SEC Climate Disclosure Rule

Will lapses in scientific integrity be permitted safe harbor?

Photo by Francisco Gomes on Unsplash

Last week, the Securities and Exchange Commission, one of the nation’s financial regulators, put in place new disclosure rules on corporate climate risk. The rules included particulars on what and when disclosure material matters related to: physical and transition risk, emissions accounting¹, an internal carbon price, and “severe weather and other natural conditions².”

The making of “material” environmental issues that need disclosure in SEC filings started in the 1970s when environmental policies led to extensive litigation and costs for compliance. The SEC provided guidance on how to disclose these specific costs.

When climate change came into the mainstream and an emissions trading scheme was developed by the Kyoto Protocol, the SEC, under the leadership of Mary Shapiro³, provided guidance on including climate change in disclosures in 2010.

But while the 1979s guidance about environmental litigation and cost of compliance was concrete: “disclose total estimated expenditures for environmental compliance”), the 2010 guidance on climate change disclosure was suggestive: “should consider disclosing”).

Biden made the development of a clear rule part of the agenda early in his presidency as part of a May 2021 Executive Order to "advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk" by 2050.

Four days after the EO, former SEC Commissioner Allison Herren Lee, demonstrated the difficulty the SEC was going to have in navigating the climate change space. She argued that

the idea that investor concerns with scientifically supported risks like those associated with climate change is grounded in “politics” turns fact-based analysis on its head.

If it were only that simple.

Politico 2023

Climate change is real, and presents risks. But it is a murky and nuanced realm where highly technical and marginal findings are spun into headline making cataclysm.

The climate change political spectacle is a confluence of science, politics, and media reporting. Ted Nordhaus at The Breakthrough Institute explains the history of how advocate scientists tailored research to spin media headlines and how the media was only too happy to oblige:

Efforts by environmental advocates to attribute extreme events to climate change coincided fortuitously with profound changes in the structure of the media, the business models of many media outlets, and the social and political culture of newsrooms in ways that have incentivized the presentation of extreme events as centrally implicating anthropogenic warming…

Today, media outlets large and small compete in a far more crowded marketplace to reach much narrower segments of the population. This incentivizes them to tailor their content to the social and political values of their audiences and serve up spectacles that comport with the ideological preferences of the audiences they are trying to reach. For the audiences that elite legacy outlets such as the New York Times now almost exclusively cater to, that means producing a continual stream of catastrophic climate news.

The production of media tailored science has proven too enticing for elite scientific journals to resist, and so they too fuel the beast. And if the journals are playing that game then scientists seeking the approval of their tenure and promotion voting peers will too.

And it turns out that this climate catastrophism quite profitably influences investor activity.

NYTimes Climate Forward 2023

If SEC regulators are unaware of the technical challenges in the detection and attribution of climate change in extreme weather, those that make their business grappling with the situation are most certainly aware.

Says the Insurance Coalition to the SEC:

the proposed climate risk disclosure requirement raises concerns for insurers because there is no consensus scientific method for insurers to distinguish between weather-related risks and climate-related risks

To which the SEC responded by making reference to a public facing page of the NOAA NCEI finding the distinction as: “weather refers to short-term changes in the atmosphere whereas climate describes what the weather is like over a long period of time in a specific area.”

That website provides the below infographic in case your in-house climate experts did not have the topic covered in their atmospheric science doctoral program.

SEC’s explanation to the insurance industry. Shove that in your model and smoke it.

The SEC’s new rule is modeled after Task Force on Climate-related Financial Disclosure recommendations so it includes a substantial scenario analysis discussion. TCFD was Bloomberg led thing under the auspices of the Financial Stability Board, a G20 thing to promote international financial stability.

The SEC final rule pulled back from the proposed rule,

The Commission proposed to require a registrant that uses scenario analysis to assess the resilience of its business strategy to climate-related risks to disclose the scenarios considered (e.g., an increase of no greater than 3 ºC, 2 ºC, or 1.5 ºC above pre-industrial levels), including the parameters, assumptions, and analytical choices, and the projected principal financial impacts on the registrant’s business strategy under each scenario.

