Better information leads to better decisions — this is the idea behind a regulatory device known as “mandated disclosure.” Mandated disclosures are all around you, from calorie counts on fast food restaurant menus to conversations with doctors around informed consent.
The U.S. Securities and Exchange Commission’s proposal to expand these ideas to the climate impacts of U.S.-listed companies may be the most significant experiment in mandated disclosure. Climate disclosure rules would require publicly traded firms to disclose information to investors about their emissions, how they manage climate risks and future regulations.
It is not difficult to spot climate-related risks facing companies such as ExxonMobilThis company produces and sells fossil-fuel products that contribute to global heating. hidden vulnerabilities existBusinesses across the U.S.
Largely as a result of investors clamoring for more informationLearn more about climate risks as well as pressureFrom green groupsThey believe disclosure will encourage climate-conscious investment SEC Chair Gary Gensler announcedThe commission would use its statutory authority in 2021. require climate-related disclosures.
The SEC now plansTo consider proposals for climate risk disclosure rules at its March 21, 2022, meeting.
We are law scholars. work on legal issues involving businesses and regulation. Here’s what you need to know about climate disclosures and some of the challenges the SEC faces in adopting them.
What Investors Want to Learn
Investor pressure to get better information on climate impacts comes in two directions.
First, investors may want to avoid companies that are likely to be affected by climate changes. The company’s products may be regulated in the futureBecause of their effect on the climate, or its supply chain may become more expensive over time. Investors want information about which businesses can adapt and retain profitability.
Second, many investors are interested in ESG investing, which involves assessing companies’ commitments to environmental, social and governance factors. Today, ESG investingAccounts US$17.1 trillion — or 1 in 3 dollars — of the total U.S. assets under professional management. The SEC’s challenge is to ensure that claims about the sustainability of a company do not become untrue. based on reality.
There has been a lot of voluntary disclosure as a result of the trend towards ESG investments About 90% of companiesIn the S&P 500Publicate voluntary reports that disclose statistics such as carbon emissions and the amount of renewable energy they use.
Some large investors require disclosure. For example: BlackRockThe, a multi-national asset manager with approximately $10 trillion under its control, requires companies that it invests in to disclose certain climate data. The United KingdomPlans to require climate disclosure beginning in April 2022 and the European UnionReporting rules are in place.
The U.S. has taken a long time to establish mandatory climate disclosure requirements. Public companies have been subject to a much more general disclosure requirement. legal standardThey did not materially mislead the investors. The SEC released guidanceIn 2010, to encourage climate disclosures it was unenforcedFailure to prompt standard disclosures.
Rule Benders and Effectiveness of Disclosure
Research on the wider application of mandated disclosure, such is for home mortgage lending consumer product labelingThis shows that it is difficult to craft effective disclosure regulations.
One reason is that companies can evade disclosing relevant information while still adhering to the letter of law. These “rule benders” can be very creative. Take this example: A New York City restaurant was subject to a regulation regarding health inspection grading. disguise its “B” rating by simply adding “EST” to its display of its grade. Disclosure regulations can also fail when they don’t effectively communicate valuable information.
A study of one type of climate disclosure – emissions labels on consumer products – found mixed evidence as to whether consumers altered their behavior in response. Rule-bending is possible human tendenciesYou can either ignore or filter out warnings by giving excessive information that confuses and overwhelms recipients.
Expect Court Challenges
One challenge the SEC has grappled with is whether it has statutory authority to require companies to disclose their “Scope 3” emissions. These are emissions that a company doesn’t directly control, such as emissions from the use of its products or emissions in its supply chain.
A company like Amazon may have extensive upstream Scope 3 emissions in its suppliers’ transportation networks. General Motors would have significant downstream emissions when its gas-powered vehicles are driven.
The SEC’s three Democratic commissioners, who make up a majority of the commission, have reportedly split on whether certain Scope 3 emissions can be viewed as “material” to investors and therefore subject to disclosure.
“Material” is definedInformation that a reasonable person would consider to be important in making an investment decision.
There are some critics of climate disclosures including several Republican state attorneys generalThis suggests that the SEC is not authorized to require disclosures that aren’t financially relevant. Missouri’s attorney general wrote that requiring climate reporting would impose “large costs and administrative burdens” on publicly traded companies. A group of senators suggested that assets related to greenhouse gases would be added to the stock exchange. shift to private companies. West Virginia’s attorney general threatened to sue the SEC.
There would be a range of costs associated with disclosure. Some companies already monitor their emissions closely. Scope 3 emissions would result in high costs for many others. For example, an oil company might be required to measure emissions from all the vehicles using its fuel.
The Administrative Procedure Act allows courts the ability to revoke SEC rules. deemed arbitrary or capriciousBecause the agency did not provide sufficient justification to choose the proposal over other options. This risk is well known to the SEC. An earlier oil and gas extraction disclosure rule was invalidatedA court in 2013 deemed it arbitrary-capricious.
The SEC’s forthcoming climate risk disclosure rule will not be the final effort to use information to shape the private sector’s response to climate change.
The future moves of the SEC will be affected by what the SEC does right now. It is no surprise that it is taking its time, and proceeding cautiously.
This article has been republished from The ConversationUnder Creative Commons license Read the original article.