Advisers, experts welcome more climate-risk transparency for companies

The SEC's proposed regulations would help connect severe climate activity to business costs

Investment advisers and fund analysts are hopeful mandatory reporting by public companies regarding climate change will give investors information they need and benefit society.

The Securities and Exchange Commission on Monday released a 510-page proposal that for the first time would require for companies registered with the agency to disclose how climate risks affect their businesses and how their operations affect the climate.

The regulation includes provisions that compel companies to report greenhouse emissions produced by their commercial activities, their energy purchases and by their supply chain.

Many companies already provide environmental information to the public on a voluntary basis. The SEC’s proposal, which was released on a 3-1 vote, would mandate such disclosures across most of corporate America.

Sarah Adams, chief sustainability officer and co-founder of Vert Asset Management, used the example of inconsistent reporting among real estate investment trusts. The SEC rule would help ensure everyone is giving investors the same type of information about how climate influences land acquisition and other decisions.

“It levels the playing field,” Adams said. “It lifts everybody up.”

The proposed disclosures will provide insights that investors and others are seeking about the intersection of climate change and the economy, said Ethan Powell, founder of Impact Shares, a registered investment advisory firm that develops environmental, social and governance funds for advocacy organizations.

“Any time there are more transparent and open conversations about how we’re affecting the world around us and how the world around us is impacting society, we can be more intentional with how we view the cost of doing business,” Powell said. “The information helps every stakeholder in a company, including consumers, investors and suppliers.”

Megan Kopka, owner of Kopka Financial, welcomes more pressure on companies to disclose how they’re affecting the environment. She’s convinced that toxic water in the Wilmington, North Carolina, area where her firm is located contributed to her husband’s death.

“It’s a good start in the right direction,” Kopka said. “I hope the purchasing power of the public will lead to changes at companies and make them more responsible and accountable.”

The SEC proposal already has generated strong opposition. Republican SEC Commissioner Hester Peirce tore into the proposal at Monday’s SEC open meeting, reflecting skepticism on the right. Peirce said the proposal bolsters the agenda of climate activists but isn’t grounded in the materiality that has always been the foundation of SEC financial disclosures.

But Aron Szapiro, head of retirement studies and public policy at Morningstar Inc., said the proposal is answering a need for environmental information in the financial markets.

“We absolutely think there is demand for this,” Szapiro said. “Standardization, consistency, comparability and completeness are important for investors to understand [climate] risks.”

If the proposal is adopted by the SEC, it will help connect severe climate activity, such as extreme heat, floods and hurricanes, to business costs like building new irrigation systems, Adams said. Climate catastrophes will no longer simply be labeled force majeure.

“Climate risk is something to be acknowledged,” Adams said. “Let’s stop being surprised by continual droughts.”

The proposal wouldn’t make climate risks transparent overnight. There’s a phase-in period for proposed disclosures of about one to four years, depending on company size. There also are exemptions for smaller companies when it comes to supply-chain greenhouse gas emissions and a safe harbor for that provision as well.

There are plenty of details to explore in the complex proposal over the 60-day comment period.

Jasmine Sethi, associate director of policy research at Morningstar, said the SEC shouldn’t go too far in allowing companies to choose how to disclose climate risks.

“You don’t want a range of discretion that creates bad data,” Sethi said.