The Bank Policy Institute (BPI)1 welcomes the opportunity to comment on the SEC’s notice of proposed rulemaking regarding amendments to the SEC’s rules under the Securities Act of 1933 and Securities Exchange Act of 1934 that would require registrants to provide certain climate-related information2 in their registration statements and annual reports. We previously expressed our views on the SEC’s climate disclosure efforts in our June 9, 2021 comment letter responding to the SEC’s March 15, 2021 request for public input on climate disclosures and have included that letter as Annex 1.3
I. Executive Summary
BPI’s member organizations are actively engaged in assessing climate-related financial risks and are working to integrate climate-related risks into their risk management and disclosure frameworks.
Many BPI member banking organizations publish extensive climate-related disclosures, including via their websites and through voluntary reports or through reporting required by international regulators. These actions are part of a trend by registrants to increasingly and voluntarily disclose climate-related information that goes beyond any material climate disclosures already included in registrants’ SEC-filed reports in an effort to be responsive to requests from investors, consumers, employees, and international authorities. We expect this trend would continue even absent SEC action on climate disclosures. For such disclosures to be meaningful to investors, however, they need to be consistent and comparable to each other and to international climate disclosure standards, which the SEC can help drive through a more standardized reporting framework. As a result, BPI supports efforts by the SEC to promote consistency, comparability, and reliability of these disclosures, while maintaining the SEC’s traditional approach of principles-based, rather than overly detailed, disclosure requirements.
We provide recommendations below for how the SEC can better calibrate the final rule to achieve its objectives. The following recommendations cover the priority topics for BPI member banks:
- The 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, significantly narrowed. There are a host of practical problems that would make compliance with the proposal’s financial reporting requirements infeasible, and any resulting disclosure would not be useful for investors. At this stage, disclosures of material climate-related financial impacts should be primarily qualitative and provided in the Management’s Discussion and Analysis (MD&A) section of Form 10-K filings. If the SEC wishes to consider climate-related financial reporting in the future (e.g., for “transition activities”), it should go through the standard Financial Accounting Standards Board (FASB) process to determine how to do so. If the SEC decides to retain a financial reporting requirement, the proposal should be narrowed significantly to only require material quantitative disclosures in aggregate that are easily observable for defined severe weather events for both the financial impact and expenditure metrics, given that producing disclosures for transition activities would require myriad assumptions and would not result in useful information for investors.
- The Scope 3 emissions disclosure requirements are overly broad as drafted and should be significantly narrowed. The proposal’s Scope 3 emissions disclosure requirements—and as particularly relevant to banking organizations, disclosure of financed emissions under Category 15 of the Greenhouse Gas (GHG) Protocol—are overly broad. They would significantly redefine the concept of materiality under the federal securities laws, as set forth in binding Supreme Court precedent. Overly broad Scope 3 emissions disclosure would not result in consistent, comparable, or reliable disclosure given the significant challenges around Scope 3 emissions data quality and availability and the continuing evolution of Scope 3 calculation methodologies, and would not result in useful information for investors. Many members are already voluntarily providing Scope 3 emissions data, where possible, in their sustainability reports. Rather than redefining the securities laws and violating long-standing legal and market concepts, the SEC should encourage Scope 3 emissions disclosures outside of the SEC reporting documents. Moving in that direction would encourage more robust climate risk disclosures at an appropriate pace as the quality and availability of information increases. If the SEC retains the Scope 3 emissions disclosure requirements, the SEC should significantly narrow the requirements, including by tailoring them to registrants’ material climate commitments and goals, which have primarily focused on high-emissions sectors. Furthermore, to the extent the proposed Scope 3 disclosure requirements are included in any final rule—even if in a narrower form—the SEC should provide for a longer transition period of at least two years from the rule’s final effective date.
- 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. Banking organizations are subject to federal prudential regulation by the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (collectively, the prudential regulators). The prudential regulators have been working both domestically and internationally over the past year to develop guidance and expectations for banks with regard to risk management, governance, and climate scenario analysis—with consultations currently outstanding.4 Given the extensive work that is underway by the prudential regulators, any climate change disclosure regime applicable to banking organizations should recognize the supervisory objectives and early stage of these efforts and not front-run the prudential process.
- The proposal’s board and management governance provisions should be modified to be less prescriptive. The proposal would impose substantive requirements on registrants that are not appropriate for a disclosure regime. The governance provisions should be revised to be principles-based, which would generate more useful disclosure that is tailored to registrants’ businesses, rather than have the SEC suggest specific governance practices.
