

The Securities and Exchange Commission on Monday debuted expansive rules that would require publicly traded companies to provide more information on how their operations affect the climate and carbon emissions.

The SEC said the new rule — approved by a 3-1 margin — would compel companies to disclose how climate risks affect their business, outline their own greenhouse gas emissions and report on climate-related targets and goals.

In a media briefing with reporters following the SEC’s Monday meeting, Chair Gary Gensler said the proposed rules would not only help to protect investors but also respond to a barrage of requests for greater clarity about corporate carbon emissions.

“I really do think that the SEC has a role to play here when this amount of investor demand and need is there,” he said, noting that future risks often affect what traders think of an investment.

Gensler added that investors today make decisions based on what they see as a company’s ability to generate cash in the future. If climate change is forecast to weigh on a company’s future earnings, investors have an incentive to learn as much about that risk as possible prior to their trade.

The SEC outlined specific rules including a requirement compelling companies to disclose information about how climate risks have had, or are likely to have, a material effect on business in the short and long terms. Another would force companies that use internal carbon pricing to detail how those prices are set.

Other rules would seek to measure and display big companies’ direct greenhouse gas emissions, as well as indirect emissions from upstream and downstream business partners.

The suite of rules now enters a 60-day public comment period during which businesses, investors and other market participants can remark on and offer changes to the proposals.

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Should the rules be approved and adopted, companies would have time to phase the disclosures into annual financial reports, according to a fact sheet provided by the regulator. Companies with over $700 million worth of shares on the public market would have the most aggressive phase-in period and would be expected to file climate-related data to the SEC in fiscal year 2023.

Gensler said he expects the ambitious set of rules to prompt a flurry of responses from investors and lawmakers alike, many of whom see the SEC’s latest proposal as a way to jump-start the Biden administration’s stalled environmental policy agenda.

Not all of those replies are likely to be encouraging. Some business groups could mount formal legal challenges that would delay the rules.

A key skeptic of the regulator’s latest move is former SEC Chair Jay Clayton. On Sunday, he echoed many industry groups in wondering if the rules overstep the powers of the SEC, which is tasked by Congress with investor protection and facilitating capital formation in the U.S. economy.

In a Wall Street Journal op-ed, Clayton wrote that “setting climate policy is the job of lawmakers, not the SEC.”

“Taking a new, activist approach to climate policy — an area far outside the SEC’s authority, jurisdiction and expertise — will deservedly draw legal challenges,” he added.

But Gensler told CNBC on Monday that climate disclosure rules are nothing new. Some of the globe’s largest companies, including Apple and Microsoft, report volumes of climate-related data and are proactively working to cut carbon emissions to zero.

“We have hundreds, if not thousands of companies already making disclosures and yet those disclosures are fragmented. They’re sort-of different, they’re following different standards,” Gensler said. “We have a role to bring in some standardization: Some consistency and some comparability.”

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