Fight Brews Over Cost of SEC Climate-Change Rules

The cost of proposed rules on climate disclosure is emerging as a key battleground as businesses and politicians scramble to plan to require companies to tally their impact on climate change. environment and the risks they face from climate change.

The Securities and Exchange Commission estimates the plan will increase the cost for businesses to comply with disclosure regulations from $3.9 billion to $10.2 billion. The cost spike equates to an average ongoing additional cost of $420,000 a year for a small publicly listed company and $530,000 a year for a larger company, the SEC said.

Costs are a rough estimate and are high because they require companies to disclose data that some companies have not previously measured about their climate impacts and the risks that climate change poses to them. surname.

Critics of the new regulations often say the costs will be too high. Some proponents of the SEC’s proposed rules say that many companies already make this data available to investors, and that standardizing the numbers would save investors money.

Under the regulation, companies will be required for the first time to report their greenhouse gas emissions, including, in some cases, 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 floods and droughts on their audited financial statements.

“This climate rulemaking is unlike anything I have seen in my 25-year career,” said David Lynn, a partner at law firm Morrison & Foerster and a former senior SEC official. its securities laws. “It’s setting up a whole new mode of disclosure.”

For companies that are starting from scratch in reporting climate data, compliance with the rules could be more expensive than the SEC estimates. It will involve creating new systems to collect, analyze and report on necessary data and potentially hire new staff, consultants and auditors, Mr. Lynn said. Costs are difficult to estimate, he said, and could be higher than the SEC believes.

The SEC declined to comment.

The climate proposal isn’t the SEC’s most expensive new rule. According to Michael Ewens, a finance professor at the California Institute of Technology, the Sarbanes-Oxley reform request in 2002 costs about $630,000 a year for smaller companies. That’s one and a half times the estimated cost of climate rules for smaller companies.

Lawmakers, companies, investors and green groups are adopting markedly different perspectives in their responses to the SEC’s consultation on their proposals, which last week lasted until last week. Between June.

Proponents of the proposal say investors need clear, consistent information to assess whether climate change is affecting their returns.

The losses suffered by investors in PG&E Corp.

shows risks. The California utility company filed for bankruptcy in 2019 after being overwhelmed by debts owed from climate change-related wildfires.

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

Many large companies have voluntarily disclosed at least some climate data, in part in response to pressure from investors. According to data provider Refinitiv, four out of five S&P 500 companies have reported greenhouse gas emissions from their operations and the energy they buy, 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.

Major investors object that the current avoidance of voluntary disclosure makes comparing companies time consuming and difficult.

Money is a sticking point in climate change negotiations around the world. As economists warn that limiting global warming to 1.5 degrees Celsius will cost trillions more than anticipated, the WSJ looks at the sums that could be spent as how and who will pay. Illustration: Preston Jessee / WSJ

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

said regulators in other countries have asked companies for much of the information the SEC plans to request.

“The more standardization and harmonization there is, the more everyone benefits – both those 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 major investors found they spend an average of $1.4 million per year on climate data collection, analysis and reporting. The most expensive item is $487,000 for rating firms, consultants, and data providers — more selling information will become available under SEC rules.

Companies that responded to the survey, by green consulting firm ERM International Group, said they spent an average of $533,000 a year voluntarily providing the information the SEC rule requires. That number is very close to the agency’s $530,000-a-year estimate of the rule’s ongoing costs to larger companies.

Trade and industry groups interested in the rules are citing their costs. The National Mining Association told the SEC its “complicated and extremely complex rules” would place a significant administrative burden on the companies.

Republicans, who oppose the SEC’s move to monitor climate disclosures, are also making cost a concern. A group of 19 senators told the agency their proposal “comes with enormous costs for employers.” They wrote the SEC billions of new compliance costs that would reduce shareholder returns.

The added costs could lead to fewer companies willing to go public, the senators added.

Scholars who have studied the impact of increased administrative costs say fears the climate rule will harm the public market may be overblown.

“These are meaningful things [cost] but our research shows that the cost of this order is unlikely to have a significant impact on the number of companies going public or private,” said finance professor Mr. Ewens.

Write letter for Jean Eaglesham at jean.eaglesham@wsj.com and Paul Kiernan at paul.kiernan@wsj.com

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Edmund DeMarche

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