It’s time for an all-out national mobilization to defeat the climate crisis.

President Biden and Congress must lead the charge to defeat the climate crisis and build a thriving, just and inclusive clean energy future. Join our work to help make it happen.

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It’s time for an all-out national mobilization to defeat the climate crisis.

President Biden and Congress must lead the charge to defeat the climate crisis and build a thriving, just and inclusive clean energy future. Join our work to help make it happen.

What to Watch for: The SEC’s Upcoming Climate Risk Disclosure Rule

Climate change threatens the stability of our entire financial system, but many Americans have no idea that their retirement funds or college savings plans could be wiped out in a climate-fueled economic crash.

On Monday, the Securities and Exchange Commission (SEC) is expected to release a long-awaited draft rule to require businesses to disclose how much greenhouse gas pollution they emit and the extent of their exposure to climate-related financial risks. The rule is expected to be an important step forward for transparency that will arm investors with the data they need to make informed decisions in a financial system that is being increasingly impacted by the climate crisis.

When the 2008 financial crisis brought our economy to the brink, most investors had no idea that their savings were tied up in toxic subprime mortgage assets. Because they didn’t understand the real risks associated with their investments, many people lost everything, and some still have yet to fully recover from the crash. Today, climate change threatens the stability of our entire financial system, but many Americans have no idea that their retirement funds or college savings plans could be wiped out in a climate-fueled economic crash. We can’t allow history to repeat itself. 

Mandatory disclosure of climate-related risk will give investors the tools they need to make smart decisions about their own exposure to climate risk, and level the playing field for businesses by setting a standard for consistent and comparable reporting. The SEC’s new rule will be a vital step to get there, and it couldn’t come at a more important time. But to be most effective, the rule will need to cover all emissions associated with a company’s value chain. This memo will dig into why it is the SEC’s job to fix this liability for investors, and detail key components that will determine the proposed rule’s strength when it is released on Monday.

Why Disclosure Matters

Right now, Wall Street firms are allowed to conceal their exposure to climate-related financial risks, leaving investors in the dark about a significant threat to the long term security of their assets. One analysis from Ceres found that more than 10% of the portfolios of some major US banks are vulnerable to physical climate risks like fire, flooding, and diminished agricultural productivity. As the climate crisis worsens, the significance of the financial risks associated with both its direct and indirect impacts will only increase.

In response to investor demand for more information on climate risk, some companies have opted for voluntary disclosure. But without a rule in place, there’s no standard for how companies measure or report that information, so investors are still left with inconsistent and unreliable data.

As SEC Chair Gary Gensler recently put it, the SEC is talking about climate risk because investors are talking about it. The commission has a mandate to protect investors and maintain orderly and efficient markets, and climate-risk disclosure will help them do both. The rule is a smart, necessary step to increase transparency and investor knowledge, but what remains to be seen is how well the rule itself is designed.

 

What To Watch For

According to the latest reporting, the SEC’s new rule is expected to require companies to disclose the greenhouse gas pollution generated directly by sources they control and indirectly through things like electricity purchased by the company. These types of emissions are typically referred to as Scope 1 and Scope 2 respectively. When the draft rule is released on Monday, experts and advocates will be reading to see how the rule handles the disclosure of what are known as Scope 3 emissions, which include any indirect emissions that occur in a company’s supply chain, including from the end consumer of a company’s product.

Understanding the extent of a company’s Scope 3 emissions is essential for investors to see the full picture of a company’s climate impact. Leaving out Scope 3 would mean missing upwards of three quarters of the overall carbon emissions, once again leaving investors to fend for themselves without a full account of information. The details of how Scope 3 emissions are included in the rule will also be closely watched – it may apply to only large filers or companies who meet a certain emissions threshold, or it may include phase-ins, delays, caveats, carve outs, etc. 

There have also been reports that the SEC’s commissioners debated basing Scope 3 disclosure requirements on a somewhat open-ended standard for materiality, which would essentially leave it up to a company to decide which Scope 3 emissions are relevant to disclose to investors. Such a standard would not only limit the information available to investors, but could leave businesses open to legal challenges from shareholders who disagree with their standard for relevance. 

"Financial regulators across the federal government, including the SEC, can and must do more to act within their mandate and protect our financial system from these growing climate risks."

What’s Next

recent report from insurance giant Swiss Re found that climate change could cause the world economy to shrink by as much as 10%, or $23 trillion, by 2050. The climate crisis is here, and its impacts will shape our financial reality for the foreseeable future. The SEC’s climate risk disclosure rule is one important step to prepare Americans to navigate this new reality, and if it is well designed it can be a powerful tool to help investors and businesses. But financial regulators across the federal government, including the SEC, can and must do more to act within their mandate and protect our financial system from these growing climate risks. It’s clear they have more tools at their disposal to help Americans measure and mitigate climate risk, and they must use every possible lever to prevent a climate-driven economic catastrophe.