The value of proposed climate disclosure rules becomes a key battleground as businesses and policymakers fight for a plan that requires companies to calculate their environmental impacts and the risks they face as a result of climate change.
The Securities and Exchange Commission estimates that the plan will increase the cost of disclosure by businesses from $ 3.9 billion to $ 10.2 billion. The jump in costs equates to a fixed additional cost averaging $ 420,000 a year for a small listed company and $ 530,000 a year for a larger firm, according to the SEC.
Costs are an estimate and high because they require companies to disclose data that some have not previously measured about their impact on the climate and the risks that climate change poses to them.
Critics of the new rules often say the costs will be too heavy. Some proponents of the proposed SEC rules say many companies already provide this data to investors and that standardizing the figures will save investors money.
Under the rule, companies will for the first time be required to report their greenhouse gas emissions, including, in some cases, from their suppliers and customers. Some climatic data need to be verified independently. Companies will also need to analyze the impact of climate risks associated with things like floods and droughts on audited financial statements.
“This climate regulation is unlike anything I’ve seen in my 25-year career in securities law, in terms of breadth and scope of offers,” said David Lynn, a partner at Morrison & Foerster. a former high-ranking SEC official. “It’s a whole new way of disclosing information.”
For companies starting from scratch in climate data reporting, enforcing the rules can be more expensive than SEC estimates. This will include setting up new systems to collect, analyze and report the necessary data and potentially hire new staff, consultants and auditors, Mr Lynn said. He said the costs are difficult to estimate and could be much higher than the SEC believes.
The SEC declined to comment.
The climate proposal is not the most expensive new SEC rule. According to Michael Juens, professor of finance at the California Institute of Technology, professor of finance at the California Institute of Technology Michael Juens, the 2002 Sarbanes-Oxley reform of strict internal control cost small companies about $ 630,000 a year, according to a 2011 poll. prices. This is one and a half times the estimated cost of climate rules for small companies.
Lawmakers, companies, investors and green groups take sharply different positions in their responses to the SEC consultation on its proposals, which it extended until mid-June last week.
Proponents of the proposal say investors need accurate, consistent information to judge whether climate change will hurt their profitability.
Losses suffered by PG&E investors Corp.
show risks. The California Public Utility Service declared bankruptcy in 2019 after being overwhelmed with commitments from climate change-related forest fires.
“Climate change threatens the value of investment in all areas,” – said in a comment to SEC BankFWD, a group of green companies.
Many large companies are already voluntarily disclosing at least some climate data, in part in response to investor pressure. Four of the five S&P 500 companies reported greenhouse gas emissions from their operations and the energy they purchased, known as Scope 1 and 2 emissions, in 2020, according to data provider Refinitiv.
Some Republican lawmakers say the SEC should allow this market reporting to continue rather than impose rules.
Major investors argue that the current mix of voluntary disclosure makes it time consuming and difficult to compare companies.
Linda-Elling Lee, Global Head of ESG and Climate Research MSCI Index Provider Inc.,
said regulators in other countries are already asking companies for much of the information the SEC plans to request.
“The more standardization and the more harmonization, the more everyone benefits – both the people who have to report and the people who have to use the data,” Ms Lee said.
A survey conducted earlier this year, which involved 35 major investors, found that they spent an average of $ 1.4 million a year each on the collection, analysis and reporting of climate data. The most expensive item was $ 487,000 for rating firms, consultants and data providers – many were selling information that became more accessible under SEC rules.
The companies, which responded to a survey by green consulting firm ERM International Group, said they spent an average of $ 533,000 a year on the voluntary provision of information required by the SEC rule. This amount is very close to the agency’s estimate of $ 530,000 per year on current management costs for large companies.
Trade and industry groups concerned about the rules cite their costs. The National Mining Association told the SEC that its “incredibly effective and complex rule” would impose a significant administrative burden on the company.
Republicans who oppose the SEC’s move to control climate disclosure also cite spending as a concern. A group of 19 senators told the agency that the proposal “brings huge costs to employers.” Billions of new conservation costs will reduce shareholder returns, they wrote in the SEC.
The additional costs could lead to a reduction in the number of companies willing to sell on the stock exchange, senators added.
Scientists who have studied the effects of rising regulatory costs say fears that the climate rule will harm public markets may be overstated.
“It’s significant [cost] figures, but our study shows that the cost of this order is unlikely to have a significant impact on the number of public or private firms, ”said Finance Professor Mr Juens.
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