3 takeaways from the SEC’s new climate disclosure rule
The rule applies to the corporate market but it leaves breadcrumbs for potential disclosure rules for governments.
Happy weekend readers! A year ago, I wrote about the SEC’s draft climate disclosure rule for the corporate sector and why the public sector should take notice. This week, the final rule was released. Though it’s toned down a bit in scope, state and local governments should still pay attention to how the commission implements the new regulations because some version of it could very well be in governments’ future.
The climate rule: A ‘guidepost’ for municipal issuers
The intention behind the SEC’s Enhancement and Standardization of Climate-Related Disclosures for Investors is to give investors a better picture of how things like droughts and wildfires, or changes in environmental policy might affect a company’s management and finances. Among other things, the rule requires corporate borrowers to disclose:
Any climate-related risks “that have had or are reasonably likely to have” a short- or long-term impact on business strategy, financial condition and outlook. (This is the SEC’s definition for “material climate-related risk.”)
Details on how the registrant assesses and manages material climate-related risks.
Any plans (adopted or in progress) to “mitigate or adapt to a material climate-related risk,” including climate goals or targets, and the business impact.
Costs and losses related to any severe weather events, carbon offsets or renewable energy credits (if the latter two are a “material component” of a company’s risk mitigation plans).
The SEC also gives companies a safe harbor, saying it considers all new information filed in compliance with the rule a forward-looking statement.
In its analysis of the rule, Municipal Market Analytics says it sets “guideposts for municipal issuers.” At a minimum, analysts Matt Fabian and Lisa Washburn add, state and local governments “should reasonably use the rule as a tool to identify where existing climate-related risk disclosures may fall short.”
They recommend that governments should consider disclosing things like material climate risk, how they identify and manage that risk, and information on mitigation efforts “as soon as possible, if not already doing so.”
It should be noted also that Municipal Market Analytics has taken a strong “pro” stance on climate risk disclosures in the municipal market. It’s been critical of governments for “boilerplate” risk disclosures despite dealing with hurricanes and rising sea levels. But I agree with their take because climate risk is no different than other long-term risks to government finances like population decline or pension liabilities. The politicization of climate change has muddied this up and turned it into a red-state-blue-state issue rather than what it is: Information to help investors assess a government’s management and finances.
The SEC is pretty clear on this as well and there are quite a few breadcrumbs in the rule for municipal issuers wondering what might be next. In the next two sections, I’ll highlight some of these clues and point to one policy tool that can help governments with disclosure.
Clues in the climate rule for the municipal market
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