A new report published by the Climate Risk Disclosure Lab profiles the climate-related disclosure practices of three publicly traded companies and provides detailed information on the resources—in terms of time, personnel, and money—it takes to produce these disclosures. The report’s findings can inform SEC staff as they consider outstanding issues before releasing a proposed mandatory climate-related disclosure rule in early 2022.
Multiple procedural requirements are necessary to successfully issue a proposed SEC rule, including the completion of a comprehensive economic analysis, or cost-benefit analysis (CBA). A 2012 SEC staff memo lists four basic elements of a good regulatory economic analysis. The Lab’s report focuses on one of these elements—an evaluation of the benefits and costs—with a particular focus on the potential costs to registrants of complying with a mandatory climate disclosure rule.
“The case studies included in this report provide unprecedented insight into the resources it takes for some public companies to compile and disclose climate-related risks,” said Lee Reiners, the report’s co-author and executive director of the Global Financial Markets Center at Duke Law. “I believe they will contribute to the development of a climate disclosure rule whose benefits clearly outweigh the costs.”
Under the Administrative Procedure Act, a court can invalidate agency action, such as rulemaking, that is “in excess of statutory jurisdiction” or is determined to be “arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law.” In response to legal challenges, the US Court of Appeals for the District of Columbia Circuit has invalidated several SEC rules as “arbitrary and capricious” due to a perceived failure of the SEC to conduct an adequate CBA. Therefore, it is important that the administrative record accompanying a mandatory climate disclosure rule provide cost data at a granular level.
This report provides the best available evidence of the costs of a potential SEC mandatory climate-related disclosure rule. The case studies included within highlight that consistent, comparable, and reliable climate disclosures are necessary; that the marginal cost to publicly traded firms of mandatory climate disclosures are minimal; and that the benefits of a well-crafted and well-reasoned climate risk disclosure rule far outweigh any potential costs imposed on the private sector.