Climate change is already impacting or is expected to impact nearly every facet of the U.S. and global economy, including energy production, infrastructure, agriculture, residential and commercial property, and product supply chains, as well as human health and labor productivity. Climate change poses major risks to companies and their investors, including physical risks to real assets due to increasing frequency and severity of extreme weather events and transition risks posed by changes in regulation, technology, and market preferences as we shift to a net zero economy. The financial impacts of physical and transition risks may affect revenues and expenditures, assets and liabilities, and access to capital and financing. For example, a 2019 survey of 215 of the world’s 500 largest companies found nearly $1 trillion in reported financial risk from climate change. When Ceres examined climate risk exposure in just the syndicated loan portfolios of the largest U.S. banks, we found that the portfolios had $250 billion in annual exposure to physical risks, and that more than half of bank lending is exposed to transition-related climate risk.  

At the same time, climate change provides economic opportunities. The International Energy Agency estimates that the transition to a net zero economy will require about $4 trillion in annual clean energy investments. Financial opportunities could arise from the development of new products and lines of business, access to new markets, investments in climate resilience, increases in resource efficiency, and changes in energy sources. (See also TCFD Implementation Guidance Oct 2021, p. 76-78).  

Given these climate risks and opportunities, legislative and regulatory action is rapidly progressing in major capital markets and national and subnational jurisdictions around the world. Following commitments to the 2015 Paris Climate Agreement by 200+ countries, today over 2,570 climate laws and policies are in place covering a range of issues. For example, 45 national jurisdictions and 34 subnational jurisdictions have carbon pricing initiatives in effect or under consideration and 16 U.S. states have set 100% renewable energy targets. In addition to the SEC, other U.S. financial regulators, including banking, housing finance, and commodities regulators, collectively affirmed climate as a financial risk, endorsed the TCFD framework, and acknowledged the critical nature of greenhouse gas (GHG) management and committed to act to address climate risk (See Financial Stability Oversight Council Report 2021, see also CFTC Subcommittee on Climate-Related Market Risk Report 2020). 

A significant amount of sustainability and climate disclosure already exists in the market. Ceres strongly supports these efforts.  

For example, the Governance & Accountability Institute reviewed 2020 reporting and found that:  

• 92% of the S&P 500 companies published a sustainability report in 2020, up from 90% in 2019 
• 70% of the Russell 1000 companies published a sustainability report in 2020, up from 65% in 2019 
• 49% of the smallest half by market cap of the Russell 1000 companies published a sustainability report in 2020, up from 39% in 2019.  

The Conference Board found that more than half of S&P 500 companies disclose climate risks in annual reports and 71% disclose GHG emissions in their annual reports, sustainability reports, or company websites, according to a January 2022 study. 

However, many investments in voluntary climate risk reporting are not resulting in clear, consistent, and comparable information that investors can apply to investment decisions.  This leads to the mispricing of climate risk and prevents investors who are looking to invest capital in innovative and resilient firms from identifying opportunities. Investors currently bear significant costs to find the decision-useful information they need. 

For example, investors may engage third party intelligence and data providers to secure enhanced climate risk data. This strategy favors well-resourced investors but may be prohibitively expensive for small- and mid-sized investors. This is a significant inequity in the market the SEC must address. In addition, some of the data, such as GHG emissions data built on estimates, may be inaccurate or may have been subject to opaque assurance or verification procedures. Investors then bear the cost of conducting additional verification directly with companies or with third-party technical support on a case-by-case basis. This exercise is resource-intensive for both investors and companies. Investors who are unable to access climate risk information through other means may resort to employing a shareholder vote strategy to achieve disclosure. This approach can lead to sizable implementation costs, reputational risks for issuers, and opportunity costs for investors whose resources could be better used analyzing disclosure that already exists.  

In short, the status quo of voluntary disclosure is expensive for both issuers and investors and hinders efficient investment decision-making and effective capital investments. Clear SEC disclosure rules that standardize climate disclosure would alleviate these burdens. 

