Mario Olczykowski and Lee Reiners
Recognizing that “investor demand for, and company disclosure of information about, climate change risks, impacts, and opportunities has grown dramatically,” former Securities and Exchange Commission (SEC or Commission) Acting Chair Allison Herren Lee released 15 questions for consideration on March 15, 2021 “with an eye toward facilitating the disclosure of consistent, comparable, and reliable information on climate change.”
The comment period ended on June 14th, and the Commission received over 5,700 comments submitted through form letters and 593 individual comments from a variety of firms, nonprofits, government officials, and individuals. Commenters represent diverse interests, ranging from the world’s largest asset managers (BlackRock, State Street, and Vanguard), large financial institutions (Bank of America, Deutsche Bank, and London Stock Exchange Group), state and federal elected officials (Attorneys General of Missouri and West Virginia, Senator Elizabeth Warren, and Congressman Sean Casten), large tech companies (Microsoft, Uber, and Apple), and standard-setting organizations (The Partnership for Carbon Accounting Financials, Sustainability Accounting Standards Board, and the Climate Disclosure Standards Board).
The Commission’s request also sparked interest on Capitol Hill. House Democrats leveraged the request to reintroduce, and pass, the Climate Risk Disclosure Act of 2021, and hearings on climate risk disclosure were held in the House and Senate. At the international level, G7 finance ministers and central bank governors endorsed “mandatory climate-related financial disclosures that provide consistent and decision-useful information for market participants” in their June 5thcommuniqué.
While reviewing each comment letter is the Commission’s job, we reviewed a large sample of comments to identify widespread points of agreement and specific issues where opinions varied based upon commenter type (NGO, multinational corporate, financial institution, etc.). Overall, most commenters support the SEC’s effort to develop mandatory climate-related disclosures; in fact, many of the commenters already disclose their climate risks in some form. However, there are a variety of opinions on what specifically should be disclosed, where and how it should be disclosed, and the extent to which the SEC should rely on existing standard setters in developing a disclosure regime.
The majority of large cap companies, asset managers, and financial institutions want climate-related disclosures to be furnished—as opposed to filed—in order to protect registrants from the strict liability that comes with including disclosures in documents filed with the SEC. This group is concerned by the insufficient science and methodologies behind quantitative climate-related disclosures, including scope 3 emissions. Thus, they endorse phased in disclosures based on good-faith compliance efforts and the creation of safe harbors to reduce liability risks. On the opposite end, most environmental NGOs and Democratic politicians want disclosures filed in audited financial statements. This group is generally more optimistic about the science behind quantitative disclosures and less supportive of a phased in approach or the creation of safe harbors.
Nearly all letters, regardless of commenter type, express support for modeling mandatory disclosures on Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. However, most of these commenters do not want the Commission to delegate rulemaking to an independent standard setter. Finally, while many commenters support industry-specific disclosures based on SASB standards, roughly just as many wish to see a single, principles-based standard applicable to all companies, with no sector- or industry-specific components.
The SEC’s Authority
Most commenters recognize the SEC’s legal authority to mandate climate-related disclosures, although some differed on whether disclosures must meet a materiality threshold. However, a handful of commenters directly challenge the Commission’s authority to compel climate-related disclosures on First Amendment grounds. West Virginia’s Attorney General, Patrick Morrisey, believes that compelling climate disclosures would not “withstand strict scrutiny under the First Amendment.” Morrisey notes that the SEC does not have a “compelling government interest” in requiring climate-related corporate disclosures and that even if it did, “mandating companies to issue statements regarding environmental, social, and governance matters which are not material to future financial performance constitutes” is not “the least-restrictive means for investors to obtain such information.” Similar arguments are raised by Missouri’s Attorney General, Eric Schmitt.
Other opponents emphasize that any disclosures must be material to the “reasonable investor” per Supreme Court precedent, and that climate-related disclosures do not meet this materiality threshold. This view is best represented in a letter signed by a group of 22 House Republicans who argue that “uniform mandates would be deeply misguided for an issue as complex as climate change.” The group also stresses that “it would be inappropriate for the SEC to establish a prescriptive disclosure regime for climate change based upon what the SEC believes is material to every public company.”
