By Bill Flook
Sen. Brian Schatz, a Hawaii Democrat, called on the SEC and other financial regulators to immediately put in place a series of climate-related reforms recommended by a recent Commodity Futures Trading Commission (CFTC) report, including requiring expanded public company disclosure of climate risk.
The CFTC’s Climate-Related Market Risk Subcommittee on September 9, 2020, approved the report, titled “Managing Climate Risk in the U.S. Financial System,” which contains more than 50 recommendations.
Schatz, one of the Senate Banking Committee’s most vocal climate hawks, in a statement called the report a “wake-up call” that climate financial risks are real.
“They will destabilize our financial system and the whole U.S. economy if left unchecked,” Schatz said. “We need the Federal Reserve, the SEC, and our other regulatory agencies to immediately move forward with the recommendations in this report—including climate risk stress testing and mandatory public company disclosure of climate risks and emissions.”
The report concluded that, in general, regulators already have “wide-ranging and flexible authorities” from Congress to begin addressing climate risk, but are not fully utilizing them.
Corporate disclosure of climate risks, the report stated, is an essential building block to ensure climate risks are measured and managed effectively. The existing regime, however, has not yielded disclosures “of a scope, breadth, and quality to be sufficiently useful to market participants and regulators.”
“Large companies are increasingly disclosing some climate-related information, but significant variations remain in the information disclosed by each company, making it difficult for investors and others to understand exposure and manage climate risks,” the report stated. It said public companies should have a clearer definition of materiality when it comes to medium- and long-term climate risks.
The CFTC report suggests the SEC’s most recent climate guidance from 2010 could be updated to keep up with global advancements, arguing the guidance has not produced high-quality disclosures from public companies.
The SEC last issued climate guidance in 2010 in Release No. 33-9106, Commission Guidance Regarding Disclosure Related to Climate Change. In the guidance, the commission said companies should inform investors about the risks they face from climate change, including lawsuits, business problems, regulatory supervision, or international treaties. The significant effects of climate change, such as severe weather, rising sea levels, loss of farmland, and the declining availability and quality of water, have the potential to affect a public company’s operations and financial results and should be disclosed.
Schatz is a cosponsor on Sen. Elizabeth Warren’s Climate Risk Disclosure Act, a measure filed in July 2019 that would broaden the information that issuers must disclose about both their contribution to climate change and the risks a warming planet pose to their business.
Also under the bill, the SEC would have two years to set out rules that “establish, in consultation with the appropriate climate principals, climate-related risk disclosure guidance” that is specialised for specific sectors of the economy. Those sectors must include finance, insurance, transportation, electric power, mining, non-renewable energy, and any other sector deemed appropriate by the SEC. The commission would need to issue reporting standards for “estimating and disclosing direct and indirect greenhouse gas emissions” by an issuer, among other disclosures.
“These disclosures, however, do not require legislation,” Warren, a Massachusetts Democrat, wrote in an August 12 letter to SEC Chairman Jay Clayton, pointing to the commission’s existing authority under the Securities Exchange Act of 1934.
This article originally appeared in the September 14, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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