Similarly, the Swiss Re Institute estimated how global warming could
affect 48 countries--representing 90% of the world economy--and
found that the decrease in GDP in North America could range from -
3.1% if Paris Agreement targets are met (a well-below 2 [deg]C
increase), to -9.5% if no mitigating actions are taken (3.2 [deg]C
increase); See The Economics of Climate Change: No Action Not an
Option, available at https://www.swissre.com/dam/jcr:e73ee7c3-7f83-4c17-a2b8-8ef23a8d3312/swiss-re-institute-expertise-publication-economics-of-climate-change.pdf.
    \791\ See, e.g., Emirhan Ilhan, Climate Risk Disclosure and
Institutional Investors, Swiss Fin. Inst. Research Paper Series
(Working Paper No. 19-66), (last revised Jan. 7, 2020), available at
https://ssrn.com/abstract=3437178 (noting that a survey of 439 large
institutional investors shows that 79% of respondents believe that
climate risk reporting is as important as traditional financial
reporting, and almost one-third consider it to be more important);
See also Macquaire Asset Management 2021 ESG Survey Report (2021),
available at https://www.mirafunds.com/assets/mira/our-approach/sustainability/mam-esg-survey/mam-2021-esg-survey-report.pdf (noting
that in a survey of 180 global institutional real assets investors,
including asset managers, banks, consultants and investment
advisors, foundations and endowments, insurance companies, and
pension funds, who combined represent more than $21 trillion of
assets under management, more than half of responding investors
selected climate change as their primary ESG concern).
    \792\ See PWC, The Economic Realities of ESG (Oct. 28, 2021),
available at https://www.pwc.com/gx/en/services/audit-assurance/corporate-reporting/esg-investor-survey.html.

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    Investors' demand for climate-related information may also be
related to the transition risks that companies face (e.g. changes in
future regulation, shifts in investor, consumer, counterparty
preferences or other market conditions, and other technological
challenges or innovations). For example, the United States' commitment
to the Paris Agreement may have contributed to investors' demand for
information on registrants' emissions and exposure to potential
transition risk, as well as whether they have in place emissions
targets with credible pathways of achievement.\793\ The 2021
Institutional Investors Survey solicited the views of 42 global
institutional investors managing over $29 trillion in assets (more than
a quarter of global assets under management (AUM)) and found that
climate risk remains the number one investor engagement priority. A
significant majority (85%) of surveyed investors cite climate risk as
the leading issue driving their engagements with companies. These
institutional investors also indicated that they consider climate risk
to be material to their investment portfolios and are demanding robust
and quantifiable disclosure around its impacts and the plan to
transition to net zero.\794\
---------------------------------------------------------------------------

    \793\ See Section IV.A.5.d.
    \794\ See Morrow and Sodali, Institutional Investor Survey
(2021), available at https://higherlogicdownload.s3.amazonaws.com/GOVERNANCEPROFESSIONALS/a8892c7c-6297-4149-b9fc-378577d0b150/UploadedImages/Institutional_Investor_Survey_2021.pdf.
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    State Street Global Advisors (SSGA) and Blackrock, two of the
world's largest investment managers, recently announced the focus areas
for their asset stewardship program for 2022, with climate change at
the top of their priority list. One of the key expectations set by SSGA
this year is a requirement for companies to provide disclosures aligned
with TCFD recommendations, including reporting on board oversight on
climate-related risks and opportunities, Scope 1 and 2 GHG emissions,
and targets for emissions reduction.\795\ Similarly, Blackrock expects
to continue encouraging companies to demonstrate that their plans are
resilient under likely decarbonization pathways, and to ask that
companies disclose a net zero-aligned business plan that is consistent
with their business model to demonstrate how their targets are
consistent with the long-term economic interests of their
shareholders.\796\
---------------------------------------------------------------------------

    \795\ See https://www.esgtoday.com/state-street-to-require-companies-to-provide-tcfd-aligned-climate-disclosures/.
    \796\ See BlackRock Investment Stewardship (BIS), Policies
Updated Summary (2022), https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment-engprinciples-global-summary.pdf.
---------------------------------------------------------------------------

