This interview was adapted for GreenFin Weekly, a free newsletter. Subscribe here.
Americans can always be counted on to do the right thing, after they have exhausted all other possibilities. Has that moment arrived at the intersection of climate and capital markets?
The U.S. Securities and Exchange Commission (SEC) is at last responding to ongoing demands from institutional investors, companies and the public to mandate climate disclosure for publicly traded companies, getting U.S. capital market requirements in line with the emerging global norm. There is, surprisingly, broader support across party lines for mandating climate disclosure than for most issues I’ve been privy to since I turned voting age, but it’s misguided to assume this ruling’s outcome will reflect that consensus.
Kristina Wyatt left the SEC just last month to join Persefoni, a climate management and accounting platform, as its deputy general counsel and senior vice president for global regulatory climate disclosure. Wyatt was serving as senior counsel for climate and ESG to the director of the Division of Corporation Finance at the SEC — she is steeped in the processes and decision-making that has underpinned this proposed ruling.
I think if I were surprised by anything, it's just how much it's gone according to plan.
This week, Wyatt shared a helpful guide breaking down the "Anatomy of an SEC Proposing Release," which I recommend you check out.
Wyatt wrote, "The more important point is that the SEC is committed to transparency — to ensuring investors have the information they need to make well-informed investment decisions." I checked in with Wyatt to get her sense of the most pertinent information and context that the sustainable finance space needs to know from this week’s climate disclosure data dump.
I’ve shared some key takeaways from our conversation: the implications of this week’s proposal on the future of existing voluntary disclosure frameworks, considerations for Scope 3 reporting, potential misunderstandings of what the ruling can accomplish and more.
The interview has been edited for clarity and length.
Grant Harrison: What about the way the climate disclosure rule unfolded this week is surprising you? Anything stand out as promising or concerning given your prior involvement in the rulemaking process?
Kristina Wyatt: I think if I were surprised by anything, it's just how much it's gone according to plan. I think that chair [Gary] Gensler and the other commissioners and the staff laid out a plan for a very, very thoughtful rule-making process. And I think that that's really come to fruition. And the proposal covers, as you know, a lot of ground … and I think it does a very nice job of weaving climate through the entirety of a company's reporting process from its narrative disclosures in the front of a 10-K in what is regulated by Regulation S-K, all the way to the back of the document where there are financial statement disclosure requirements that would show up in regulation S-X, and it's unusual to have a rule that actually covers both of those and weaves its way through the entire financial filing.
This does that in a very impressive way. It's a testament to the fact that climate is so integral to so many companies’ business operations and financial results, and needs to be treated like a critical financial input.
Harrison: What do you think is the most overlooked significance of this proposal?
Wyatt: The most overlooked significance is the extent to which it will push climate and climate risk and strategy into the boardroom, and into senior management. To that end, Persefoni’s CEO, Kentaro Kawamori, penned an open letter to business leaders highlighting the key takeaways from the SEC proposal and what they should do next.
I also think there will be a lot of focus on the required disclosures of Scopes 1 and 2 and on disclosures by certain companies of Scope 3 emissions. I think there will also be a lot of discussion of the attestation requirements for Scopes 1 and 2 and for the information that goes in the notes to the financial statements. All of that is critically important. But I think the piece of this that is probably the most important and the most significant is that it pushes climate-related issues to the top of the agenda of the board and senior management of companies. And as such, it will cause them to focus on and address their climate-related risks and opportunities in a way that ultimately will be good for the companies and good for their shareholders.
Harrison: You provided a guide to understanding the SEC’s climate disclosure proposal release wherein you wrote, "There will be many summaries and analyses … in the days and weeks ahead." Is anything you’re hearing in the media, professional circles or otherwise demonstrating common misunderstandings of the rule?
Wyatt: That's a great question. I've read a bunch of materials that have come out in the last day or so but certainly not all of it. A lot of the commentary looks to be quite good. I think that what we'll probably tend to see is that there will be greater nuance that goes into the discussion, as people dive further into the 500-page proposal. I think there will probably be a lot of questions that come out of that deeper reading of the proposal. I'd love to answer that question a little bit better, even in a couple of weeks, once we've seen more written about it.
Harrison: Do you see any common trends in how ESG investing proponents are miscalculating what progress this rule is capable of producing in the real economy? And the same for ESG investing detractors?
Wyatt: I think there's certainly a lot of celebration on the side of the investor community. And some might say that that is a little bit premature, because the proposals still have to go through the comment period and the commission will still have to adopt final rules. Then there could very well be litigation, so we should probably be a little bit cautious as to what the final rules ultimately might look like, and then when they might be implemented.
On the other hand, I do think that this will continue to push what they call the "private ordering" process forward. This is where the markets are demanding this information and demanding it in a more consistent way over time, and so there tends to be a convergence on certain reporting standards, namely the [Task Force on Climate-related Financial Disclosures] and the Greenhouse Gas Protocol. That's consistent at a baseline with what the SEC proposal has done. The general direction of travel will continue toward convergence of those reporting standards, which also happen to be the reporting standards that are being followed around the world in the U.K., the [European Union], in Asia and all over the world. These are likely to be the foundation of the standards that the [International Sustainability Standards Board] will end up adopting.
