At an open meeting on Monday, the US Securities and Exchange Commission (SEC) put forward landmark new rules on mandatory climate-related disclosures, in proposals described by Chair Gary Gensler as “driven by the needs of investors and issuers.” We are pleased to see that (as expected) these new disclosures would need to be tagged in a structured, machine-readable data language – namely Inline XBRL.
The digital tagging requirement would extend not only to quantitative facts but also narrative disclosures. The use of Inline XBRL, say the proposals, would benefit users by making the disclosures more readily available and easily accessible for aggregation, comparison, filtering, and other analysis, compared to a non-machine-readable format such as ASCII or HTML. “This would enable automated extraction and analysis of climate-related disclosures, allowing investors and other market participants to more efficiently perform large-scale analysis and comparison of climate-related disclosures across companies and time periods.” This places XBRL at the heart of the SEC’s goal of providing decision-useful information to investors, as well as consistent and clear reporting obligations for issuers.
At the same time, with issuers already subject to a range of other Inline XBRL requirements, the Commission expects reporting burdens to be minimal. The collection of both climate and financial information in a single format will also facilitate integrated analysis.
The proposed rules draw in large part on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). They would require public companies to disclose, in their registration statements and periodic reports, climate-related risks likely to have a material impact on their business, results of operations, or financial condition. These would include greenhouse gas emissions, subject to independent assurance, since these are increasingly used as a risk proxy – with Scope 3 emissions to be phased in for larger companies. Companies would also need to make disclosures on their governance of climate-related risks and any transition plans, and to include certain climate-related financial statement metrics in a note to their audited financial statements.
There is, as one might expect, vigorous debate around the proposals, centred in perceptions of materiality. Dissenting Commissioner Hester Pierce holds that the SEC is overstepping its remit, and that material climate concerns fall within existing SEC rules. Other Commissioners, argue that investors both need and demand disclosures about what they consider a clear material risk. “I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance,” states Gensler.
It is worth noting that most companies already dedicate considerable time and resources to compiling climate and other environmental, social and governance (ESG) information, for example in filling out proprietary surveys from the various ESG ratings providers – a common subject of feedback from issuers. With the need for companies to collate and report climate-related information here to stay, it seems clear that this process should be as efficient and as useful as possible.
Digital reporting using XBRL offers the opportunity to do it once and do it well, generating high-quality information for useful analysis by investors, data providers (including ESG ratings providers), regulators and issuers themselves.
The proposals are now open for public comment, and are expected to generate significant feedback and an in-depth review process leading to the development of the final rules. Whatever form those eventually take, this week’s announcement was undoubtedly a watershed moment for corporate reporting in the US and beyond. As Wes Bricker, who is (inter alia) Chair of XBRL International’s Board of Directors, writes in a personal post: “Now, regulators, investors and other stakeholders are increasingly asking for comparability, consistency and higher quality in ESG reporting, and SEC rulemaking is a step in that process.”
With the worlds capital markets increasingly intertwined, and paying ever more attention to climate and other ESG metrics, the next challenge for regulators and standards setters will be to ensure that reporting carried out in one market can be used in another. The associated digital challenge is to ensure that wherever there is an intention to require the same information, it should both enable all stakeholders to consume it and offer meaningful quality and comparability, even though different jurisdictions will approach reporting in slightly different ways. Stay tuned for much more on that topic going forward!