March 16, 2024 / VOLUME NO. 305

Mission Creep

On March 6, the Securities Exchange Commission issued its final rule to enhance disclosures around climate-related risk. Public companies — including banks — will have to disclose any climate-related risks that could have a material strategic, operational or financial impact, and steps taken to mitigate those risks. They’ll have to disclose costs or losses associated with severe weather events. And public company boards will have to describe their role in overseeing those risks. 

Importantly, public companies will also have to disclose their directly and indirectly created carbon emissions. But the rule won’t require companies to disclose emissions created outside its walls by vendors and clients — for banks, emissions created by loans and investments — which would be tougher figures to calculate. That’s good news for financial firms.

Still, industry groups including the U.S. Chamber of Commerce quickly cried foul over the SEC’s perceived mission creep. In an immediate response to the rule, the Chamber noted concerns about the “scope, breadth, and legality of the SEC’s climate disclosure efforts,” and didn’t rule out litigation. 

Erik Walsh, counsel at Arnold & Porter, says legal challenges could bear fruit due to the broad, national impact of the rule. “This is so much more than about disclosures in 10-Ks. [The SEC is] effectively implementing an environmental policy with this climate disclosure rule.”

The SEC rule isn’t the first regulatory edict to change how banks examine climate risk. In October 2023, federal bank regulators finalized interagency principles targeting banks above $100 billion in assets. But the SEC rule would have a wider reach, impacting smaller, public institutions.

In a statement, SEC Chair Gary Gensler said the rule aligns with the agency’s mandate to protect investors. The SEC has “an important role in helping to ensure that public companies make full, fair, and truthful disclosure about the material risks they face,” he said. “Investors get to decide what investments they make based upon those disclosures.”

Lawsuits could come, but Walsh advises public banks to prepare to comply with the rules, which will begin taking effect next year. 

• Emily McCormick, vice president of editorial & research for Bank Director

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