And that was before a 6-3 decision by the US Supreme Court on 30 June raised some questions over just how far the SEC could go in requiring companies to disclose things like how much pollution their business generates. While the SEC hasn’t commented on the case, plenty of others have filled that void, claiming that the SEC will no longer be able to move forward with the rules without Congress permission
Count me in the camp that believes the proposal is about improving disclosures for investors, which is critical to the agency’s mandate that dates back to the 1930s. In theory at least, the court decision shouldn’t have much impact, though it probably will get messy and lead to lawsuits and long delays in implementation.
Even as those battles play out, the SEC will have to contend with a controversy around its push for more information on businesses’ environmental impact.
The new climate-related disclosures proposed by the SEC centre around two areas: companies’ own contributions to pollution as well as those of their customers and suppliers; and companies’ exposure to climate threats that could impact their business.
One complaint made by companies and lobbying groups in letters submitted to the SEC was that the additional information sought by regulators was excessive and would be costly to assemble. Some, like Exxon Mobil, argued that some disclosures should be protected from liability.
Businesses have valid concerns about the new rules, starting with having to parse a proposal that runs to almost 500 pages. In a comment letter sent by the American Bar Association, attorney Jay Knight noted that the SEC estimated these new rules would involve 70 extra hours of work per filing.
Still, it’s already very clear that all sorts of companies are being affected by climate change, from confronting higher costs for raw materials to growing vulnerability to flooding to potential increased spending in the transition to cleaner energy. Requiring companies to provide more detailed disclosure by spelling out climate-related risks that could have a material impact seems like common sense.
The new rules will address the current patchwork of disclosure, where some companies reveal a lot and others practically nothing. This is possible because companies are operating under existing SEC guidance, issued in 2010, that left a lot of room for interpretation and few specifics about what information companies are required to disclose.
In the absence of standardized reporting, investors have no way of knowing why a company has disclosed relatively little about its climate impact. Was it because the company didn’t think the issue was material to their business? Or was there some other reason?
It’s especially perplexing to investors when there are differences in disclosure practices among companies in the same industry, or when companies use different metrics or language to measure the exact same thing.
Take two large retailers, Home Depot and Lowe’s. Home Depot first began talking about climate-related risks in a 10-K form it filed for 2017 and has significantly increased its disclosures over the past five years to include steps it had planned to reduce its carbon footprint. But Lowe’s only began in 2019, and its disclosure was essentially a mere mention of the words “climate change." It’s reasonable to expect that two companies in similar industries would be similarly affected, and this is where better rules come into play.
I have come down on the side that more information, even if it’s disclosed in 6-point italics in a footnote of a 10-K filing, is better than less. Even if most investors never bother to read that information, it helps those who do want to make more-informed decisions about their investments.
The evidence today is clear that most companies are affected in all sorts of ways when it comes to climate-related issues. Investors in those companies deserve to have standardized information so that they can better assess the impact. Here’s hoping that America’s SEC is up to the task—and resisting pushback.
Michelle Leder is a Bloomberg Opinion columnist
