Chairman Jay Clayton provided his own view of climate disclosure criteria, and two other commission members also provided insight at the end of last month. This indicates that climate disclosure issues are top of mind for members and staff at the U.S. Securities and Exchange Commission (SEC).
The chair indicated that he would continue to rely on the principles that have guided SEC disclosures for decades. For environmental and climate-related issues, the guiding principle of materiality remains the foremost indicator of a disclosure obligation. Climate is one of several issues that the chair notes as “evolving.”
Specifically, international and business standards for gathering and disclosing information related to climate change abound, and some investors are looking for more certainty and comparability with respect to climate disclosures. They believe the SEC should be providing a standardized regulation for climate disclosures. This view is shared by Commissioner Lee, who issued a separate public statement on January 30 advocating for a mandatory standardized framework for climate disclosures. She specifically notes:
[T]he proliferation of voluntary standards and principles—and specific requests from numerous investors—put significant and sometimes competing demands on issuers, creating workstreams and costs that could be simplified and mitigated by uniform standards.
However, the chair reiterated a “principles-based” approach to disclosure and specifically referenced the 2010 Guidance Regarding Disclosures related to Climate Change, Release No. 33-9106 (Feb. 2, 2010), 82 Fed. Reg. 6290 (Feb. 8, 2010), as providing sufficient guidance to companies. Commissioner Peirce echoes Clayton, praising the commission for not bowing to demands for a “new” framework. Clayton notes that the SEC staff continues to meet with the representatives from issuers, investors, and governments across the world and will continue to monitor climate issues, particularly with respect to “threshold issues.”
Clayton lists five “threshold issues” that should be considered in deciding whether further regulation of climate disclosures would yield better decisional information than the materiality standard:
The “landscape…is…complex, uncertain, multinational/jurisdictional and dynamic.”
Capital allocation decisions around climate are forward looking and based on the same uncertainties identified in (1).
The current regulations are based primarily on disclosure of historic information, and forward-looking requirements are limited and often provided safe-harbor protection.
As a standard setter, the SEC should not substitute its judgment for the operational and capital allocation judgment of the company and investors.
The SEC’s mandate to protect investors does not always match the mandates of similar regulators in other jurisdictions. Facially similar rules must be reviewed in light of the entire regulatory scheme.
For the above reason, the chair notes that the SEC will continue to engage with all interested parties and the international community and will continue to review disclosures with these threshold issues in mind. Additionally, Clayton identified two areas of possible inquiry:
Discussing with issuers the extent to which they use climate models and metrics in “planning, including price, risk and capital allocation decisions.”
Discussing with asset managers their experience in using climate models and metrics to allocate capital on a sector or industry basis.
In sum, climate disclosure issues continue to be discussed within the SEC and, while materiality remains the guiding principle for companies now, the SEC has indicated that it will continue to monitor how companies disclose climate risks and opportunities.