- The proposal’s cost-benefit analysis does not satisfy the SEC’s statutory cost-benefit obligations. The SEC is required to conduct a thorough and rigorous cost-benefit analysis as part of its rulemaking process.5 Here, the SEC’s analysis falls short, particularly with respect to assessing costs for banking organizations. The SEC largely does not quantify putative benefits of the proposal, and the benefits that are discussed are highly speculative, whereas the SEC significantly undercounts costs.
- The proposal should be revised to permit foreign private issuers (FPIs) to comply using home country standards. All FPIs should benefit from a substituted compliance regime, such as applies to Canadian registrants.
- To avoid conflicts of law and implementation challenges, the proposal should permit alternative compliance by using international standards. Once the rule is finalized, all registrants should have the option of using International Financial Reporting Standards (IFRS) Foundation’s International Sustainability Standards Board (ISSB) as an alternative means of compliance.
- The proposal should not require third-party attestation of Scope 1 and Scope 2 GHG emissions disclosures. In light of the robust controls registrants already have in place over their 10-Ks, the benefits of such attestation do not outweigh the costs.
- The SEC should provide more guidance around GHG emissions verification. We agree with the SEC’s approach not to mandate the precise GHG emissions verification standards needed for a registrant to meet its Regulation S-K obligations. However, to give registrants greater certainty, the SEC should provide additional guidance regarding which verification standards would be acceptable.
- Should the SEC retain an attestation requirement, it should confirm that attestation reports are considered expertized material for purposes of Scope 1 and Scope 2 GHG emissions disclosures, and the attestation requirements should be scaled back. Firms acting as underwriters will be subject to unwarranted due diligence requirements if Scope 1 and 2 GHG emissions attestations are not considered to be expertized material for purposes of liability under Section 11 and Section 12 of the Securities Act of 1933 and Rule 10b-5 under the Securities Exchange Act of 1934. Similar to other expertized material such as financial statements, technical reports for mining companies, and reserve reports for oil and gas companies, the highly technical nature of attestation reports and the assurance procedures required to be conducted by a third party make it unreasonable to expect underwriters to be responsible for performing the same level of diligence as would be appropriate for non- expertized material. Although the proposal seems to assume that attestation reports are expertized, the SEC should modify the proposal to clarify that attestation reports are expertized material for liability purposes.
- The SEC should clarify that consolidation of legal entities for GHG emissions disclosures need not match consolidation for financial reporting. There are many operational challenges that would restrict a registrant’s ability to follow the same consolidation treatment for both GHG emissions disclosures and financial reporting. The SEC should recognize these limitations and clarify that registrants may choose, and disclose, their approach to organizational boundaries for purposes of computing GHG emissions.
The remainder of this letter provides more detail on our recommendations.
To read the full comment letter, click here, or click on the download button below.
1 BPI is a nonpartisan public policy, research and advocacy group, representing the nation’s leading banks and their customers. Our members include universal banks, regional banks, and the major foreign banks doing business in the United States. Collectively, they employ almost two million Americans, make nearly half of the nation’s small business loans, and are an engine for financial innovation and economic growth.
2 Throughout this letter, we use the term “climate information”—and related terms such as “climate disclosures” and “climate risks”—to refer to climate-related risks for financial institutions, as differentiated from risks to the climate itself.
3 See BPI, Comment Letter re Request for Public Input on Climate Change Disclosures (June 9, 2021), available at https://www.sec.gov/comments/climate-disclosure/cll12-8901041-242153.pdf.
4 See Basel Committee on Banking Supervision, Consultative Document, Principles for the Effective Management and Supervision of Climate-Related Financial Risks (Nov. 2021), available at https://www.bis.org/bcbs/publ/d530.pdf; Office of the Comptroller of the Currency, Principles for Climate-Related Financial Risk Management for Large Banks (Dec. 16, 2021), available at https://www.occ.gov/news- issuances/bulletins/2021/bulletin-2021-62.html; Federal Deposit Insurance Corporation, Statement of Principles for Climate-Related Financial Risk Management for Large Financial Institutions, 87 Fed. Reg. 19507 (Apr. 4, 2022); Financial Stability Board, Interim Report, Supervisory and Regulatory Approaches to Climate-Related Risks (Apr. 29, 2022), available at https://www.fsb.org/wp-content/uploads/P290422.pdf.
5 The statutes require the SEC to “consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.” 15 U.S.C. §§ 77b(b), 78c(f), 80a-2(c). Courts have relied on this language to evaluate the sufficiency of the SEC’s cost-benefit analysis. See, e.g., Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011).