Materiality, Scope 3 emissions elicit debate in SEC climate rule comments

The comment period on the rule closed June 17, and the SEC indicated in its spring rulemaking agenda it will take a vote in the fall. Experts who have followed the debate closely expect there will be legal challenges if the agency passes the rule—a near certainty given its 3-2 Democratic majority under Chair Gary Gensler.

The rule is a sweeping potential mandate that would force all public companies to quantify, measure, and disclose their effect on the environment. It would order public companies to include disclosures about how climate-related risks affect their strategy, business model, and outlook; how the company’s board and management oversee climate-related issues; and any plans for transition to a lower carbon footprint.

Debated among industry groups and companies in comments to the SEC is whether the climate-related disclosures would be grounded in materiality.

In a June 16 comment letter, the U.S. Chamber of Commerce said the proposed rule “would result in extensive disclosure of non-material information that is not useful to investors.”

“The Chamber believes companies should disclose climate risks when material, and the SEC can provide companies with valuable structure and direction as to how to do so. A consistent theme of this comment letter, however, is that the proposed rules are too much, too soon and too inflexible,” wrote Tom Quaadman, chamber executive vice president.

In a June 22 comment letter, Bloomberg L.P. argued the information that would be disclosed to investors on climate-related risks and opportunities is material to investors’ understanding of individual investments.

“The proposal’s required disclosures of climate-related risks are necessary to allow for a robust and consistent analysis of the financial impacts associated with climate change on business strategy, financial planning, and operations,” wrote Gregory Babyak, Bloomberg’s global head of regulatory affairs. Bloomberg tracks environmental disclosures by more than 13,000 international companies representing 88 percent of global market capitalization, and Babyak noted, “For these companies, there is significant variability in the level of disclosure of climate risk.”

Another contentious point is that the SEC’s requirements are onerous and will be costly to implement.

The agency estimated costs for large companies in the first year of compliance to be around $640,000 and annual costs in subsequent years to be $530,000. It estimated assurance costs for large companies to be at least around $75,000 to $145,000.

“If the rules were to be finalized as proposed, we believe actual costs would be much higher than the estimates outlined in the proposal,” wrote Paul Noe, vice president for public policy for the American Forest and Paper Association, in a June 17 comment letter.

Noe stated, “The SEC should not create new financial accounting rules on climate change at this time,” and he added the rule as proposed contains requirements that are “extremely far-reaching, granular, complex, and prescriptive while requiring innumerable assumptions, estimates, and judgments in the face of major data limitations and speculative impacts.”

Shiva Rajgopal, professor of accounting and auditing at Columbia Business School, argued in a June 12 comment letter the climate risk disclosures would represent “modest compliance costs” that are far outweighed by the benefits to the company and investors.

“These compliance costs will be more than made up by even a minimal reduction in estimation risk an investor faces in understanding the exposure of a firm to physical and transition risks associated with climate change,” Rajgopal wrote. “… Mandatory audited disclosures that assure an investor that a particular company is not materially vulnerable to climate risk would reduce the estimation risk and cost of capital for such a firm as well.”

One more controversial area of the proposal is the inclusion of Scope 3 greenhouse gas (GHG) emissions by vendors, suppliers, and customers that some businesses deem too difficult to quantify.

In a June 17 comment letter, ExxonMobil Corp. argued Scope 3 GHG emissions should be excluded from the disclosure rule.

“The SEC should allow the scientific/technical approaches to mature to create a more sound measure of emissions measurement that recognizes demand, life-cycle emissions, and product substitution impacts,” wrote ExxonMobil Senior Vice President and Chief Financial Officer Kathryn Mikells.

A group of state attorneys general remarked in a June 17 comment letter removing the requirement to disclose Scope 3 emissions would gut the rule.

“We support the SEC’s decision to require large accelerated filers to disclose their Scope 3 GHG emissions if those emissions are material or if those emissions are part of a transition plan,” wrote California AG Rob Bonta in a letter signed by attorneys general from 18 other states and the District of Columbia. “Many registrants’ Scope 3 GHG emissions are by far the most significant portion of the GHG emissions associated with their business.”