In what was expected to be a positive end to 2023 for ESG investors and sustainability officers, the Securities and Exchange Commission’s (SEC) climate disclosure requirements release has been rescheduled […]

In what was expected to be a positive end to 2023 for ESG investors and sustainability officers, the Securities and Exchange Commission’s (SEC) climate disclosure requirements release has been rescheduled to release in the spring of 2024. Despite bold efforts made by California’s momentous climate disclosure legislation release in October, Gary Gensler, the SECs chair has declined to comment on specific reasons for the delay or on a definitive timeline to see the crucial federal legislation enacted.

For ESG advocates favoring the legislation there is now a profound sense of disappointment. The decision to delay the release has raised questions about the regulatory path forward and the implications for investors, companies, and global sustainability initiatives. California’s proactive approach to enacting its climate disclosures has on the contrary led by example at the state level and national level with no other state yet to follow suit. Nonetheless this shows the distinct paths taken at the federal and state level which reflect the challenges that federal level authorities are facing in setting a standardized framework for all.

With California pushing ahead with its own climate disclosures, it is expected that the state is already beginning to exert a level of influence on how the SEC puts together its own framework. Indeed, where Gary Gensler did comment was on the positives that could be extracted from California’s disclosures. The new California disclosures could “change the baseline” for the SEC’s long-overdue climate rules.

It is important that the US focuses on deploying its own set of climate disclosures as at the international level it is now falling behind. The European Commission has now enacted its Corporate Sustainability Reporting Directive (CSRD) and soon Corporate Sustainability Due Diligence Directive (CSDDD), the UK has adopted the ISSB standards, while other countries like Singapore have sought to align with the ISSB reporting requirements too. The impact from these regulatory developments is likely to have a big impact on US companies as those doing business in foreign jurisdictions with a climate disclosure requirement will be expected by law to also disclose their sustainability efforts even if at home it is not a requirement. [2]

It is to be noted that the commission has delayed the release a few times already. The delay can be attributed to resistance from public companies and political pushback particularly on issues such as disclosure of scope 3 greenhouse gas emissions, a 1% materiality threshold for financial statement disclosures and attestation of scope 1 and scope 2 GHG emissions for larger companies. [3]

Transformative Impact of California’s Climate Disclosures on SEC.

With another window of opportunity now closed for the SEC, this rule proposed in early 2022, aims to compel publicly traded US companies to disclose climate-related risks in their regular financial filings. These risks encompass transition indicators such as greenhouse gas emissions and physical threats like hurricanes and wildfires that pose risks to company operations and assets.

The significance of these disclosures has become ever more important with climate related phenomenon’s intensifying year over year, especially in states like California which are enduring some of the strongest impacts. Investor surveys consistently underscore the importance of climate risk disclosures for capital allocation and risk management. [4] Responding to this demand, regulatory bodies like the SEC have initiated climate risk disclosure initiatives. However, the SEC’s rule which has now faced multiple delays is a result of the many challenges particularly the growing investor demands for robust information on climate disclosures and then the fierce opposition from powerful business groups and their Congressional allies, citing concerns about the costs of new disclosures and interference of the state with the way in which businesses conduct their operations.

The recent enactment of state disclosure laws in California, particularly SB 253 and SB 261, has injected new dynamics into the SEC’s decision-making process. These state laws closely mirror the expected disclosures under the SEC rule. SB 253 which is expected to mandate greenhouse gas inventory disclosure for California-based companies with annual revenues exceeding USD1bn, while SB 261 requires climate risk disclosures for companies with revenues over USD500mn, excluding insurance firms. Being the US’s state with the highest GDP, California laws carry significant weight as many well-known US companies are registered there, thus the disclosure requirements are likely to have a big impact on the 75% of Fortune 1000 companies from California.

However, the definition of “doing business” in California is yet to be finalized, and the estimates might be conservative. If the definition is broader, even more US public companies could fall under the purview of the California laws. This means that a considerable number of American firms are now subject to robust climate disclosure rules, significantly reducing compliance costs for the SEC rule, as companies would already be complying with California’s laws. [5]

The impact of California’s legislation goes beyond cost reduction. For companies needing to disclose climate risks under the SEC rule, compliance now involves reporting information that has already been collected under California’s laws. Additionally, while the SEC faced resistance to including Scope 3 emissions disclosure, which opponents argued was costly, SB 253’s Scope 3 mandate is expected to enhance data quality and reduce data costs as the rule is implemented.

The emergence of California’s laws prompts some to question the necessity of a federal SEC rule. However, the reality is that not all US companies are covered by California’s laws, and investors still require consistent and reliable information. Moreover, the US faces many disclosure requirements both domestic and international, making a standardized rule even more crucial.

Internationally, the European Union has introduced its Corporate Sustainability Reporting Directive (CSRD), requiring disclosures from EU and non-EU companies doing substantial business in Europe. The International Sustainability Standards Board (ISSB) has also set global standards for climate and sustainability disclosures. While these differ from California’s laws in key aspects, the lack of clear, consistent disclosures validates the SEC’s action.

Overall, with global standards evolving particularly in competing markets like the U.K., EU, and Singapore and now with California’s laws in place, passing a comprehensive SEC rule is now crucial to streamline reporting obligations for all publicly traded US firms and provide clarity and consistency to investors in US public markets.

Sources

[1] https://greencentralbanking.com/2023/10/04/sec-has-no-excuse-delay-climate-disclosure-rules/

[2] https://greencentralbanking.com/2023/07/06/eu-climate-disclosure-rules-could-impact-thousands-of-us-firms/

[3] https://tax.thomsonreuters.com/news/sec-once-again-delays-action-on-final-climate-disclosure-rule/#:~:text=The%20Securities%20and%20Exchange%20Commission,but%20filed%20in%20late%20August.

[4] https://www.ceres.org/news-center/blog/analysis-shows-investors-strongly-support-secs-proposed-climate-disclosure-rule

[5] https://greencentralbanking.com/2023/11/29/california-climate-disclosure-laws-change-sec-game/