More commenters believe that climate risks are material and adopt the position best expressed by Senator Elizabeth Warren and Representative Sean Casten: “Climate change is one of, if not the single-largest systemic risk to our global financial system.” Another letter signed by over five hundred investors, foundations, companies, lawmakers, and NGOs, expresses support for SEC rulemaking by noting that “climate change poses a variety of material risks to companies of all sizes in all industries across our nation.” Similarly, California Attorney General Rob Bonta argues that climate risk disclosures, “which are well within the SEC’s authority to require, are essential not only to the SEC’s mandate to protect investors but also to ensure efficient capital formation and allocation.” The SEC’s rulemaking authority is also supported by the largest asset managers in the world: BlackRock, Vanguard, and State Street.
Whenever the SEC does propose a mandatory climate disclosure rule, it will certainly be challenged in the courts. Perhaps in an effort at preempting at least some lawsuits, SEC Commissioner Allison Herren Lee delivered a speech on May 24ththat persuasively argued, amongst other things, that the SEC has the authority to compel disclosure of information that may not be “material in every respect to every company making the disclosure.” Specifically, “Section 7 of the Securities Act of 1933 gives the SEC full rulemaking authority to require disclosures in the public interest and for the protection of investors.” However, Commissioner Lee’s speech did not address the First Amendment arguments raised by several Republican lawmakers in their comments and we anticipate that any proposed climate disclosure rule will be litigated on this basis.
How Should Disclosures be Made?
Many large companies submitted comment letters expressing their support for mandatory climate risk disclosures. Alphabet, eBay, Amazon, Facebook, Salesforce.com (in a joint letter), Microsoft, and Walmart all recommend a mandatory climate-related disclosure framework guided by materiality. But these companies also want “disclosures [to] be furnished via separate climate reporting to the SEC,” as opposed to disclosures being in “annual, quarterly, and other documents filed with the SEC.” This position is emblematic of the debate around filing vs. furnishing, with many companies preferring to furnish climate information because it protects them from “undue liability,” whereas filing with the SEC creates an implied private right of action for material omissions and misrepresentations in the filed report.
Furnishing is supported by the Business Roundtable as well as BlackRock, Vanguard, and State Street. These commenters express concerns around the strict liability that accompanies filing climate-related disclosures in registrants’ annual or quarterly reports. Vanguard wants the SEC to “provide flexibility to issuers to disclose through the 10-K or website, or other voluntary means” in order “to address companies” liability concerns associated with providing climate change information via Form 10-K.” BlackRock and the Business Roundtable propose a liability “safe harbor.”
It is not terribly surprising that public companies who are otherwise supportive of mandatory climate disclosure would seek to protect themselves from shareholder lawsuits. It is even less surprising that the American Gas Associationrecommends “the Commission adopt a ‘furnished’ not ‘filed’ approach that includes enhanced safe harbor provisions.” But many other commenters want to see climate risks in companies’ financial statements, namely 10Ks and 10Qs. A Ceres-led group of over 500 investors, corporations, NGOs, and individuals state in their letter that climate related-disclosures should be introduced by incorporating “the 11 recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) into Regulation S-K” and amending “Regulation S-X to require companies to disclose a breakdown of current period and planned capital expenditures in a note to their financial statements, to show the portion of investments attributable to addressing (a) transition risks and opportunities, and (b) adaptation to and/or mitigation of physical risks associated with climate change.” Similar recommendations are made by PIMCO, the California Attorney General, and various scholars. PIMCO neatly summarizes this position: “The ‘how’ of disclosure is in some ways equally as important as the ‘what’, and we believe that reporting on climate risks should be provided at least annually, ideally in an issuer’s 10-K filing.”
Reliance on Existing Standards
The majority of comment letters urge the SEC to leverage existing voluntary disclosure frameworks that many registrants already adhere to. However, there is no uniformity on whether the Commission should designate an official climate disclosure standard setter that would be responsible for developing and maintaining an SEC-enforced climate disclosure standard.
For commenters in favor of climate disclosures, there is near universal support for having TCFD recommendations form the basis of a new mandatory framework. There is also widespread support for sector specific disclosures based on Sustainability Accounting Standards Board (“SASB”) standards. BlackRock reflects the view of many other commenters when it states: “mandatory disclosure should be aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”) and sector-specific metrics, such as those identified by the Sustainability Accounting Standards Board (“SASB”).” Pairing TCFD recommendations with SASB sectoral standards is even endorsed by Uber: “Adopting a climate change disclosure framework that is aligned with TCFD and SASB reporting would further reduce complexity and enable public companies to focus on the climate change disclosures that are most relevant to their businesses.”
