Trade Groups Seek Significant Changes to SEC Climate Proposal

The Securities and Exchange Commission wants to require public companies, including stock banks, to disclose climate-related risks to their businesses. But the impacts could be felt more broadly in the financial industry.

Banking and mortgage trade groups have called for the Securities and Exchange Commission to significantly revise or even abandon its proposal to require public companies to disclose climate-related risks.

In a letter commenting on the proposal, the Mortgage Bankers Association said the proposed framework did not appear necessary, noting that existing rules could ensure that investors receive climate-related information. In a separate letter, the American Bankers Association said the rules exceeded the SEC’s mandate to protect investors and called for the agency to significantly revise the proposal or create an entirely new framework.

“ABA believes a useful and operational climate disclosure framework can be achieved,” the ABA said in its letter. “However, the Commission needs to revisit this effort.”

The SEC’s proposed rules would require publicly traded companies to take a standardized approach to disclose climate-related risks to their businesses and other related information, a move the SEC had said would give investors more consistent, comparable and reliable information.

The rules would apply to public companies and those going through an initial public offering, though some businesses, including smaller ones, would not be subject to all requirements.

The proposed rules would require companies to provide specific metrics and disclosures on financial statements, including the impact of climate-related risks. They would also have to report – and have an auditor confirm – the company’s direct greenhouse gas emissions, known as “scope 1 emissions,” as well as “scope 2 emissions,” which involve sources for the company’s power supply. Some companies would also report on “scope 3 emissions,” which cover supply chains and, in the case of banks, could include investment and lending relationships.

The SEC accepted comments on the proposal until June 17.

In a 21-page comment letter, the Mortgage Bankers Association’s President and CEO Robert Broeksmit said the trade group shared the SEC’s objective of ensuring investors have information about climate-related financial risks that are useful for making decisions. But he added that the rulemaking proposed by the SEC did not “appear to be entirely necessary to achieve that objective.”

“Public companies already are required to disclose material information relevant to their financial condition and results of operations, which would include information regarding a company’s material climate-related financial risks,” Broeksmit said. “It appears, therefore, that the objective of ensuring companies disclose material information could be addressed under current rules.”

If the SEC does issue new rules, Broeksmit said, the agency should focus on the disclosure of information about material risks.

“The commission has long recognized that disclosure of immaterial information does not serve investors’ interests, and mandatory disclosure of immaterial information may mislead investors into believing the information is more important than it really is,” Broeksmit said.

The MBA made several recommendations about the proposed disclosures, including several related to scope 3 emissions. In addition to making disclosure of this type of emission voluntary, the MBA said the SEC should highlight that scope 3 emissions are not material unless there is “a specific and reliable relationship” between the company’s emissions and its levels of climate-related risk.

“This concept is important to MBA members because this is likely to be the case for Scope 3 emissions and climate-related risk,” Broeksmit said.

In a 33-page letter, Michael Gullette, the ABA’s senior vice president of tax and accounting, also said disclosures needed to be material and appropriate for a company.

“New standards for climate-related disclosures and accounting must conform to the long-held definition of materiality and also be scalable to the size and complexity of the registrant,” Gullette said. “A final rule must limit disclosure requirements for Scope 3 emissions to those explicitly included in a registrant’s material, publicly announced climate-related goals and sufficient safe harbors and transition time must be provided, given the nascent state of climate-related financial risk management.”

Gullette noted that regulated banks are analyzing the financial impacts of climate-related risks.

“Those efforts are appropriately focused on prudential concerns,” Gullette said. “In all cases, banks address the risks they face under close supervision and examination by their prudential regulators.”

He said that while the ABA supported the SEC’s efforts to provide investors with information useful for decision-making, a new proposal would be needed.

“[T]he Proposal is inconsistent with the foundational materiality concept and its detailed requirements are likely to add dramatic and significant costs to registrants and even many private companies, often without a significant improvement in decision-usefulness for investors,” Gullette said. “In other words, the Proposal emphasizes process – requiring costly disclosures to discourage lending to certain segments of the economy – over actionable, decision-useful information.”