May. 08, 2022
May 8, 2022
The SEC's proposed rule for disclosures of climate risk is sensible. I'd like to submit a few comments as an environmental professional working in the GHG space.
The SEC should decide upon some set time horizons for climate change trajectories businesses report under. If this rule is to protect investor interests, then ensuring comparability of disclosures is necessary. In my experience reviewing climate risks and GHG emissions (note that this comment is submitted personally and is not affiliated with my employer), I've found mid-century and end-of-century are sensible time horizons to focus on. Short-term climate change projections in the next-5-year horizon the SEC offers in the rule don't seem to be as available or as reliable as longer-term climate model projections.
I would say that different time horizons make sense for different aspects of the disclosures here. For example, a business can more reliably predict energy demands in its business strategy and generally survey their energy providers to lower carbon emissions in the near-term (5 years, let's say) than they can analyze climate change projections on the same time horizon. Therefore, I would like to recommend that the SEC consider breaking out the time horizons for the disclosure based on what is technically and otherwise feasible to ensure the best information is included in company disclosures. A few suggested categories demanding custom time horizons: 1) climate resilience planning (next 5 years, 10 years, 15-20 years, etc.), 2) projected climate change effects on relevant critical business assets (10 years, 30 years, 50 years, 100 years, etc. as the science allows), 3) energy portfolio adjustments (any time horizon, as this is a business plan), 4) investment planning for shifts in lo
wer-carbon infrastructure (any time horizon as this is a business plan), and 5) business strategy planning (any time horizon as this is a business plan).
At a minimum, if the SEC opts to allow a business to choose its own time horizon and other assumptions in their disclosure, then some standardization in the assumptions should be performed. Those assumptions should appear in a standardized form in the structured data for the disclosure.
Another matter that I feel should be more flushed out in the present rule is the structured data requirement outlined in section K. The use of standard data format is essential to allow anyone attempting to compare different disclosures. I would like to recommend that the SEC consider requiring additional metadata in disclosures that is comparable across business disclosures. For example, estimated GHG emissions by Scope would allow for a quick comparison across businesses using a definition of emissions already in the current environmental parlance. Additional information might be various risk metrics that the SEC might look into as the rule progresses. Examples might be fire risk, flooding risk, and supply chain disruption risk over a business's supply chain. These metrics would need to be high level, but metadata on these risk metrics in a structured data format would be very useful for anyone using disclosures for comparisons.
An additional requirement the SEC is proposing that may require adjustment is Scope 3 emission disclosures. Scope 3 emissions have historically been the most difficult emission category to estimate to any accurate level. Additional time for Scope 3 emissions disclosures may be useful, and I would like to recommend a working group or some other collaboration between various governmental agencies and private partners (disclosing companies and NGOs alike) to determine acceptable Scope 3 emission estimate practices. I would like to point out that a business estimating Scope 3 emissions likely doesn't have all public companies supporting its supply chain. If a company in the disclosed supply chain doesn't have climate disclosure requirements, then estimates of those emissions would be difficult for the disclosing business. What's more, indirect impacts on small businesses may be less able to perform costly GHG estimations or climate risk analyses. Consideration of these matters in the pro
posed Scope 3 Safe Harbor proposal and establishing a working group across stakeholders would be prudent path forward for the present rule.
Another item the SEC has solicited comment on is the allowance for a business to disclose climate change opportunities. This allowance seems acceptable, but the requirements for climate opportunities in a disclosure should require additional scrutiny of the science that's gone into establishing a proposed climate opportunity. Safeguards to prevent abuse of climate opportunity disclosures to veil climate risks should be in place.
I would also like to comment on some of my experience in reviewing company policy on climate change that may be useful for the SEC's consideration. I have found intersectional issues in climate change to be paramount for consideration - for example, mitigation of climate change via electrification or infrastructure investment can also be good for climate resilience by safeguarding a company against climate stresses and shocks. SEC disclosure requirements requiring companies to disclose how they've considered the intersection of climate mitigation and climate resilience in their business strategy could be excellent information for investors to see in potential investments.