SASB standards are supported by many commenters as a source for industry-specific metrics (e.g., letters submitted by Vanguard, BlackRock, Microsoft, Walmart, American Institute of CPAs (AICPA), and the Climate Disclosure Standards Board.) However, not every commenter is in favor of sector-specific standards. Some commenters, including Alphabet, eBay, Amazon, Facebook, Salesforce.com, and PricewaterhouseCoopers LLP, urge the SEC to establish one disclosure standard applicable equally to all companies. The joint Alphabet letter emphasizes that a principles-based framework “is flexible and provides a basis for companies to report the relevant and important information for their industry and their stakeholders, without need for continuous updating of the framework.”
Not surprisingly, multinational corporations and financial institutions worry about being forced to disclose climate-related information under multiple frameworks. For this reason, many commenters support the development of globally consistent sectoral standards and mention the International Financial Reporting Standards (IFRS) Foundation as the entity most likely to drive such convergence. In March 2021, the IFRS Foundation announced the formation of a working group to accelerate convergence in global sustainability reporting standards. The goal is to establish an International Sustainability Standards Board (ISSB) under the IFRS Foundation structure. The Institute of International Bankers wants the SEC to “engage with the IFRS Foundation with a view to producing a robust, durable and consistent international framework.” Similarly, the Japanese Bankers Association “supports the IFRS Foundation’s initiative to create a global sustainability reporting standard.” Support for the IFRS effort is also expressed in letters submitted by BlackRock, State Street, T. Rowe Price, and the London Stock Exchange Group. The IFRS-led Sustainability Standards Board received a major boost last month when the G7 finance ministers and central bank governors, in their communiqué, agreed “on the need for a baseline global reporting standard for sustainability, which jurisdictions can further supplement” and welcomed “the International Financial Reporting Standards Foundation’s program of work to develop this baseline standard under robust governance and public oversight, built from the TCFD framework and the work of sustainability standard-setters.”
Although most commenters support TCFD recommendations and SASB standards, some of them do not believe these bodies, or any other third party, should have delegated authority to draft regulations that get applied to U.S. companies. These commenters are concerned that the SEC’s goals could be undermined if they outsource rulemaking to a third party; Microsoft argues that the SEC should not give this authority to “any unaccountable third party that may advance objectives that are outside of the Commission’s core mission.”
Other commenters are more receptive to the SEC delegating the development and maintenance of climate disclosure rules to a third party, provided the SEC exercises appropriate oversight. For example, State Street believes that: “Subject to appropriate structure, funding and governance, the Commission should consider establishing and overseeing a domestic standards-setting body that would be responsible for developing and maintaining sector-specific climate risk reporting standards, based on financial-materiality, which would complement mandatory Commission rules.” Another model, as noted by the American Gas Association, is to tap an entity “with characteristics similar to the Financial Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB)” to adopt a climate disclosure framework. Addressing the issue of third-party standard setter accountability, SASB states: “while the COSO and FASB precedents make clear that the SEC has the authority to refer to third-party standards for certain purposes, we believe that the SEC should consider assuming an oversight role relative to any third-party standard setter for sustainability disclosure.”
While there is near universal agreement on the need for companies to disclose their climate-related risks, commenters disagree on what specifically should be disclosed. Most commenters acknowledge that disclosures should generally include quantitative metrics, but some major players, especially large cap companies, financial entities, and asset managers, worry about insufficient science behind current quantitative climate metrics. Deutsche Bank notes that quantitative disclosures “should be measured on a consistent and comparable basis” and that in “sectors where this capability is still being developed, enhanced qualitative disclosures should be required until such time that they can be supplemented by quantitative disclosures.” Similarly, Bank of America stresses that “[i]t will take time to develop the processes necessary to capture and analyze [climate risk] data” and that a “lack of uniform, universal climate taxonomies … presents an ongoing challenge for the climate data effort.” Similar sentiments are expressed in letters submitted by BlackRock, Vanguard, State Street, Microsoft, and Walmart. This concern echoes a recent House Financial Services Committee hearing, where some Representatives discussed the insufficient science and methodologies behind metrics applicable to quantitative climate data.
There is less controversy regarding the applicability of Greenhouse Gas (GHG) Protocol metrics. Many commenters, including Ceres, BlackRock, and Microsoft, express support for mandatory quantitative disclosure of scope 1, scope 2, and scope 3 emissions. Unconditional support for the quantitative disclosure of scope 3 emissions is also shared by most environmental NGOs. However, many commenters, including large cap companies, financial entities, and asset managers, express reservations around scope 3 emissions due to the costs associated with collecting this data and the lack of methodological rigor in its calculation. Some commenters condition their support for scope 3 disclosure on the inclusion of a phase in period and liability safe harbors. BlackRock argues that “scope 3 and any other quantitative disclosures may require a phased approach and appropriate safe harbor where data and methodologies are still developing,” while State Street urges the SEC to, “in consultation with all stakeholders, … reach consensus on the technical questions (e.g., to address the risk of companies ‘double counting’ GHG emissions) around the feasibility of disclosing Scope 3, and mandate Scope 3 disclosures as soon as practicable.” Addressing scope 3 emissions, Bank of America notes that “very little information is available regarding methods and assumptions used to gather, calculate or estimate such information.”