To improve the quality of disclosure, and because climate change has financial impacts on companies and poses material risks, investors expect climate risks be disclosed alongside other financial risks and impacts in SEC filings, in particular the annual report on Form 10-K.  Investors also expect companies to subject climate risk information to the same levels of internal scrutiny that exist for other material information. This would also improve the reliability and quality of the disclosures. 

Nearly 800 companies and 733 investors representing $52 trillion in assets under management, have called on governments to implement mandatory climate disclosures. They have done this because of the urgency of the climate crisis, the need for harmonized global regulations, and the need to position themselves for success in a net zero economy. Mandatory, standardized disclosure provides consistent and clear expectations for companies to communicate their climate risks to investors. This leads to a more level playing field which rewards companies that explain how they are identifying and managing climate financial risk, how they set and plan to meet their climate targets, how they will achieve emissions reduction targets, and how they are making their business resilient to climate risk. Supporting mandatory disclosure sends a positive message to employees and customers and helps companies stay ahead of changes in regulations and proactively assess and address risks in advance of sudden shifts in market demands.  

Many investors and banks are committed to decarbonizing their portfolios and aligning investments with the Paris Agreement and need companies to position themselves to address climate risks. Mandatory climate disclosure will enable investors to access consistent and comparable data that is needed to assess the performance of their portfolios and make investment decisions.  

The SEC rule will contribute to a global baseline of climate risk disclosure from which investors and companies will benefit. With the SEC’s effort, the U.S. will join peer regulators in Belgium, Canada, Chile, France, Japan, New Zealand, Sweden, and the United Kingdom who have mandated TCFD-aligned climate-related financial disclosures. The SEC’s effort will also complement the IFRS’s fast-moving workstream to create a global climate disclosure standard that will influence many jurisdictions.

Ceres strongly encourages investors and companies to review and sign onto this Statement of Essential Principles for SEC Mandatory Climate Disclosure Rulemaking (SEP). You may use language from the SEP in your own comment letter. We hope you will publicly welcome the SEC’s proposed rule. Share your position on climate disclosure with your trade groups, investors, and suppliers. To understand how the SEC is already focusing on disclosure, review the SEC’s 2010 Climate Disclosure Guidance and its sample letter to companies regarding climate disclosures. 

In 2021, a majority of investor commentators called for SEC to align its climate disclosure rule with the TCFD and require disclosure of scopes 1, 2, and 3 greenhouse gas emissions.  

We encourage companies to:  

• Review the TCFD recommendations and GHG Protocol standards.  
• Build your team to set Science-Based Targets for emissions reductions, develop a transition plan for success in a net-zero economy, meet these reporting objectives, and align with these standards.  There is further information available on the Ceres 2030 Roadmap. 
• Ceres company members are encouraged to reach out to your relationship manager for support. 

Investors 

• A majority of investors have called for the SEC climate disclosure rule to align with the TCFD and require disclosure of GHG emissions.  
• Investors with over $2.7 trillion in assets under management signed this Statement of Essential Principles on Mandatory Climate Disclosure.  
• Betty Yee, California State Controller, and Thomas DiNapoli, New York State Comptroller, make the case in this article.  

Companies 

• Companies supporting mandatory disclosure come from many sectors and their numbers are growing as more recognize the opportunity to lead, get ahead of regulation and enforcement, and leverage the opportunities disclosure presents to increase competitiveness, encourage innovation, and attract investors.  
• Apple, Etsy, HP, Salesforce, and Uber were among the first to call for mandatory disclosure when the SEC issued its Request for Information in June 2021. 
• Accenture, Adobe, Allbirds, Autodesk, Bayer AG, Biogen, Danone, eBay, Enel, Gap, Guess?, H&M Group, Heineken, Levi Straus & Co., Lyft, Logitech, Mars, Marshalls, Michelin, National Grid, Nestle, Netflix, PepsiCo, PwC, South Pole, Unilever, and Veolia joined 800+ companies in signing this open letter to G20 leaders calling for disclosure and ambitious climate action. 

