7 things investors need to know
Gary Gensler, chairman of the Securities and Exchange Commission, at the SEC headquarters in Washington, on July 22, 2021.
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The Securities and Exchange Commission on Monday unveiled a sweeping proposal to expand investors’ insight into the threat that climate change poses to public companies and how they contribute to a warming planet.
If adopted, the proposal would have a far-reaching impact across the spectrum of investors, according to legal and financial experts.
Here’s what investors need to know about the 510-page rule.
What is it?
The SEC proposal concerns disclosures that all publicly traded companies make to investors on a regular basis.
The agency is trying to require a minimum level of climate-related reporting as part of this disclosure framework.
The title of the proposed rule — “The Enhancement and Standardization of Climate-Related Disclosures for Investors” — outlines its broad goal.
Why is the SEC doing this?
The SEC requires publicly traded companies to be transparent about risks and other information they deem “material” to the firm. That can encompass a broad range of items, from cybersecurity risk to geopolitical risk, for example.
Such disclosures are the backbone of the agency’s regulatory regime, according to Erin Martin, partner at the law firm Morgan Lewis and a former attorney at the SEC.
Investors use the reports to assess a company’s financial health and governance, for example, which in turn impact decisions to buy, hold or sell a company’s stock or bonds.
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SEC officials say they’re responding to investor demand for transparency around climate-change risk — which Commissioner Allison Herren Lee on Monday called “one of the most momentous risks to face capital markets since the inception of this agency.”
Human-caused climate change has fueled hotter temperatures and drier conditions across the world, and scientists widely believe it’s contributing to worsening disasters like hurricanes, wildfires and heatwaves. The last seven years have been the hottest on record.
That can affect companies in the form of credit risk, market risk, insurance or hedging risk, operational risk, supply-chain risk, reputational risk and liquidity risk, among others, Lee said.
Not all officials agree, though. Commissioner Hester Peirce, who voted against the proposal, thinks it oversteps the SEC’s authority and places the interests of environmental activists ahead of other shareholders, among other criticisms.
“[The proposal] forces investors to view companies through the eyes of a vocal set of stakeholders, for whom a company’s climate reputation is of equal or greater importance than a company’s financial performance,” Peirce said.
The SEC approved the proposed rule in a 3-1 vote.
What types of disclosures?
The proposal would require many tranches of disclosure.
For example, companies would have to detail the impact of “physical” risks (such as a severe ice…
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