Banking Group Pushes Back on SEC’s Climate Mandate

The American Banking Association has called on the Securities and Exchange Commission to revise its climate risk disclosure proposal for public companies.

The SEC proposal requires the measurement, disclosure, and auditing of the greenhouse gases emitted, not only directly by a company, but also by its business partners up and downstream of the production process, as well as use, and disposition of its products. The bankers group says the SEC has exceeded its mandate and wants the agency to either withdraw the proposal or resubmit another one.

In a letter to SEC Chairman Gary Gensler dated June 17, the ABA said “these requirements go far beyond the SEC’s mandate to protect investors. ABA respectfully urges the Commission to address the serious concerns we note in this letter. New standards for climate-related disclosures and accounting must conform to the long-held definition of materiality and also be scalable to the size and complexity of the registrant. A final rule must limit disclosure requirements for Scope 3 emissions to those explicitly included in a registrant’s material, publicly announced climate-related goals and sufficient safe harbors and transition time must be provided, given the nascent state of climate-related financial risk management.”

While acknowledging that some investors are interested in addressing potential climate-related financial risks, the bankers group said climate change is not the top consideration for most investors and most companies. The ABA is concerned with the areas of materiality, scalability, and financed emissions in its letter to the SEC.

The bankers group believes climate-related disclosure requirements should be restricted to companies where it is likely that a reasonable investor would weigh climate-related factors when deciding whether to purchase or sell the company’s securities or how to vote on company proposals. This adheres to the concept of materiality, which is essential to accounting, financial reporting, and risk management. It would also lessen concern that the SEC proposal is putting political considerations over investor protection. The ABA said the current SEC proposal is too broad and will have negative consequences for accounting and auditing practices because it establishes a “troubling precedent for future tracking of other non-financial issues.”

The ABA believes the SEC proposal’s disclosure requirements on climate risk processes will be costly for most small and mid-sized companies. The costs of compliance could result in a bifurcation of the financial/banking/accounting industry in which only the very big banks can afford compliance under the SEC protocols.

The banking industry group also says that tracking the emissions the banks emit as well as those emitted by its clients is difficult to meaningfully compare any climate-related risk and performance. The ABA said the SEC protocols of comparing emissions-related metrics between companies will likely confuse investors and will not add value to their analysis of companies. The organization is concerned that the scope of emissions reporting may dissuade smaller companies from banking with publicly held financial institutions. And the group also suggests robust emissions reporting is intended “to discourage lending as a way to allocate capital away from certain industries.”

Disclosing climate-related risk would be further complicated by differing requirements among the financial regulators outside the U.S. The group also said there are too few personnel to be considered experts in climate-related financial risk management.

According to Bryan Junus of The Corporate Citizenship Project, a corporate governance think-tank, echoed the concerns of the ABA and stressed that the proposed SEC rule change could pose risks to the country’s energy grid and supply chain.

“This SEC rule change will make it much more difficult for companies in emitting industries to sell securities and secure financing. This is a dangerous move with potentially disastrous consequences given that our energy grid and our supply chain are already under strain. Further financial pressures on emitting industries will further destabilize our supply chain and energy grid. This is not a risk worth taking.”