SEC climate disclosures were a good first step. Now companies must do more.

Climate change is expensive. In 2023 alone, NOAA recorded 28 climate change related disasters in the U.S. whose damages clocked in at more than a billion dollars each. Those 28 disasters cost the U.S. economy just shy of $93 billion in a single year. To give a sense of contrast, from 2018 to 2022, federal product liability Approved Class Action Settlement Awards and Punitive Damages, which are part of a category of risk that private companies are required to report on, together totaled about $415 million nationwide over five years. And despite the uncertainty involved in litigating class action product liability, an investor would be rightfully upset if a company failed to disclose a pending suit.

A step forward with a new rule

The Securities and Exchange Commission (SEC) published a draft rule in 2022 on how publicly traded companies should report on their climate risk. In response, the SEC received over 24,000 comments on the draft rule and finally voted on a final rule on March 6, 2024. It is not often that such a mundane government meeting about financial reporting receives so much attention but there is a very good reason why: climate risks are increasing, they are expensive, and they can’t be managed if we don’t know where the problems are.

SEC Chair Gensler made clear that SEC staff have been working for years to develop and finalize this climate disclosure rule to provide decision-useful information to investors because climate risks are material and we couldn’t agree more. Climate risk can – and very often does – impact a company’s bottom line and it is critical that investors have sufficient information in the financial report to determine if a company’s finances are sound. Some companies have been reporting on climate risk for years and often do so in stand-alone sustainability reports, but this SEC rule standardizes the process and requires the reporting to occur in the financial report where it belongs and in a way that allows investors to compare across entities on an apples-to-apples basis.

Embracing transition plans

Developing a transition plan, which has become best practice, should clearly outline how a company intends to adjust its climate risk over time and reduce its emissions. These plans aim to describe how companies align with mid-century net-zero goals and the SEC requires filers to update their disclosures based on actions included in company transition plans. Including rules for those companies that have transition plans is a step in the right direction. Although this rule does not require companies to have transition plans, we believe it should. Transition plans are required in other jurisdictions . The International Sustainability Standards Board, a global standard-setting body that has developed what's become the global baseline of sustainability disclosures, also requires information on transition plans.

Transition plans – if done well – provide clarity on how a private company intends to meet its climate targets. Key components include: interim targets that do not assume that futuristic technologies will win the day in 2049; targets that are based on science, and governance that demonstrates that upper management is accountable to the climate goals. Transition plans should clearly articulate how emissions reductions will be achieved across scopes 1 through 3. That the SEC called out this vital tool and demanded sunlight shine on how it will impact a company’s decision-making process is critical to advancing the decarbonization of our economy.

The SEC is also stepping its toe into the water on carbon offsets with this new rule. If carbon offsets have been used as a material component of the plan to achieve climate targets or goals, certain information needs to be disclosed. This oversight function is important because if a company chooses to forgo the hard choices by buying low-integrity carbon offsets instead of cutting its direct emissions, investors and the broader public should know.

We should be clear that the SEC’s final rule is weaker than the original draft rule. The draft rule came under significant fire, and the final rule has already been threatened with legal challenges. A significant change from the draft is that the SEC’s final rule does not include a requirement to report on Scope 3 emissions which are an entity’s indirect emissions, often related or attributed to a company’s supply chain. For companies with a large physical presence, the exclusion of reporting Scope 3 emissions may be a distinction without a difference, as most of their emissions originate from internal operations and the energy consumed at its facilities. However, for many companies, including the bulk of the financial sector, most of their emissions are in Scope 3. Without a Scope 3 reporting requirement, many emissions will be left off company financial statements. That reduces transparency and accountability.

Scope 3 reporting is complex. That said, it is important for companies to begin the process of tracking Scope 3 emissions now, as it paves the way for eventually reducing them. Regulatory action is critical, but voluntary action can be impactful too. Investors, the private sector and stakeholders should set expectations and demand both. The SEC took an important step forward on March 6^th and although the final rule is not strong enough to support action to meet climate goals, it is important to acknowledge and celebrate that regulators are stepping in to hold companies to account. Some companies may not need that pressure, but many do and as we all know, we don’t have time to quibble.

The SEC is doing its job so why all the fuss?

SEC disclosure rules exist so that investors have the critical information they need before buying or selling stock on a public exchange. While it is not the job of market regulators to protect investors from risk, it most certainly is the job of regulators to make sure that investors are given necessary information to make well-informed decisions about risk for securities traded on public markets. And in today’s world, financial disclosure reports need to include a full disclosure of climate risk.

From the archives: WWF welcomes SEC rule to standardize climate disclosures [April 2022]

Elizabeth Lien is Senior Director, Federal Climate Policy and Subnational Programs, at World Wildlife Fund.