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Energy, investor groups clash ahead of SEC climate-risk rulemaking


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Energy, investor groups clash ahead of SEC climate-risk rulemaking

Investor groups and environmental advocates say mandatory corporate climate risk disclosures with uniform metrics are critical for shareholders and economic stability. That position is at odds with the one advocated by energy industry players, many of which are asking for flexibility, liability protections — or no new guidelines at all.

The U.S. SEC is sifting through thousands of comments it received over the last three months on whether and how the agency should require stricter climate risk disclosures from the businesses it regulates. The exercise comes amid a surge in investor activism to get companies to be more transparent about how extreme weather, supply chain interruptions, potential carbon regulations and other climate-related uncertainties may affect their performance.

The SEC is expected to propose a rule by October detailing how publicly traded companies should communicate such risks in their financial filings. It follows an executive order President Joe Biden issued May 20 that, among other things, requires regulators to assess climate threats to the U.S financial system.

Inconsistent reporting

Hundreds of large companies in the U.S. already disclose climate risks. Some use a well-established global reporting structure developed by the nonprofit CDP, formerly known as the Carbon Disclosure Project. Others may rely on their own metrics or recommendations from a trade group.

The problem is the lack of uniform standards, proponents of a national rule said. With little or no consistency in reporting, risk-averse or socially conscious investors have difficulty deciding where to place their money.

"While there has been significant progress in expanding climate-related disclosure over the last decade, at present the sustainability disclosure landscape is hampered by inconsistent frameworks across and within industries and jurisdictions," BlackRock, the world's largest money manager, wrote in its comment to the SEC. "We support the SEC mandating disclosure of these additional metrics as soon as practicable."

Reporting on corporate greenhouse gas emissions would be a good starting point, BlackRock suggested, while cautioning that any requirement that companies also disclose hard-to-analyze Scope 3 emissions from the products they sell may have to be phased in over time. With $9 trillion in managed assets, the firm's views are certain to be taken into account.

How to fit many sectors into 1 rule

More than 80% of S&P 500 companies already share corporate carbon emissions data with investors, and about 50% share some of their Scope 3 emissions data, according to the Center for Climate and Energy Solutions.

"Mandating such disclosures provides companies and investors with critical data regarding their own climate risks, as well as a company’s overall impact on climate change," the nonprofit group told the SEC.

Others cautioned against a "one size fits all" approach that may not be useful for industries as different as retail, mining and IT.

Two large trade groups representing investor-owned utilities and natural gas companies told the SEC that they have already developed a voluntary reporting template for members that want to share environmental, social and governance data in their SEC filings. Rather than imposing a national and uniform standard, they asked the agency to adopt the system they rolled out for their companies in 2019 specifically for their industry.

"We do not believe that the commission needs to do anything further with respect to disclosure of climate-related risks and opportunities," the Edison Electric Institute and American Gas Association wrote.

The idea of industry-specific reporting requirements within a broader SEC rule appears to have wide support.

Ceres, the investor network with $2.7 trillion under management, wrote that metrics tailored to industries help investors because they make disclosures comparable but said such metrics should build on standards recommended by the Task Force on Climate-related Financial Disclosures. The recommendations were published by the international Financial Stability Board in 2017 and are widely accepted.

Large investors onboard

Another hot topic for industrial players is the prospect of greater liability for companies that must suddenly predict risks 10 or 20 years into the future as global temperatures rise.

Chevron Corp., Conoco Phillips and the American Petroleum Institute were among commenters asking the SEC to stipulate so-called safe harbor protections in its proposed climate-risk reporting rule to shield the companies against legal or regulatory penalties.

Some commenters, including the Libertarian Competitive Enterprise Institute and West Virginia Attorney General Patrick Morrisey, questioned whether the SEC's mission gives it the right to include climate risks in corporate reporting requirements.

"If you choose to pursue this course, we will defeat it in court," Morrisey warned the agency.

Institutional investors, meanwhile, seem united in their support of a federally mandated climate-risk reporting rule, an indication of how far the market has moved in just a year.

"We believe market forces alone likely will not produce a more efficient disclosure framework in the near-term, even though the absence of such information is a present challenge for investors," wrote Vanguard, the world's second-largest asset manager, with a $7.2 trillion portfolio.