Courtesy of Dave Kovaleski, Financial Regulation News
June 20, 2022 — The Bank Policy Institute (BPI) offered feedback on the Securities and Exchange Commission’s (SEC) proposed climate disclosure policy, expressing its concerns.
The proposal would require public companies to provide a detailed financial accounting of climate-related risks, information on indirect emissions, and numerous requirements for disclosure of risk management policies and practices.
BPI officials said that many banks already voluntarily disclose climate information, adding that an overly prescriptive approach from the SEC could undermine the goal of providing useful information to investors. Further, BPI says the proposal fails to account for the interaction with the prudential bank regulatory framework.
“Banks share the SEC’s goal of communicating material climate risks transparently to investors and managing those risks in a prudent manner. However, the proposal’s overly detailed requirements would lead to a mountain of information that would be misleading and of little use to investors. This is particularly the case given the significant limits of climate data today. It is important to ensure that the climate-related disclosures produced are useful to investors,” Lauren Anderson, BPI senior vice president and associate general counsel, said.
While investors are increasingly seeking more information on how firms will be affected by climate-related risks, BPI says climate risk data is in the early stages of development. As such, there are significant data gaps and inaccuracies. BPI adds that data challenges are even more problematic for banks as they must rely on data from their clients to produce their climate disclosures. The approach that the SEC is taking could lead to a false sense of precision regarding climate reporting and end up misleading investors. Regulators should recognize the need for a flexible framework that will allow disclosures to improve over time.
Specifically, the proposal’s Regulation S-X financial reporting requirements are largely inoperable, will not result in useful disclosure for investors, and should be removed or, at a minimum, narrowed, said BPI.
Also, they state that the Scope 3 emissions disclosure requirements are overly broad as drafted and should be narrowed to focus on registrants’ material targets or goals. Further, the risk management aspects of the proposal should be modified so that they do not front-run, and are consistent with, ongoing efforts by the federal banking regulators.
In addition, the proposal’s board and management governance provisions should be modified to be less prescriptive and not place outweighed importance on one potential risk factor that public companies must manage. Among other recommendations, BPI says the proposal’s cost-benefit analysis likely under-estimates costs by several degrees and has not demonstrated the purported benefits outweigh even the identified costs. Also, BPI says the proposal should not require third-party attestation of Scope 1 and Scope 2 GHG emissions disclosures.