With regard to the issuer side, I think what we're likely to hear is two main sources of objection or concern. One would be that it will be costly and difficult to disclose this information, and the other will be that it will increase a company's potential liability if they have to disclose this information in filed SEC documents. My answer to that is if companies try to comply with the new rules in the way that many companies have been gathering their greenhouse gas emissions data — largely on spreadsheets and with consultants — that it would be very difficult and costly. But there are tools, like Persfeoni’s, that make the process a lot easier and more transparent and auditable. So I think on the cost side, we have answers. I also think there's sort of a corollary to that, which is that if you know that what you are reporting is accurate, and you can show that and you have an audit trail, that's the best defense you're going to have against potential liability.
Harrison: Critics point to the SEC’s existing materiality guidance as already complete, saying that the climate disclosure rule doesn’t successfully make the case that climate disclosure is material. What do you have to say to naysayers here? More specifically, what do you say to the criticism that this is overreach by the SEC?
Wyatt: This is certainly going to be a big part of the conversation over the course of the months and maybe years to come. I think that the question of what's material really stands in the hands of investors. The Supreme Court has made it clear that information is material if the reasonable investor finds it important to an investment decision. There are trillions of dollars of assets under management that are asking for this information. The investor community has been quite clear that they need this information, so it’s pretty hard to buy the argument that this information isn't material.
Commissioner Allison Lee published a really good opinion on materiality, and she made the very good point that not every specific line item that's required in an SEC report has to be individually material to every company. There are certain line items, plenty of them, that are just disclosures that are important for companies writ large, even if that particular item isn't material to that particular company. I think that's going to be an important point to remember, particularly with regard to climate because it is material and critically important to so many companies. Further, investors really want consistent information to enable them to compare how companies are addressing their climate-related risks.
Harrison: The gulf between Congressional action and Americans’ sentiments across party lines is not new, but support for mandating climate disclosure for publicly traded companies is uncharacteristically high. Given such overwhelming support, what do you see as the primary obstacle to this rule getting implemented?
Wyatt: I hope that there's significant engagement in the comment process. Those comments that come in will be taken very seriously by the commission, and they'll certainly be woven into the final rule when it's adopted. I think we can expect to see a good bit of support for the proposal. Chair Gensler noted, I think, that some 75 percent of the comments submitted in response to the request for public input last spring favored regulation of climate reporting. Of course, some of the comments will oppose the proposal, and I think the arguments that will be made are very much along the lines of what we've talked about here.
You've raised the question of materiality and whether the SEC might be going beyond its scope in adopting rules related to climate. I think some companies or business groups might be concerned about the cost of compliance, maybe because they don't quite understand how it will work and that there are ways to to comply without it being unduly burdensome. We've talked about liability and the fear of litigation — I think that will be one of the key arguments. Additionally, you've likely heard some discussion of, for example, First Amendment claims. Claims that the SEC is beyond its authority in regulating climate disclosures. I don't think those are well-founded, but I think those are arguments that we're likely to hear.
Harrison: The SEC's climate proposal will adopt the recommendations of the TCFD. How do you see this affecting the "alphabet soup" of ESG disclosure frameworks for companies going forward?
Wyatt: I think it's a huge step forward. And just to be clear, I think that the SEC proposal doesn't wholesale adopt the TCFD, but it is substantially based on that framework. The fact that the proposal is framed around the TCFD recommendations, as well as the Greenhouse Gas Protocol, just carries the drive toward convergence ahead in a huge way. The reason for that is that there has been this convergence over the course of the last year or so that really culminated at COP26 with the formation of the ISSB. Those standards still have to be issued, but there was a prototype that was developed by many of the "alphabet soup" standard setters, who came together and formed a sensible reporting construct that the ISSB is very likely to follow. It tracks closely with what the commission has done here, and it tracks the TCFD and the greenhouse gas protocol, as does the U.K. and the EU, Singapore, New Zealand, Japan and many other jurisdictions.
This is just a critical moment, and I think what we've seen in the last year is this dramatic convergence, to a point where there was a recognition that we really do have to pare back the different reporting standards because, well, with the proliferation of standards, companies didn’t know what to report to. Investors were not getting consistent information, so we weren't moving in the right direction up until about a year ago. The SEC’s proposal is squarely in line with the direction of travel of the international community. So, I think it's a great step.
Harrison: The SEC proposal has made Scope 3 emissions disclosure dependent on how material they are to a company’s business. Do you see any significant risks, or potential risks, this decision has on the climate rule’s effectiveness?
Wyatt: I think it's the right decision. Scope 1 and 2 greenhouse gas emissions are so universally important and easier to gather. Making them required without regard to materiality makes sense. But Scope 3 is just more difficult, so the commission took a different position with it. They did limit its application to larger companies, so smaller reporting companies will not have to report their Scope 3 emissions, which reflects a good balance between how difficult it will be to get the information and how important it is.
The materiality overlay is important because it basically says, look, disclose your Scope 3 if it's important to your investors; if it's a significant factor that the reasonable investor would want to know, disclose it. But if you're in an industry where your Scope 3 emissions really aren't significant, then don't worry about it. You can disclose it, but you don't have to.
Harrison: This must have been satisfying for you to see this come to fruition. How does it feel?
Wyatt: I'll be honest, it feels great. And I couldn't be any prouder of the staff and the commission. I think that they put out a proposal that is really tremendous, and bridges a gap that's difficult to bridge, and does an amazing job of serving both companies and investors. It's just a great step forward.