The U.S. Securities and Exchange Commission (SEC) is expected to finalize its climate change-related disclosures next month, after a technical hitch forced it to reopen a window for public comments. The expected advancement of the rule and the range of investor perspectives on climate-related goals make the 2023 proxy season key for issuers.

Consistent, comparable, and decision-useful information

Since joining the SEC in February 2021 at the behest of President Joe Biden, Chairman Gary Gensler has pitched a climate-change rule as “driven by the needs of investors and issuers.”

“Companies and investors alike would benefit from the clear rules of the road proposed in this release,” Gensler said when proposing the rule in March 2022. “I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance.”

Most investors agree with that assessment. In a comment letter, $7-trillion asset manager Vanguard’s Investment Stewardship Officer John Galloway wrote that “We consider climate risks to be material and fundamental risks for investors and the management of those risks is important for price discovery and long-term shareholder returns.”

As for issuers, a blanket rule could help avoid the slow and contentious process of working out investor appetites through shareholder proposals. Data from Insightia’s Voting module show that overall support for greater disclosure has increased in recent years. Twenty-one shareholder proposals for climate change reports won more than 50% support in the U.S. in 2021 and 2022, compared with eight in the two previous years.

Highlighting the importance of the rule, Gensler told the Council of Institutional Investors (CII) conference in Washington D.C. this week that the agency had received over 15,000 comments on the rule. “The reason there is this level of engagement is because investors are making decisions based on the climate decisions companies are making,” Gensler said. “Our only remit is full, fair, and truthful disclosure.”

A split in the investor lobby

But not all investors agree on how far the rules should extend. Major index investors like BlackRock and Vanguard have stated concerns that mandating disclosure of Scope 3 emissions, which are produced by a company’s supply chain and customers, might not be the best course for all companies, at least at the current time.

“Over time, we believe that Scope 3 emissions could become a routine part of material risk disclosure,” BlackRock said in its comment letter, before nonetheless calling for more time and guidance to improve the calculation of Scope 3 emissions.

Vanguard’s Galloway called for “more targeted and flexible disclosures than the full Scope 3 framework proposed, which includes significant data requirements and potentially broad applicability.”

Sheena VanLeuven, a director at PJT Camberview, told Insightia , “While engagement overall remains robust and investors have maintained their policy expectations on climate-related disclosure and oversight, we have seen a downward trend in how frequently climate-related topics are raised in meetings.”

Climate engagement has now split into two camps, according to VanLeuven.

“Investors continue to broadly seek transparency on climate and ESG issues, expressed through their engagement with companies, policies, and voting behavior. Shareholder proposals with reasonable requests for more disclosure continue to get high support,” she noted. “However, as more companies meet the ‘table stakes’ for ESG disclosure, we are seeing proponents put forth proposals with highly prescriptive demands, which fewer investors are showing an inclination to support.”

McKenzie Ursch, the head of legal for Follow This, told Insightia that in its campaign at oil supermajors, emissions disclosure had been superseded in its demands. “It is not as if we can state in our conversation with companies that they had best adhere to our request as impending regulation will force them to do so; our request is for these companies to set targets, and many have already been voluntarily reporting on their Scope 3 emissions for years,” he said in an email.

”It’s happening anyway”

Outside of the energy sector, whether or not to disclose Scope 3 emissions will continue to be a closely contested topic.

“There’s been a chilling effect,” said Andrea Ranger, a shareholder advocate at Green Century Capital Management. “Because the rules haven’t come out yet, companies worry they could be held liable for publishing emissions data that didn’t follow the SEC’s anticipated guidelines. I find that argument specious… There’s really only one set of guidelines that everyone’s being using to date, and that’s the GHG Protocol.”

“Companies are waiting for direction from the SEC. Our response to that is, no matter what the SEC comes out with, we will seek critical information, we will seek targets, we will try to understand how much risk companies are creating for the climate and thus our investments,” said Fugere.

Indeed, climate activist groups filed a record number of environmental shareholder proposals in 2022, according to Insightia’s Voting data and four different investor groups told Insightia in interviews for this article that they believed Scope 3 reporting was an inevitability.

“We’re all eager for a climate disclosure rule to be issued by the SEC and we want it to be as strong as possible and include Scope 3,” said Christina Cobourn Herman, Senior Director, Climate Change & Environmental Justice at the Interfaith Center on Corporate Responsibility (ICCR). “Whether they like it or not, many companies are going to have to start reporting their Scope 3 emissions because international reporting regimes are going to require it, and these are global companies.”

Describing the climate change rule as “an investor-led drive for information and targets,” Danielle Fugere, president of As You Sow, told Insightia that “Investors will continue to seek that information regardless of whether the SEC has backed away from that or has backed away from Scope 3.”

At a conference organized by the International Corporate Governance Network (ICGN) in Stockholm this week, International Sustainability Standards Board (ISSB) Vice-Chair Sue Lloyd confirmed that the standard-setting body’s upcoming reporting requirements, due to be released in June, will call on global companies to report on Scope 3 emissions. While such reporting will likely consist of rough estimations for the time being, companies will be expected to take steps toward more “sophisticated Scope 3 reporting” several years down the line.

Furthermore, an increasing number of companies are finding out that work quantifying Scope 3 emissions is already happening down their supply chains. “What I think many companies are finding as they ask their suppliers is they find that they’re not the only ones,” Fugere added. “The SEC rule would drive that rule faster but it’s happening anyway.”