SEC is considering climate disclosure rules for US companies – and facing threats of lawsuits

Better information leads to better decisions – this is the idea behind a regulatory device known as “Mandatory disclosure.” Mandated disclosures are all around you, from calorie counts on fast food restaurant menus to conversations with doctors around informed consent.

The U.S. Securities and Exchange Commission’s proposal to extend these ideas to the climate impacts of U.S.-listed businesses may be the most significant experiment in mandatory disclosure. The disclosure rule, due to be proposed soon would require publicly traded companies, to disclose information to investors about their emission and how they are managing climate risks.

It is easy to spot potential risks for companies like ExxonMobilMore information about, which produces fossil fuels that contribute towards global warming and sells them. hidden vulnerabilities existFor businesses throughout the U.S.

Largely because of Investors are eager to find out moreLearn more about climate risks As well as pressureFrom Green GroupsAccording to them, disclosure is key to climate-conscious investing. Gary Gensler, SEC Chair, announcedIn 2021, the commission will use its statutory authority. Require climate-related disclosures.

We are law scholars. Work on legal issues involving business and regulation. Here’s what you need to know about climate disclosures and some of the challenges the SEC faces in adopting them.

What investors are looking for

Investor pressure to get better information on climate impacts comes in two directions.

First, investors may want to avoid companies that are affected by climate change. The company’s products may be Regulated in the futureDue to their impact on the environment, or its supply chains could become more expensive over the course of time. Investors want to know which businesses are able to adapt to changing circumstances and maintain profitability.

Second, many investors are interested in ESG investing, which involves assessing companies’ commitments to environmental, social and governance factors. Today, ESG investingAccounts US$17.1 Trillion — or 1 in 3 dollars — of the total U.S. assets under professional management. The SEC must ensure that claims regarding the sustainability of a company’s assets are not made. Based on reality.

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A flood of voluntary disclosure has resulted from the trend towards ESG investment. 90% of companiesThe S&P 500Publishing voluntary reports disclosing data on things like carbon emissions or how much renewable energy they use is encouraged.

Some large investors require disclosure. For example: BlackRockThe, a multi-national asset manager with approximately $10 trillion under its control, requires companies that it invests in to disclose certain climate data. The United KingdomClimate disclosure will be required starting in April 2022. European UnionThere are reporting rules in place.

However, the U.S. has been slow in imposing mandatory climate disclosure requirements. Public companies have been subject to a much more general disclosure requirement. Legal standardThey do not materially mislead investors. The SEC Released guidanceIn 2010, to encourage climate disclosures It was not enforcedFailure to prompt standard disclosures.

Rule breaking and the effectiveness disclosure

Research on the wider application of mandated disclosure, such is for home mortgage lendingAnd Consumer product labelingThis shows that it is difficult to craft effective disclosure regulations.

One reason is that companies can evade disclosing relevant information while still adhering to the letter of law. These “Rule breaking” can be very creative. Take the example of a New York City restaurant that was subjected to a health inspection grading regulation. Disguise its “B” rating by simply adding “EST” to its display of its grade. Disclosure regulations can also fail when they don’t effectively communicate valuable information.

A Study of one type climate disclosure – emissions labels on consumer products – found mixed evidence as to whether consumers altered their behavior in response. Rule-bending is possible human tendenciesTo reduce or filter out warnings, provide an avalanche information that confuses or overwhelms the intended recipient.

Expect court challenges

One challenge the SEC has grappled with is whether it has statutory authority to require companies to disclose their “Scope 3” emissions. These are emissions that a company doesn’t directly control, such as emissions from the use of its products or emissions in its supply chain.

A company like Amazon may have extensive upstream Scope 3 emissions in its suppliers’ transportation networks. General Motors would have large downstream emissions if its gas-powered cars were driven.

The SEC’s three Democratic commissioners, who make up a majority of the commission, According to some reports, the couple has split. on whether certain Scope 3 emissions can be viewed as “Material” to investors and therefore subject to disclosure.

“Material” is definedInformation that a reasonable person would consider to be important in making an investment decision.

Some climate disclosures are being criticized by some, including Many Republican state general attorneysThis suggests that the SEC is not authorized to require disclosures that aren’t financially relevant. Missouri’s attorney general wrote that requiring climate reporting would impose “Large administrative and cost-intensive burdens” on publicly traded companies. A group of senators suggested that greenhouse gas-related assets be included. Shift to private companies. West Virginia’s attorney general Threatened to sue SEC.

There would be a range of costs associated with disclosure. Some companies already closely monitor their emissions. Scope 3 emissions would result in high costs for many others. An example is an oil company. All vehicles that use its fuel must be able to measure their emissions.

The Administrative Procedure Act permits courts to invalidate SEC rules. These are deemed arbitrary and capriciousBecause the agency did not provide sufficient justification to choose the proposal over other options. This is a serious risk that the SEC is aware of. A prior oil-and-gas extraction disclosure rule Was invalidatedA court ruled that the 2013 ruling was arbitrary and capricious.

Take care

The SEC’s forthcoming climate risk disclosure rule will not be the final effort to use information to shape the private sector’s response to climate change.

These future moves will be affected by the actions taken by the SEC now. It is no surprise that it is taking its time, and proceeding cautiously.