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The U.S. Securities and Exchange Commission (SEC) released a proposed rule on mandatory corporate disclosure of climate-related financial risks in March 2022. The proposed rule will require all publicly traded companies, including major food and agriculture corporations, to disclose their annual climate emissions and other information relevant to investors. The SEC is accepting public comments on the proposed rules through June 17, 2022. IATP’s Senior Policy Analyst Dr. Steve Suppan explains why these rules are important, how they might work and how they could be strengthened.

Why is the SEC issuing this proposed rule on climate-related financial risk?  

On March 21, the SEC released for public comment a proposed rule on how publicly traded companies in the U.S. will report to the agency, investors and the public their climate-related financial risks. These risks include the impact of climate change on the companies’ facilities, operations, foreign subsidiaries, supply chains, access to and cost of credit and insurance, and costs to the company of transitioning to a low carbon economy. The SEC fact sheet about the rule is here.

Mandating climate financial risk disclosure is the result of the failure of the SEC’s 2010 voluntary disclosure guidance to elicit qualitative and quantitative climate-related risk information demanded by investors. Investor groups managing in aggregate more than $100 trillion assets have complained that voluntary disclosures were inconsistent, incomparable and lacked sufficiently detailed financial and emissions reporting data for investors to use in making decisions to allocate, reduce or reallocate investments. Investors want more detailed, uniform and comparable information to be able to decide whether companies have viable plans for reducing their climate-related financial risks and are taking advantage of climate-related investment opportunities in new services or products.

What are some of the highlights of the proposed rules? 

The Task Force on Climate Related Financial Disclosures (TFCD) of the intergovernmental Financial Stability Board issued voluntary guidance for companies in 2017. Much of the SEC rule emulates the latest TCFD guidance with which thousands of SEC registered companies are familiar. Under the proposed rule, companies are required to file uniformly formatted, item specific and electronically tagged (to enable comparison among companies by investors) financial data in annual audited reports. These reports will include expenditures on repairing or replacing facilities and supply chains damaged by severe climate events and chronic climate conditions. The companies also must file a publicly available, SEC-formatted narrative report to explain to investors a company’s climate-related financial vulnerabilities and how and when the company will reduce the financial risks of those vulnerabilities. Companies may also report, in the same format, their climate-related technology and services investment opportunities.

The proposed SEC rule requires that companies report annually their Scope 1 (direct operational) and Scope 2 (purchased electricity) emissions. These reports should enable investors to judge both a company’s current exposure to climate-related financial risk and the emissions benchmark from which companies will reduce their risks over a timeframe comparable to risk reduction by other companies in the same economic sector. Companies would be required to report their Scope 3 (supply chain) emissions if the company judges those emissions and the costs and risks of reducing those emissions to be “material” to the financial viability of the firm. Companies must also disclose their annual emissions if they have set an emissions reduction target, such as those for the Science Based Targets Initiative (SBTi) net zero standard for the Forestry Land and Agriculture Group (FLAG) of companies.

Companies will have a phase-in period before required compliance as early as 2024, if the SEC adopts the rule in December 2022. Companies reporting Scope 3 emissions will have a safe harbor from most forms of liability and litigation, assuming that reporting requirements are met in good faith. To facilitate ease of compliance, the SEC recommends emissions data collection and reporting according to the requirements of the Greenhouse Gas Protocol or the U.S. Environmental Protection Agency, both of which are in wide corporate use. The SEC has proposed a separate reporting standard for emissions financed by banks. Although the proposed rule provides companies with flexibility in reporting Scope 3 emissions, investors may withdraw investments from companies with large but unreported or underreported Scope 3 emissions.

Will the proposed SEC rule affect farmers’ access to credit? 

No. The proposed rule applies to publicly traded companies, including agriculture and meat processing companies whose stock share trading the SEC regulates. It does not apply to farms, no matter how large. Senator John Thune (R-SD) and 10 Republican colleagues sent President Joe Biden an April 6 letter that characterized several Biden administration climate change initiatives as being anti-farmer and as likely to prevent farmers from getting loans. The Senators apparently feel that investors have no need for the climate-related information that investors are demanding. This patronizing attitude towards investors in no way helps farmers and ranchers on the front lines of battling climate change. 

