What the SEC climate disclosure rule may mean for investors
Securities and Exchange Commission Chair Gary Gensler testifies before the Financial Services and General Government Subcommittee on July 19, 2023 in Washington. Win Mcnamee | Getty Images News | Getty Images

The Securities and Exchange Commission is poised to issue a final rule on Wednesday that would require companies to beef up disclosures around climate risks — a level of transparency that should help investors assess a company's value in a warming world, said experts. At a high level, the rule — initially proposed in March 2022 — would expand investors' insight into the threat that climate change poses to publicly listed companies and how businesses contribute to a warming planet. Climate disclosures would be made in annual filings companies make to the SEC, such as a Form 10-K, and in registration statements filed before an initial public offering. "I think climate disclosures have largely become table stakes for the investment community," said Lindsey Stewart, director of investment stewardship research at Morningstar.

Current climate disclosures are 'uncommon'

Ships on the Panama Canal on August 21, 2023. The Panama Canal Authority had reduced maximum ship weights and daily vessel transits to conserve water amid historic drought. Shipping experts fear such events could become the new normal as rainfall shortfalls highlight climate risks. Daniel Gonzalez/Anadolu Agency via Getty Images

Such data points are currently spotty. Publicly listed U.S. companies make climate disclosures on a voluntary basis, and they remain "uncommon in all but a few sectors," according to S&P Global. Corporations will likely be required to disclose short- and long-term physical risks, such as the impacts of hurricanes, droughts, wildfires, extreme heat and sea level rise, Stewart said. They'd also likely report "transition" risks from legal or regulatory changes, new technology and business practices that aim to adapt to a hotter world, he said.

watch now

Corporations would also be required to report their total greenhouse gas emissions, both created directly by a company and indirectly along its supply chain. The depth of that carbon reporting may be diluted from the SEC's initial proposal in March 2022 due to blowback and to insulate the rule from legal challenges, experts said. Overall, transparency around climate risk may be essential for investors to gauge if a company's stock is worth holding or if its stock price is reasonable, experts said — for example, is it too expensive given high exposure to climate risk, or perhaps fairly priced considering it's well positioned? "Investors want to be able to accurately price those risks and opportunities as they look medium and longer term at their investments," especially retirement investors who may have a timeline decades in the future, said Rachel Curley, director of policy and programs at the U.S. Sustainable Investment Forum.

Climate change is a 'momentous risk' to capital markets

A damaged gas station is taped off after Hurricane Idalia made landfall in Cedar Key, Florida, on Aug. 30, 2023. Christian Monterrosa/Bloomberg via Getty Images

Challenges are 'likely'

Congressional and legal challenges to the rule "are likely," Jaret Seiberg, financial services and housing policy analyst at TD Cowen, wrote Thursday in a research note. Last year, a group of House and Senate Republicans sent a letter to SEC Chair Gary Gensler criticizing the proposal, saying it "exceeds the [agency's] mission, expertise, and authority."

"Congress created the SEC to carry out the mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation — not to advance progressive climate policies," according to its three signatories, Rep. Patrick McHenry, R-N.C., Sen. Tim Scott, R-S.C., and Rep. Bill Huizenga, R-Mich.

Carbon emissions accounting is contentious

Smoke from a coal-fired power station. Chris Ratcliffe/Bloomberg via Getty Images

One particularly contentious area involves the depth of greenhouse gas reporting, experts said. The SEC proposal outlined three tiers of emissions disclosures: Scopes 1, 2 and 3. Scope 1 emissions are direct. They're caused by operating the things a company owns or controls: for example, by running machinery to make products, driving vehicles, or heating buildings and powering computers, according to the World Economic Forum. Scope 2 emissions are indirect. They're created by the production of energy that an organization buys, the WEF said. Companies can cut Scope 2 emissions by installing solar panels or using renewable energy rather than using electricity from fossil fuels, for example, it said. Scope 3 emissions are also indirect but broader: They include emissions "up and down [a company's] value chain," according to Deloitte. For example, they may "be emitted by a company's suppliers of raw material, or when a consumer uses a company's products," S&P Global wrote.

I think climate disclosures have largely become table stakes for the investment community. Lindsey Stewart director of investment stewardship research at Morningstar