A pair of SEC officials Tuesday reviewed topics including materiality and how issuers should think about disclosing severe weather events relative to the regulator’s recently finalized climate disclosure rule during a webinar hosted by Ceres, the non-profit sustainability advocacy organization.
Eirk Gerding, the head of the division of corporate finance at the Securities and Exchange Commission, told the audience “climate risk is financial risk,” and that issuers will have to disclose their strategies to mitigate climate risk.
He and Paul Munter, the SEC’s chief accountant, said the climate disclosure rule, finalized in March, will require public companies to disclose their climate risks and damages from severe weather events. Larger companies will also have to disclose their emissions that result directly from their operations and from the companies’ energy consumption, known as Scope 1 and Scope 2 emissions respectively, to the extent to they are material to the company’s investors.
Gerding said the required disclosure must include a qualitative and quantitative narrative on the strategy and the specific acts taken to reduce climate risk such as “transition plans” or “scenario analysis.” Further, companies must disclose any oversight from their boards on climate risks and how any related policies are integrated into their general risk management strategy.
Severe Weather Events and Natural Conditions
Munter added that issuers must disclose damages that result from severe weather events, which can include events such as rising sea levels, draughts, floods, hurricanes and wild fires. Munter stressed that issuers are not required to speculate on to what degree a particular disaster was related to climate change.
The rule also covers “natural conditions,” a catch-all phrase, that according to the rule “need not be climate-related, and therefore may include types of non-climate-related occurrences, such as earthquakes.”
Covered disclosures would be subject to a de minimis exemption, Munter explained. Companies would only need to disclose their related costs and losses if it reaches 1% of their income or loss or $100,000, whichever is greater. When considering if such an event is material to investors, Munter says that companies should “apply judgement when considering if an event is significant,” and should consider factors such as the business’s industry, geography, capital investment and history of similar events.
Emissions and Materiality
During the webinar Thomas Riesenberg, a senior adviser with Ceres, asked Munter and Gerding how companies should go about figuring out if their Scope 1 and 2 emissions are material or not, especially if a company has not disclosed them in the past. He said some issuers now have the impression that “it’s all a voluntary rule, it’s no longer mandatory.”
Gerding answered that “the Commission is not adopting a new materiality standard,” and pointed to examples in the text for when issuers should consider their emissions information to be material.
Reading from the rule, Gerding said that emissions are material if they can serve “as a central measure and indicator of the registrant’s exposure to transition risk as well as a useful tool for assessing its management of transition risk.” He added that emissions are material if the issuer has a related climate goal.
Gerding said that emissions may not be material if a company’s exposure to transition risk comes from a specific product that it markets which may be vulnerable to a decrease in market demand. Indeed, the rule says that “we are not mandating Scopes 1 and/or 2 emissions disclosures from all registrants,” and the rule “will not require disclosure of GHG emissions data where such data is immaterial.”