Why are these rules important for food and agriculture companies, investors, farmers and food consumers? 

As IATP has documented in a recent report, food and agriculture companies are among the largest emitters of Scope 3 emissions. However, few of these companies report those emissions voluntarily, and none in audited financial statements that investors can compare. Nevertheless, these companies often claim they are reducing their emissions intensity (usually CO₂ equivalents per unit of production) while saying nothing about the increase in their absolute emissions that contributes to the dire state of our climate. The acceleration of our deteriorating climate and its consequences most recently was reported in early April in a consensus report of more than one thousand scientists of the Intergovernmental Panel on Climate Change.

The SEC rule requires annual absolute emissions reporting, disaggregated into estimates of the seven greenhouse gas emissions. For example, meat and dairy companies would have to collect and report data about their methane emissions from concentrated animal feeding operations (CAFOs) that contract their production to meat and dairy processors. According to the proposed rule’s definitions of “organization boundaries” and “operational boundaries,” the companies, not the CAFO contracting farmers, would be responsible for reporting and reducing their Scope 3 emissions. Although the SEC rule allows companies to use emissions offset contracts, the emissions reductions claimed in those contracts must be reported separately and cannot be subtracted from a company’s absolute emissions reporting. However, this data collection and reporting is contingent upon a company’s determination that the Scope 3 emissions and the costs of their reduction pose “material” risks to the company’s short, medium and/or long-term viability.

In November 2021, IATP published research on the global climate impact of a “50-year binge” on synthetic nitrogen fertilizer use, particularly in the release of the powerful greenhouse gas nitrous oxide, which would be reportable under the proposed rule. Fertilizer companies would have to report Scope 1 and 2 emissions under the proposed rule, and Scope 3 emissions, subject to the provisos on materiality of financial risk to the company and whether the company has set a published goal for emissions reduction. However, according to the proposed rule’s definitions of “upstream and downstream activities,” it is less clear how fertilizer companies would report Scope 3 emissions. For example, the upstream use of natural gas to produce synthetic nitrogen fertilizer is readily quantifiable. However, the downstream nitrous oxide emissions resulting from the production of wheat processed into breakfast food likely will be more difficult to quantify, even in computer modeled estimates.

How could the proposed rule be improved?                                                    

The rule would allow companies to report their use of emissions offset contracts to claim reductions in their annually reported absolute emissions. However, there is no requirement to report, even in narrative form, the financial risks of offset trading nor to report the financial risks of delaying direct company investment in emissions reductions by investing heavily in offset contracts. Such requirements are needed. The proposed safeguard from litigation for Scope 3 emissions reporting should be subject to more conditions, including the auditor and chief financial officer’s “reasonable assurance” (an important legal standard) that the company has reported all its estimated supply chain emissions for the fiscal year and nearby historical years. Finally, for companies reporting industrial solutions to climate change, such as Direct Air Capture of emissions and Bioenergy Carbon Capture and Storage, as climate investment opportunities, companies must report the energy expenditures, financial risks of technological failure, and the subsidies, contracts and other forms of financial support from public institutions for these technologies, without which these technologies currently are not feasible on a commercial basis.

What comes next in the rulemaking process?  

Public comments on the proposed rule will be accepted until June 17. IATP will submit an individual comment and partner with other organizations on a more comprehensive comment. The SEC staff will revise the proposed rule in response to comments received. The five SEC commissioners will vote on whether to finalize the rule for implementation, possibly as early as December 2022. Senator Joe Manchin (D-WV) has joined Republicans and fossil fuel companies in opposing the proposed rule. West Virginia’s attorney general has threatened to sue the SEC all the way to the U.S. Supreme Court to strike down the final rule as a violation of the Constitution. Republican Senators have suggested that SEC registered companies would go private, rather than comply with the rule. In February, the SEC proposed a rule that would require far more financial reporting and accounting transparency from private companies to protect investors in those companies. Insofar as the companies subject to that proposed rule have climate-related financial risks, it is possible that the climate financial risk disclosure rule could be expanded to cover private companies that otherwise might evade disclosure. 

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