Why governments should pay attention to the SEC's new climate rule

Photo by Markus Spiske on Unsplash

The SEC in late March gave initial approval to a sweeping new rule that would require companies to disclose their impact on the environment. While it does not regulate municipal bond disclosures, governments could still see some impact from the rule if it holds. This week, I’ll explain the basics.

The growing demand for climate impact disclosures

Climate-friendly investments have grown in popularity among investors as more governments have set carbon emission reduction goals and extreme weather events have negatively affected certain industries. Investors want to know not just what a corporate or government issuer’s climate risks are, they want the information in a standardized way. While many market participants do provide climate-change-related information in one form or another, the process is not regulated and far from standardized. This makes it harder—nigh impossible—to accurately compare issuers across the spectrum. 

Enter the SEC’s proposed rule which would 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. It would apply to public companies, including investor-owned utilities like PG&E and Dominion Energy. 

Here are some of the key requirements in the proposed rule:

• The processes for identifying, assessing, and managing climate-related risks 

• Transition plans related to mitigating climate risk

• The results and methodology of any scenario analysis to assess climate resilience

• The impact of severe weather events and other natural disasters

• Information about publicly-declared climate goals

• Greenhouse Gas emissions metrics including indirect emissions from purchased electricity or other forms of energy.

See also: Climate rule fact sheet

The SEC started this process last year, when it announced it was considering proposing a climate rule and asked the public for information on climate-related disclosures. The Government Finance Officers Association was one of those who responded and it urged the feds to let municipal market participants govern themselves, a position that many on the issuer side agree with.  

What’s next? The public has until May 20 to comment on the plan. SEC staff suggested the proposed rule could be adopted with an effective date in December 2022. 

What the climate disclosure rule means for power companies

Investor-owned power companies such as PG&E, Dominion Energy, Idaho Power and the Tennessee Valley Authority, would have to follow the new climate disclosure rule.