Statement on Final Rules Regarding Mandatory Climate Risk Disclosures

Today, the Commission is considering whether to adopt final rules to mandate climate risk disclosures by public companies and in public offerings. I am pleased to support this adoption because it benefits investors and issuers alike. It would provide investors with consistent, comparable, decision-useful information, and issuers with clear reporting requirements.

Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take so long as companies raising money from the public make what President Franklin Roosevelt called “complete and truthful disclosure.”

The SEC has an important role overseeing the disclosures at the core of that basic bargain. Our agency, though, was set up to be merit neutral. Thus, the SEC has no role as to climate risk itself.

Over the last 90 years, we have updated, from time to time, the disclosure requirements underlying the basic bargain and, when necessary, provided guidance with respect to those disclosure requirements. We did it in the 1960s when we first offered guidance on disclosure related to risk factors.[1] We did so in the 1970s regarding disclosure related to environmental risks.[2] We did so in 1980 when the agency adopted Management’s Discussion and Analysis (MD&A) sections in Form 10-K.[3] We did it again in the 1990s when we required disclosure about executive stock compensation.[4] And we did it as well when the Commission issued 2010 Climate Guidance about climate-related risks faced by public companies.[5]

Of course, there was lively debate about each of these disclosure requirements. Today, though, they have become integral to our disclosure regime, and it’s hard to imagine investors not having access to them. There also has been lively debate about today’s climate rule.

Consistent with this agency’s disclosure rules over the decades, today’s final rules are grounded in materiality. Materiality represents a fundamental building block of the disclosure requirements under the federal securities laws. The Supreme Court articulated the meaning of materiality in cases in the 1970s and 1980s.[6] It is this standard of materiality that is reflected in Commission rules.[7] It is this same materiality standard that appears in numerous disclosure rules governing registration statements and public company annual reports.[8] It is this same materiality standard that is used throughout the final rules we’re considering today.

A lot has changed in the last 14 years since that 2010 climate guidance. Far more investors are making investment decisions that are informed by climate risk, and far more companies are making disclosures about climate risk.

Already 90 percent of the Russell 1000 issuers are publicly providing climate-related information, though that’s generally in sustainability reports outside of their SEC filings.[9] Further, nearly 60 percent of those top 1,000 companies are publicly providing information about their greenhouse gas emissions.[10] Investors ranging from individual investors to large asset managers have indicated that they are making decisions in reliance on that information.[11]

It’s in this context that we have a role to play with regard to climate-related disclosures.

Our vote today is on rules, not just guidance, and ones that require disclosures be filed, not just posted online. Today’s rules enhance the consistency, comparability, and reliability of disclosures.

The final rules provide specificity on what must be disclosed, which will produce more useful information than what investors see today.

Further, the final rules require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements. Bringing them into the filings will help make them more reliable. There are standard controls and procedures for filings unlike for sustainability reports.

Consistent with our mission and Congressional mandate, today’s adopting release addresses climate risk disclosures in three important ways.

First, the final rules update Regulation S-K to require disclosure of material climate-related risks faced by a company as well as any governance and processes used by the company to manage climate-related risks. In addition, if a company uses transition plans, scenario analysis, or internal carbon prices to manage a material climate-related risk, the final rules require disclosures about such use. Further, a company will be required to disclose material climate-related targets or goals (if a company has them), plans for achieving those targets or goals, and annual progress. As part of these disclosures, the final rules will require disclosures in Regulation S-K of material expenditures directly resulting from activities to mitigate climate-related risks as well as transition plans and targets or goals.

Second, the final rules will require larger registrants, specifically large accelerated filers and accelerated filers, to disclose direct emissions (Scope 1) and emissions associated with energy purchases (Scope 2) when those emissions are material.

Registrants also will be required to file an attestation report with their Scope 1 and 2 emissions. Such attestation reports will improve accuracy and reliability of those metrics as well as the key assumptions, methodologies, and data sources.

In the proposal, we took a layered approach to disclosure of Scope 3 greenhouse gas emissions. While many investors today are using Scope 3 information in their investment decision making, based upon public feedback, we are not requiring Scope 3 emissions disclosure at this time.

Also, to address concerns raised by commenters, the rules will allow registrants more time to file emissions disclosures. Registrants will be allowed to file those disclosures with their second quarter report the next fiscal year.

Third, the final rules require important financial statement footnote disclosures on expenditures resulting from severe weather events. Companies will be required to disclose capitalized costs, expenses, charges, and losses as a result of such events. These disclosures will give investors insight into the financial impact on companies today and provide important context for understanding companies’ forward-looking disclosures in Regulation S-K.

As the release notes, many U.S. issuers that have overseas operations may have to comply with other jurisdictions’ climate disclosure rules. I think today’s action is an important step for our U.S. capital markets. I think it’s important to have U.S. standards to which U.S. issuers can point.

These rules will enhance the disclosures that investors have been relying on to make their investment decisions. Issuers and investors will benefit from the consistency, comparability, and reliability of these disclosures.

I’d like to thank members of the SEC staff for their work on these final rules, including:

• Mellissa Duru, Luna Bloom, Elliot Staffin, Kristin Baldwin, Valian Afshar, Almaze Semere, Dennis Hermreck, Nolan McWilliams, Grace Baer, Lindsay McCord, Ethan Horowitz, Robert Errett, Deegi Biteng, Adam Turk, Ted Yu, Liz Walsh, Duc Dang, Brad Skinner, Mike Reedich, Kat Bagley, Cheryl Brown, Jeb Byrne, Nabeel Cheema, John Fieldsend, Jason Weidberg, Michael Coco, Angie Kim, Charli Gibbs-Tabler, and Chris Windsor in the Division of Corporation Finance;
• Jonathan Wiggins, Shaz Niazi, Anita Doutt, Gaurav Hiranandani, Erin Nelson, Meagan Van Orden, Mamta Soni, Vassilios Karapanos, Shana Wolfson, and Jeanne Riggs in the Office of the Chief Accountant
• Ruoke Yang, Minyoung Pyo, Erin Smith, Oliver Richard, Lauren Moore, Rebecca Orban, Sam Croffie, Mikhail Pevzner, Missaka Warusawitharana, Giulio Girardi, Charles Woodworth, Dwi Sianto Mansjur, Parhaum Hamidi, Julie Marlowe, Anthony Santoro, Jim Yu, Maciej Szefler, Ryan Brady, Mengxin Zhao, Asaf Bernstein, Phillip Sporrer, Evan Avila, Sam Dannels, and Michael Davis in the Division of Economic and Risk Analysis;
• Bryant Morris, Leila Bham, Evan Jacobson, Michael Killoy, Peggy Kim, Eduardo Aleman, Hillary Holman, Tracey Hardin, Daniel Staroselsky, John Rady, and Samuel Goldstein in the Office of the General Counsel;
• Diana Tani, Monique Winkler, Ryan Wolfe, Ian Rupell, and Dana Schwartz in the Division of Enforcement;
• Kathleen Hutchinson, Morgan Macdonald, Eileen Radford, and Emily Albertson in the Office of International Affairs;
• Laurita Finch and Lidian Pereira in the EDGAR Business Office.