Fight Brews Over Cost of SEC Climate-Change Rules

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Investors are demanding the environmental-impact data but companies balk at their expense under the plan

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The costs are a rough estimate and are high because they require companies to disclose data that some haven’t measured before on their climate impact and the risks that climate change poses to them.

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Critics of new regulations often say costs will be too onerous. Some supporters of the SEC’s proposed rules say that many companies are already providing this data to investors and that standardizing the numbers will save investors money.

Under the rule, companies will for the first time be required to report their greenhouse-gas emissions including, in certain cases, those from their suppliers and customers. Some climate data will have to be independently audited. Companies will also have to analyze the impact of climate risks from things like flooding and drought on their audited financial statements.

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“This climate rule making is unlike anything I’ve seen in my 25-year career in securities law, in the breadth and scope of the proposals,” said David Lynn, a partner at law firm Morrison & Foerster and former senior SEC official. “It is standing up a whole new disclosure regime.”

For companies that are starting from scratch in reporting climate data, complying with the rules could be more expensive than the SEC estimates. It will involve creating new systems to collect, analyze and report the data needed and potentially hiring new staff, consultants and auditors, Mr. Lynn said. He said the costs are difficult to estimate and could be well higher than the SEC believes.

The SEC declined to comment.

The climate proposal isn’t the most expensive new SEC rule. The 2002 Sarbanes-Oxley reforms’ requirement for rigorous internal controls cost smaller companies about $630,000 a year, based on 2011 survey data updated to today’s prices, according to Michael Ewens, a finance professor at the California Institute of Technology. That is one-and-a-half times the estimated climate-rule cost for smaller companies.

Lawmakers, companies, investors and green groups are adopting sharply different positions in their responses to the SEC’s consultation on its proposals, which it last week extended to mid-June.

Supporters of the proposal say investors need clear, consistent information to judge whether climate change will hurt their returns.

The losses suffered by investors in PG&E Corp.

show the risks. The California utility filed for bankruptcy in 2019 after being overwhelmed by liabilities from wildfires linked to climate-change.

“Climate change threatens the value of investments across the board,” BankFWD, a green campaign group, said in its comments to the SEC.

Many big companies already disclose at least some climate data voluntarily, partly in response to pressure from investors. Four out of five S&P 500 companies reported the greenhouse-gas emissions from their operations and the energy they purchased, known as Scope 1 and 2 emissions, for 2020, according to data provider Refinitiv.

Some Republican lawmakers say the SEC should allow this market-led reporting to continue, rather than impose rules.

Big investors counter that the current hodgepodge of voluntary disclosures makes it time-consuming and difficult to compare companies.

Linda-Eling Lee, global head of ESG and climate research at index provider MSCI Inc.,

Said regulators in other countries are already asking companies for much of the information that the SEC plans to require.

“The more standardization there is, and the more harmonization there is, everyone benefits—both the people who have to do the reporting and the entities that have to use the data,” Ms. Lee said.

A survey earlier this year of 35 big investors found they spent an average of $1.4 million a year each on collecting, analyzing and reporting climate data. The most expensive item was $487,000 on ratings firms, consultants and data providers—many selling information that would become more readily available under the SEC rule.

The companies that responded to the survey, by green consulting-firm ERM International Group, said they spent on average $533,000 a year voluntarily providing the information the SEC’s rule would require. That tally is very close to the agency’s $530,000 a year estimate of the ongoing cost of its rule for bigger companies.

Trade and industry groups concerned about the rules are citing their costs. The National Mining Association told the SEC its “incredibly consequential and complicated rule” would impose substantial administrative burdens on companies.

Republicans, who oppose the SEC’s move to oversee climate disclosures, are also flagging costs as a concern. A group of 19 senators told the agency its proposal “comes with enormous costs for employers.” The billions in new compliance costs would reduce shareholder returns, they wrote to the SEC.

The added costs could result in fewer companies willing to be publicly traded, the senators added.

Academics who have studied the effects of increased regulatory costs say fears the climate rule would harm public markets may be overblown.

“These are meaningful [cost] numbers but our research suggests that costs of this order are unlikely to have a significant impact on the numbers of firms going public or private,” said finance professor Mr. Evens.

Write to Jean Eaglesham at [email protected] and Paul Kiernan at [email protected]

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Credit: www.Businesshala.com /

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