The U.S. has left open the question of whether it will join the international effort to set baseline reporting standards for how public companies disclose information about their impact on the environment, their employees and society.
A proposal this week to require companies listed on American exchanges to detail climate risks to investors did not call for the creation of a U.S. green standard setter. Rather the Securities and Exchange Commission leaned on the Task Force on Climate-related Financial Disclosure (or TCFD) as the basis for its draft rule.
The goal is to base the rule on what companies already use to craft their sustainability reports, SEC Chairman Gary Gensler told reporters.
While the SEC’s proposal marks a sweeping shift in the type of information public companies must share with investors, it won’t end demands for details about clean water, resource management or other environmental topics. The proposal is a response to investor pleas for more detailed and reliable information about how corporations address environmental, social and governance (ESG) matters, often covered in voluntary reports that they post on their websites.
Companies are expected to need reporting standards that go beyond the SEC’s detailed climate rule, regardless of its final form or fate.
“There’s a lot more work to be done still on harmonizing standards,” Paul Washington, executive director of the ESG Center at the Conference Board, said of the SEC proposal. “This is an important word, but it’s certainly not the final word.”
A Framework to Build Upon
Washington said it’s helpful that the U.S. didn’t try to come up with its own competing standards but relied on an existing framework focused on climate. But climate is a subset of more than 80 environmental issues that companies could discuss in sustainability reports, he said.
The SEC isn’t going to tell companies how exactly to measure or report carbon emissions, and it is unlikely to stand up a U.S. standard setter who would provide that deeper guidance. That presents an opportunity to leverage the work of the newly created International Sustainability Standards Board, said Robert Eccles, who helped to launched two similar reporting entities, and whose work will form the basis for the ISSB’s standards.
“What’s important about what the SEC has done is it’s a framework, it’s an argument,” Eccles said. “They’ve gone as far as they think they can. Even if it all gets rolled back, they’ve basically given very good guidance as to what they think good reporting would be on climate.”
The SEC’s proposal asks if the commission should accept reporting based on the ISSB’s planned standards, including for U.S. companies, but especially for international firms that may face similar requirements in other countries.
Both the SEC’s and the ISSB’s proposals build on the climate task force’s recommendations, a voluntary framework to help companies report and assess global warming risks. Feedback on both proposals would help to ensure consistency between individual country requirements and global reporting standards, the IFRS Foundation, parent of the new board, said in a statement.
Michael Bloomberg is chairman of TCFD and controls entities that operate Bloomberg Tax.
Global Guidelines Emerging
Demand for more in-depth reporting standards will mount along with the risks of climate change, and with it the need for a separate entity to set those reporting standards, said Alan Jagolinzer, accounting professor at the University of Cambridge.
“We’re all trying to figure out what actions are required, what measurements can we do and get trust around, and how do we report that,” Jagolinzer said. “Having multiple entities trying to think through these questions is important.”
While other frameworks may provide useful information, standardizing reporting for greenhouse gas emissions marks a significant improvement for investors, said Jasmin Sethi, associate director of policy research at Morningstar Inc.
For disclosures to be useful for investors, the information has to be based on the same standard to provide comparable data to analyze. And investors want to compare those disclosure not just across U.S. listed companies, but globally.
The SEC seems to be moving in the same direction as Canada and Europe, which have both proposed climate reporting requirements, Sethi said.
“We definitely support having global consistency,” she said. “We’re dealing with global companies. Investors are looking at things from a global perspective.”
The work of the ISSB, including a prototype standard released last year, factored into the regulator’s work on its disclosure proposal, which aims to give investors reliable information about companies’ climate risks, Gensler said. “We were informed by it, but in all cases we made our independent choices.”
Gensler said he had compared notes with regulators from a dozen countries in recent months to understand how they might address climate reporting—including whether to require verification of the data and what type of emissions companies should disclose.
The SEC wound up referencing the climate task force because it is widely used by companies and has informed policies in countries including the U.K. and Japan. “We’re all looking within our markets and within our laws to try to bring some consistent comparable disclosures,” he said.