As IATP noted in a mid-April FAQ, the Securities and Exchange Commission (SEC) released for comment a nearly 500-page proposed rule in response to myriad investor requests for standardized and comparable information about the financial and business operations risks of climate change. Investors who trade shares of companies on SEC regulated stock exchanges receive corporate disclosures of many kinds of corporate financial risks: disclosures of climate-related risks comprise one more disclosure category, albeit a complicated one. On June 17, IATP submitted its comment letter to the SEC.
The proposed rule has been the object of disinformation, and even promises of lawsuits, based on the assertion that the SEC does not have the congressional authority to mandate that corporations disclose information about their climate-related financial risks to investors and the public. The latest opposition came in the form of a 16-page bill from Republicans in the House of Representatives agriculture committee. According to a June 15 press release, the bill would eliminate many regulations on agriculture and “rescind the SEC’s harmful proposed rule on climate-related disclosures.”
The entire one sentence text of the section of the bill pertaining to the SEC does no such thing. However, the bill would vitiate the investor imperative to receive comprehensive and standardized information about climate-related financial risks and costs to companies: “The Securities and Exchange Commission may only require information relating to the emissions of an issuer, including the upstream or downstream emissions from the value chain of the issuer, to be included in a report to the Commission if such issuer determines there is a substantial likelihood that a reasonable shareholder would consider such information important with respect to making an investment decision.”
Translated, the bill forbids the SEC from requiring companies that raise capital from investors trading company shares on SEC regulated stock exchanges to report their greenhouse gas (GHG) emissions, unless the company decided that GHG information was relevant to investment decision making. Under the proposed rule, emissions from “upstream activities” could include, e.g., per animal estimates of GHGs prior to slaughter by meatpackers. In our letter to the SEC, we cited an example from IATP’s recent reporting on the world’s largest meatpacking company, JBS. If the Republican bill became law, JBS could determine that its 51% increase in GHG emissions over a five year period and the cost of reducing those emissions to fulfill JBS’ net zero emissions by 2040 pledge were not important information for investors and need not be included in JBS’s annual reports to the SEC.
Because the opponents of the proposed rule, including Republican SEC Commissioner Hester Peirce, charge that it is a “backdoor environmental rule,” our responses to the SEC questions emphasized that the proposed rule contains no environmental regulations, indirect or otherwise. The costs of repairing or replacing corporate facilities damaged by severe weather events attributed to climate change is probably the most evident kind of financial risk to be reported under the proposed rule. But equal, if not more important, is the information the proposed rule would require concerning corporate business strategies, transition plans and capital allocations to reduce the climate-related risks for which corporate GHG emissions are a benchmark from which to measure and manage climate-related financial risk.
The SEC would allow companies to report their climate-related financial opportunities. IATP advised that these opportunities, such as climate-related products and services, be reported as part of the company’s business strategy. We believe that companies with a credible business strategy to manage and reduce their climate-related financial risks, partly though developing new products and services, will be rewarded by investors who will increase their shareholdings and/or make longer term investments in response to the year-by-year reporting of success of climate finance transition plans.
Another set of questions in the proposed rule concerned the corporate use of emissions offset projects, credits and derivatives (futures, options and swaps) contracts to manage climate-related financial risks. For the past year, IATP has been analyzing industry initiatives to scale up carbon emissions offset trading that have been increasing exponentially, without regulatory requirements, as well as the introduction of “nature based” offset futures contracts on the Chicago Mercantile Exchange. We used some of this analysis to propose to the SEC a definition for “carbon offset derivatives” and an a more detailed definition of the “costs” of offset trading that would provide clearer information to potential investors. Our letter also discussed the financial risks for corporations of managing climate-related financial risks with emissions offset credits and offset derivatives that misrepresent emissions reductions in reporting to the SEC under the proposed rule. Reporting corporate use of offsets in financial statements filed with the SEC will help investors understand the extent to which business strategies to manage and reduce climate-related financial risks depend on offset trading vs. direct investment to reduce corporate climate-related risks.
We informed the SEC that 45% of investors polled in 2020 by the Task Force on Scaling Voluntary Carbon Markets had concerns about “a lack of environmental and social integrity of certain [offset] projects” on which tradable offset credits are based. Indeed, at a June 2 meeting of the Commodity Futures Trading Commission (CFTC) on voluntary carbon markets, Tyson Slocum of Public Citizen said there is a “crisis of integrity” in voluntary carbon markets. (An archived webcast of the meeting is here.) The CFTC is cognizant of this problem and has released a Request for Information about climate-related financial risk and offsets in the cash and derivatives markets with a deadline of August 8.
The CFTC, not the SEC, has regulatory authority over the contracts and markets on which offset contracts trade. IATP suggested that the SEC establish an information exchange with the CFTC about the exchange self-certification of new emissions contracts without formal CFTC review and about offset market developments. We recommended that SEC registered companies report separately on the intended purposes of the offsets they trade: those that claim to avoid emissions; those that claim to reduce emissions; and those that claim to remove emissions permanently. The latter includes offset credits derived from carbon capture and storage facilities and pipelines, such as those funded by $12.1 billion in the Biden administration’s 2022 infrastructure bill. Each kind of offset has distinct accounting, environmental and social integrity risks and costs.
Throughout the proposed rule, the SEC provides accommodations that take into account the technical challenges and costs of climate-related financial reporting, particularly for those corporations that are not doing so already on a voluntary basis. IATP supports the proposed phase-in period of up to four years for smaller SEC registered companies to enable them to learn how to file the mandatory information before compliance is required. The SEC proposes safe harbors from most litigation for some provisions, including the reporting of Scope 3 (value chain and supply chain) emissions, if reporting requirements were followed in good faith. However, we recommended that the safe harbor be ended after three years for Scope 3 reporting, since the SEC anticipates that time period will suffice for corporations to learn how to use the Greenhouse Gas Protocol developed with businesses, and other reporting protocols.
Unfortunately, these accommodations are unlikely to mollify those who oppose the proposed rule as unconstitutional, as beyond the SEC’s statutory authority or as discriminating against high-GHG-emitting industries, such as fossil fuels, aviation, and, yes, agribusiness. Opponent litigation likely will stall implementation of a finalized rule for at least the last two years of the first term of the Biden administration, unless opponents succeed in petitioning for expedited review to the conservative majority of the U.S. Supreme Court. Those challenges would only postpone corporate climate transition action and continue to keep investors in the dark about the consequences of climate change on corporate finances and business operations.