This had support from those who noted that in order for disclosures to be comparable (as per Biden) then the scenario’s embedded assumptions need to be made clear.

Not surprisingly, big players shied away from anything that might cause too much divulging of analytic special sauce. These groups included: Alphabet, Amazon, Insurance Groups, CEMEX, and Chevron.

As a compromise, the SEC, provided the qualifier: “brief”

The final rule provides that, if a registrant uses scenario analysis… and if, based on the results of scenario analysis, a registrant determines that a climate-related risk is reasonably likely to have a material impact …then the registrant must describe each such scenario, including a brief description of the parameters, assumptions, and analytical choices used...

The speculative nature of these scenario based technical exercise is seen in the clamor for safe harbor provisions to apply:

Commenters stated that because many of the required climate-related disclosures will involve complex assessments that are substantially based on estimates, assumptions, still-evolving science and analytical methods, and the use of third-party data, the safe harbor should cover all such climate-related disclosures.

The safe harbor provision is common in forward looking financial statements and protects against litigation.

But- and I am neither lawyer or accountant- safe harbor is granted for those not making intentionally misleading statements; there is an element of good faith.

What sort of actual knowledge does or should a climate risk analyst have about documented lapses in scientific integrity in climate change science?

The SEC estimates that analytic companies are getting $600/hr or more.

I figure that my free two cents is at least a minimum bar of the actual knowledge a paid consultant would and should have of lapses in integrity in climate science. If I am aware of these things they should be too.

Apple Dictionary

Intentionally misleading statements about climate risk may include:

• Claims that climate change has increased disaster losses

• The use of NOAA’s billion dollar dataset

• Implausible and extreme emission scenarios, and scenarios intentionally designed for research purposes only

• Plausible high emission scenarios framed as midrange scenarios (which implies the continued legitimacy of the extremes)

• Calculations that use different emission scenarios in different parts of the analysis, or pair extreme emission scenario with more desirable sounding social projections

• Claims of working to improve equity while using emission scenarios that project inequities

• Misuse of event attribution to make claims about an occurrence rather than a probability of a marginal change in intensity

• The application of a multiplicative factor of 10 because of (un)known unknowns

One could go on and those getting $600/hr+ should go on.

And just because the Biden Administration does these thing does not make it okay. Actually, it makes it a serious problem. And it substantiates the point that politics has indeed turned fact based analysis of climate change risks on its head.

1. The SEC rule also set up a stable demand for emissions accounting and the consulting business thereof. It took its firmest position on required disclosure of emissions in the form of aggregate CO2e for certain filers (generally, the largest corporations). In doing so, it gave a nod to the GHG Protocol (a project of World Resources Institute and World Business Council on Sustainable Development) but it did not require the use of the GHG Protocol, which uses GWP100. So, everyone can count equivalents however they want. In fact, the SEC requires reporting of Scopes á la the Protocol but provided alternative definitions Scopes. Sounds messy.

But, companies can purchase assurance cover for their GHG accounting and so, there was no demand for GHG accounting statements to receive to safe harbor.

2. A lively debate was offered around reporting of “severe weather events and other natural conditions.” Comments included:

• Do we have to show that a weather event is attributable to climate change?

• All weather events or those above a historical baseline?

• Wildfire has lots of causes and should not be on the list of severe weather events and natural conditions

• What are “other natural conditions” anyway?

• And later, a commissioner wanted to know: what is a “severe natural condition”?

  • The phrase appears only in footnote 2093: “For example, in determining whether high temperatures constitute a severe natural condition, a relevant factor may include average seasonal temperatures.”

Great questions, says the SEC:

under the final rules, registrants will have the flexibility to determine what constitutes a severe weather event or other natural condition based on the particular risks faced by the registrant

One comment suggested “other natural conditions” can include deforestation.

3. Shapiro went on to work closely with Michael Bloomberg, eventually as part of the TCFD and other disclosure standard organizations. She is currently an adviser to the silicon valley unicorn Watershed, a platform for all your disclosure and offset purchasing needs, of which Al Gore is an investor, among some other notables.