7 things investors need to know

on Mar24
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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.

Aerialperspective Images | Moment | Getty Images

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 Holy Fire at Lake Elsinore, California, on Aug. 9, 2018.

Kevin Key / Slworking | Moment | Getty Images

Companies that made climate targets or commitments would have to disclose those, and their plans to achieve them.

They’d also disclose their greenhouse-gas emissions, both direct (from sources owned or controlled by the company) and indirect (from electricity and energy used by the company).

Some (but not all) would report a third tier of emissions further down the supply chain (in the production and transportation of goods from third parties, or employee commuting or business travel, for example).

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Emissions data, which would be reviewed by a third party, helps investors understand how revenues and expenses may be impacted as the U.S. transitions to a lower-emissions economy, and offer insight into how companies are meeting climate pledges, SEC officials said.  

“Climate risk is not unlike any other risk that can affect a company’s performance,” said Dylan Bruce, financial services counsel for the Consumer Federation of America, an advocacy group.

OK, great. But is this a big deal?

I can’t talk to an asset manager today who says they’re not concerned about climate at all. No one says that.

John Hale

global head of sustainability research at Morningstar

“It’s not a company-by-company determination,” Martin said. “The SEC is saying it believes all this information is material information companies should be providing to the general public.”

Companies also don’t necessarily know what information to report now — meaning its scope, specificity and reliability varies, and investors don’t get uniform data, Crenshaw said.

What does this all mean for investors?

The rule’s impact goes beyond individuals who buy a company’s stock, experts said.

For example, asset managers who pick stocks and bonds for mutual funds and exchange-traded funds, and institutions that oversee pensions and endowments, may opt to limit holdings in a company that appears overexposed to climate risk. These sorts of decisions may indirectly impact millions of investors.

“It’s not just climate-aware funds — it’s all funds,” said Jon Hale, the global head of sustainability research at Morningstar. “I can’t talk to an asset manager today who says they’re not concerned about climate at all. No one says that.”

A section of the Sausalito/Mill Valley bike path is seen covered in ocean water in Mill Valley, California, on Jan. 3, 2022.

Josh Edelson | Afp | Getty Images

Even index-fund managers who don’t actively pick stocks and bonds will have more ammunition to influence change at companies, he said.

Index-fund providers like Vanguard Group and BlackRock are big shareholders in public companies, and can leverage that power to sway managerial decisions during shareholder meetings if they feel companies aren’t doing enough to address climate risks, for example, Hale said.

Might there be an impact beyond investing?

There could be a bigger knock-on environmental and societal effect, experts said.

The SEC’s purview is the realm of investing. But there could be an inadvertent public-relations aspect to the disclosure requirements, for example. Might a big greenhouse-gas emitter redouble efforts to rein in their carbon footprint, fearing public blowback for its emissions disclosures?

It’s too soon to tell, but this is just one of the potential cascading effects of the rule, experts said.

When does it take effect?

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