On climate, SEC can dictate but market will decide


NEW YORK, March 25 (Reuters Breakingviews) - Companies listed on U.S. markets report all kinds of information they’d rather not – like the chief executive’s salary as a multiple of the average worker’s pay, for example. A new draft proposal from the Securities and Exchange Commission to increase climate-related reporting would add many new items to that list. It’s a legal punch bag in the making. But if the market wants clarity and consistency, the substance of the SEC’s plan will happen even if regulatory fiat fails.

Chief watchdog Gary Gensler wants companies to disclose more, and in a more standardized way, on three broad topics: the risk climate change poses to the company itself, any plans it has to reduce emissions, and the amount of greenhouse gas it currently emits, or causes to emit. It’s the last bit that’s most controversial. Much of the rest is made public already, but is often relegated to “sustainability reports” or divulged in quirky ways.

Gensler is hardly sticking his neck out compared to overseers in Europe. The so-called Task Force on Climate-Related Financial Disclosures, a green reporting framework from which the SEC has taken its cue in a number of ways, becomes mandatory in the United Kingdom in April for large companies. The European Union has also been further ahead on the issue than the United States.

The problem for Gensler is that some of the edgier parts of his proposal may fall flat at home. Asking companies to disclose their Scope 3 emissions – those that come from suppliers or customers – is a minefield. Those numbers are hugely unflattering for oil companies, say, where carbon dioxide emissions can exceed 1 billion tonnes. But the data is also hard to collect, heavily reliant on forecasts and work done by consultants, and therefore more like an estimate than a fact. In an acknowledgement of how messy that is, Gensler is giving firms a couple of years to get this done, exempting small companies or those who don’t have Scope 3 reductions targets, and affording legal protection in case their early numbers are wrong.

Even that may not be enough leeway. Already, opponents have a multitude of potential arguments with which to challenge the rule in court. Those range from the idea that it’s beyond the SEC’s scope, or that the definition of what’s “material” to an investor is fuzzy, to the claim that forcing companies to communicate on such matters is a breach of their constitutional right to free speech. Even with a conservative, pro-business leaning Supreme Court, that sounds like a stretch. But it’s less of a long shot than it might have been in the past.

History suggests, though, that even when a regulatory push fails, it can still happen if the market wills it. Take the so-called proxy access rule in 2010, in which the SEC told companies to let long-term investors with more than 3% of the shares more easily propose their own board directors. The rule was overthrown by a court that deemed its formulation “arbitrary and capricious.” Yet investors pushed, and companies mostly ended up adopting the practice anyway. It’s now the norm for the vast majority of S&P 500 constituents.

Climate disclosure is likely to go the same way, with the market pushing for change even if the rule gets blocked in court. True, investors don’t always wield power, but those that do ought to support much of what Gensler wants. Giant asset managers like BlackRock (BLK.N) can much more easily – and profitably – sift, sort and create indices of companies that report data and outline emission-reduction plans in easily-comparable ways. More broadly, climate change is the number one topic for shareholder proposals in this year’s annual-meeting season, with 145 such motions counted by investor action group As You Sow, compared with 91 last year.

The most likely outcome is that change comes in steps. After all, the way companies disclose their executive compensation has taken shape over 90 years – including a broad change in 2006 that widened the net to include anything that’s intended as compensation, even if it doesn’t obviously look like it. Gensler may still be right to shoot for the moon. But even if he doesn’t manage to impose more transparency and accountability, the market eventually will.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)


- The U.S. Securities and Exchange Commission proposed rules on March 21 that would require listed companies to disclose a range of climate-related risks and greenhouse gas emissions.

- Companies would disclose their own direct and indirect greenhouse gas output – known as Scope 1 and Scope 2 emissions. They would also have to report emissions by suppliers and customers, categorized as Scope 3, if those are material or if the company has set a target to reduce them.

- The SEC can finalize the rule after a 60 day public comment period. Hester Peirce, one of four SEC commissioners, voted against the proposal, describing it as an edifice that would “cast a long shadow on investors, the economy and this agency.”

Editing by George Hay and Pranav Kiran

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