Comment on the SEC climate disclosure rule

June 17, 2022
Article

Why the SEC’s proposal is a critical piece in the global fight against climate change.

The public comment period on the proposed SEC rules requiring climate disclosure has just closed. Republicans voicing opposition to the SEC’s proposal maintain that disclosures should remain voluntary, citing undue financial burden to already strained businesses for compliance costs. Other critics call into question the SEC’s purview to regulate climate-related risks and emissions data, doubting the agency’s authority and ability to regulate a subject matter with which they have little expertise or experience.

I want to take a quick minute to talk about why the SEC’s proposal is a critical piece in the global fight against climate change.

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Climate risk is financial risk 

Don’t take this premise for granted. It’s critical and, at this point, observable and undeniable. Now that we’re witnessing in real-time the increased frequency of extreme weather events and the vast, costly destruction they cause, it’s clear that climate risk does not just threaten the intrinsic value of our planet but the economic value as well. Every year in the U.S., we see tens of billions of dollars of damage to property, commodities, and supply chains caused by storm surges, wildfires, and drought. Quite frankly, it’s too expensive not to act. 

Disclosures are an effective tool for managing risk

When we think about the original goals and mandate of the SEC to manage risk in the public securities market, it’s logical for it to expand that oversight to climate-related risks, given the known impact they have on the long-term value of a company. By requiring companies to disclose these risks, investors can make informed decisions on how to deploy capital, and markets can properly value the financial impact of these exposures.

Ensuring accountability and validity to claims 

The current state of sustainability reporting is inconsistent. Companies self-report, often cherry-picking criteria and which boundaries of their organization to include. By standardizing climate disclosure—particularly carbon emissions—with the organizational boundaries established in the 10-K, companies are forced to take stock of their entire operation. Where sustainability reports often present the most flattering picture, regulated disclosures require the whole picture, which is critical to maintaining integrity as companies set targets and celebrate progress.

How else will we achieve net-zero?

A significant portion of the global economy—one-sixth of GDP and 76% of global emissions—has committed to net-zero targets. How can we reasonably monitor, let alone achieve progress towards these goals, without compelling companies to disclose their emissions? It’s an apt time to quote Peter Drucker, “You can’t manage what you don’t measure”. Leaders of the global community have agreed that we need to maintain warming well below 2° C, ideally to 1.5° C, to avoid devastating and irreversible impacts of change. Now is the time to adopt the enforceable policies critical to get us there.

As for the argument that compliance costs are burdensome for small companies, I turn to my friend and expert, Columbia Business School Kester and Byrnes Professor, Shiva Rajgopal. His recent Forbes post offers a thorough analysis of the financial feasibility of the proposed rule as an insignificant proportion of market capitalization.  

For those looking for a more straightforward rationalization, just think about the financial burden of doing business in a world with volatile fuel prices, unstable energy markets, and interrupted supply chains. Annual disclosure feels like a drop in the bucket compared to the global economic dystopia of climate change.  

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Author
Alyssa Rade
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The takeaway

You can’t manage what you don’t measure