GHG emissions are fundamental to investors’ understanding of a company’s financial position in the face of the net zero transition. Direct GHG emissions are from sources owned or controlled by a company. Indirect GHG emissions are a consequence of the activities of the company but occur at sources owned or controlled by another entity. The GHG Protocol, the world’s most widely used emissions accounting standard, categorizes emissions as follows: 

• Scope 1: All direct GHG emissions. 
• Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat or steam. 
• Scope 3: Other indirect emissions, such as the extraction and production of purchased materials and fuels, transport-related activities in vehicles not owned or controlled by the reporting entity, electricity-related activities (e.g. transmission and distribution losses) not covered in scope 2, outsourced activities, and waste disposal. 

Scope 3 emissions often make up the largest portion of a company’s carbon footprint. According to the Carbon Disclosure Project, a company’s supply chain emissions (included in scope 3) are on average 5.5 times greater than emissions from its direct operations (scope 1 and 2). SEC Commissioner Allison Herren Lee summarized scope 3’s importance to investors in the financial sector: “The SEC should work with market participants toward a disclosure regime specifically tailored to ensure that financial institutions produce standardized, comparable, and reliable disclosure of their exposure to climate risks, including not just direct, but also indirect, greenhouse gas emissions associated with the financing they provide, referred to as Scope 3 emissions. There is a concentration of risk in the financial sector that is not readily ascertainable except through Scope 3 emission disclosures.” Scope 3 from product use is also critically important to investors, especially in the transportation and energy sectors, where it accounts for a large percentage of total emissions. 

The Value Reporting Foundation (formerly the Sustainability Accounting Standards Board) has created industry specific metrics on climate disclosure for 72 out of the 77 industries it covers. The TCFD provides industry-specific disclosure recommendations and suggests possible metrics for some industries.

In June 2021, Ceres submitted recommendations for a strong rule in response to SEC Acting Chair Lee’s March 2021 request for information on climate change disclosure. We recommended that climate disclosures be included within 10-K filings, and be aligned with the TCFD, and include GHG emissions, a net zero scenario analysis with underlying assumptions, progress towards announced science-based targets including offset use, disclosure of the use of internal GHG pricing, and climate risks related to specific capital expenditures, among other disclosures. We recommended that SEC expand specific industry-specific metrics, including the oil and gas reserves reporting rules, to include a calculation of effective CO2 emissions, and to make mandatory the optional price sensitivity table. We also called for disclosure of climate-related environmental risks such as water and deforestation risks and social risks and called for assurance of climate disclosures at the reasonable assurance level. Please see pp. 6-17 in our comment for more details.  

Ceres recommends that an SEC rule should include both backward- and forward-looking data elements, so investors can understand the impacts of climate-related issues on companies, as well as future risks and opportunities they face. Backward-looking data includes extreme weather events that impacted operations or supply chains and the impacts of regulations such as carbon taxes. Forward-looking information can include how a company is positioned in different low-carbon scenarios, as well as information on net zero targets and plans to achieve those targets. Ceres’ recommendations, if adopted, would result in disclosures that improve investors’ understanding of how climate issues affect and are likely to affect an organization’s future financial performance and position, as reflected in the income statement, cash flow statement, and balance sheet.

Ceres Resources

• Ceres’ recommendations for SEC climate disclosure rulemaking (June 2021)  
• Ceres Roadmap 2030: Transparency and Disclosure 
• Lifting the Veil: Investor Expectations for Paris-aligned Financial Reporting at Oil and Gas Companies 
• Investor Guide to Corporate Climate Commitments 
• Evaluating the Use of Carbon Credits 
• Practicing Responsible Policy Engagement 

External Resources

• Recommendations of the Task Force on Climate-Related Financial Disclosures 
• Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures (Oct 2021) 
• US Financial Stability Oversight Council: Report on Climate-Related Financial Risk (Oct 2021) 
• U.S. Commodity Futures Trading Commission: Managing Climate Risk In The U.S. Financial System: Report of the Climate-Related Market Risk Subcommittee, Market Risk Advisory Committee  
• Enforcement of SEC’s 2010 Climate Change Guidance 
• Op-ed: America Needs Climate Disclosure to Protect Its Economy  
• Op-ed: The SEC must require companies to disclosure their risk from climate change 
• Just Capital Poll: 87% of Americans agree that the federal government should require large companies to publicly disclose climate risks
• Briefing on International Sustainability Standards Board Exposure Draft