While large cap companies, asset managers, and most financial institutions largely restrict their recommendations for quantitative disclosures to scope 1, 2, and 3 emissions, other commenters want to see additional metrics disclosed. For example, the New York State Comptroller, AllianceBernstein, and several NGOs, including the Securities Industry and Financial Markets Association (SIFMA) and the United Nations Environment Programme – Finance Initiative (UNEP-FI), advocate for metrics related to a firm’s carbon footprint and/or weighted average carbon intensity. SIFMA notes that registrants should be permitted to disclose “weighted average carbon intensity either instead of or in addition to carbon footprint because carbon footprint may not be applicable as a metric to all registrants, such as publicly traded asset managers.” The New York State Comptroller and NGOs, including Ceres and Americans for Financial Reform, also advocate for mandatory disclosure of data related to registrants’ use of carbon offsets in achieving their targets, with Ceres noting that “most science-based targets do not count carbon offsets.”
Many companies also want firms to disclose the GHG emissions price they use for internal business and investment decisions. Ceres argues that “internal pricing helps companies take long-run, climate-related risks into account in decisions that otherwise might naturally focus on short-term returns,” and the New York State Comptroller notes that internal carbon pricing can be used to “identify opportunities and risks, as an incentive to drive GHG reduction and energy efficiencies to reduce costs, and to guide capital investment decisions.” Some commenters also urge the Commission to mandate disclosure of registrants’ capital expenditures to meet their transition strategies.
Bank of America advocates for Stakeholder Capitalism Metrics developed by the International Business Council in cooperation with Deloitte, EY, KPMG, and PwC. They believe these 21 core and 34 expanded metrics “represent a common, core set of metrics and recommended disclosures to align sustainability reporting, reduce fragmentation, encourage the convergence of existing standards toward a single, global common standard, as well as encourage faster progress towards solutions to environmental and social challenges.” Stakeholder Capitalism Metrics are also endorsed in letters submitted by the non-profit B Lab Global and UNEP-FI.
In a speech last month, SEC chairman Gary Gensler noted that he is “really struck by the call for enhanced disclosures” and that he has asked his “staff to put together recommendations on mandatory company disclosures on climate risk and on human capital.” These recommendations will be informed by the insights and expertise expressed by hundreds of commenters in their letters to the Commission. But not every comment letter is created equal, so the question becomes: Which voices will the SEC rely on the most? The answer is particularly relevant to the specific information that firms should disclose, as this is the issue with the greatest variance in opinion based upon our review of comments.
In the same speech, Chairman Gensler may have offered a hint when he noted that “staff are looking into a range of specific metrics, such as greenhouse gas emissions, to determine which are most relevant to investors [emphasis added] in our markets.” If the Commission focuses on the view of investors in their review of the comment letters, it will find that investors generally support mandatory climate-related disclosures based upon TCFD recommendations with industry-specific disclosures that rely on SASB standards. Asset managers represent the largest group of investors, and they want climate-related disclosures to be furnished so that registrants can avoid the strict liability that comes with filing disclosures in annual and quarterly reports. Investors also advocate for the disclosure of quantitative metrics such as scope 1 and 2 emissions, but many investors have reservations around requiring scope 3 emissions.
Even if the SEC overweighs investor comments in their review, it does not necessarily follow that comments from Blackrock or Vanguard foreshadow the content of a final rule. While these firms manage trillions of dollars, they are also fiduciaries with a legal obligation to act in the best interest of their clients. Their clients include defined benefit and defined contribution pension plans, charities, foundations, and endowments, all of whom are exposed to the ravages of climate change and have a vested interest in a more sustainable planet. Therefore, by focusing on investors, the SEC can take a more expansive approach to mandating climate disclosures. Time will tell if they do.
Mario Olczykowski is a research assistant at the Global Financial Markets Center and the Climate Risk Disclosure Lab
Lee Reiners is the executive director of the Global Financial Markets Center and serves on the Climate Risk Disclosure Lab steering committee
 TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 448–449 (1976).