    Investors, including large institutional investors, have also
formed initiatives aimed in part at improving corporate disclosures on
climate-related risks. These initiatives include the Climate Disclosure
Project, Climate Action 100+,\797\ the Global Investor Coalition on
Climate Change (``GIC''),\798\ the Institutional Investors Group on
Climate Change (``IIGCC''),\799\ and the Transition Pathway Initiative
(``TPI''),\800\ with many of these groups seeing increasing membership
in recent years.\801\ In addition to stated demand, revealed
preferences from investment decisions and asset price responses to ESG-
related news and climate change risk suggest substantive demand for
information on climate-related risks.\802\ Investors have also
demonstrated their interest in climate-related issues through an
increase in climate-related shareholder proposals \803\ and increased
flows into mutual funds with environmental goals in their investment
mandates.\804\
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    \797\ Climate Action 100+ is composed of 615 global investors
across 33 markets with more than US$60 trillion in AUM. See Climate
Action 100+, available at https://www.climateaction100.org/about/.
    \798\ As of Apr. 2018, GIC was signed by 409 investors
representing more than U.S. $24 trillion in AUM, available at
https://climateinitiativesplatform.org/index.php/Global_Investor_Coalition_on_Climate_Change_(GIC).
    \799\ IIGCC has more than 330 members, mainly pension funds and
asset managers, across 22 countries, with over $33 trillion in AUM.
See The Institutional Investors Group on Climate Change, available
at https://www.iigcc.org/.
    \800\ The TPI is supported globally by 108 investors with more
than $29 trillion combined AUM. See Transition Pathway Initiative,
available at https://www.transitionpathwayinitiative.org/.
    \801\ For example, Climate Action 100+ launched in 2017 with 225
investors with more than USD $26.3 trillion AUM to engage with 100+
of the world's highest emitting companies to reduce material climate
risks. In 2021, Climate Action 100+ has grown to 615 investors, $60
trillion in assets, engaging with 167 companies that represent 80%+
of global industrial emissions.
    \802\ See P. Kr[uuml]ger, Corporate Goodness and Shareholder
Wealth, 115(2) Journal of Financial Economics 304-329 (2015); G.
Capelle-Blancard, A. Petit, Every Little Helps? ESG News and Stock
Market Reaction, Journal of Business Ethics 157, 543-565 (2019); and
G. Serafeim and A. Yoon, Which Corporate ESG News Does the Market
React To? (Forthcoming) Financial Analysts Journal (2021) (for
evidence of stock market responses to ESG news). See also A.
Bernstein, M. Gustafson, and R. Lewis, Disaster on the Horizon: The
Price Effect of Sea Level Rise, 134.2 Journal of Financial Economics
253-300 (2019) A. Bernstein, S. Billings, M. Gustafson, and R.
Lewis, Partisan Residential Sorting on Climate Change Risk
(Forthcoming), Journal of Financial Economics (2021); M. Baldauf, L.
Garlappi, and C. Yannelis, Does Climate Change Affect Real Estate
Prices? Only If You Believe In It, 33 (3) Review of Financial
Studies 1256-1295 (2020) (for evidence of responses of investor
demand in equilibrium prices and investment choice (based on
heterogeneous preferences and beliefs) in real estate markets).
    \803\ A recent 2021 proxy season review by the Harvard Law
School found that shareholder climate-related proposals have
increased for the second consecutive year. The authors also note
that, in 2021, environmental proposals were withdrawn at a
meaningfully higher rate relative to the prior year. This is an
indication of stronger commitments from companies to take actions
towards the specified environmental goals, or at the very least
provide the related disclosures. Many companies may prefer engaging
with a proponent rather than taking the proposal to a vote. See 2021
Proxy Season Review: Shareholder Proposals on Environmental Matters,
available at https://corpgov.law.harvard.edu/2021/08/11/2021-proxy-season-review-shareholder-proposals-on-environmental-matters/.
    \804\ See S.M. Hartzmark and A.B. Sussman, Do Investors Value
Sustainability? A Natural Experiment Examining Ranking and Fund
Flows, 74 (6) The Journal of Finance 2789-2837 (2019). Data from
fund tracker Morningstar Inc. compiled by Goldman Sachs Group Inc.
shows that, since the start of 2019, a net $473 billion has flowed
into stock mutual and exchange-traded funds with environmental goals
as part of their mandates, compared to a net $103 billion going into
all other stock funds. See Scott Patterson and Amrith Ramkumar,
Green Finance Goes Mainstream, Lining Up Trillions Behind Global
Energy Transition, Wall Street Journal (May 22, 2021), available at
https://www.wsj.com/articles/green-finance-goes-mainstream-lining-up-trillions-behind-global-energy-transition-11621656039?mod=article_inline.
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2. Impediments to Voluntary Climate-Related Disclosures
a. General Impediments to Voluntary Climate-Related Disclosures
    In practice, however, investors' demand for climate-related
information is often met by inconsistent and incomplete disclosures due
to the considerable variation in the coverage, specificity, location,
and reliability of information related to climate risk. Multiple third-
party reporting frameworks and data providers have emerged over the
years; however, these resources lack mechanisms to ensure compliance
and can contribute to reporting fragmentation.\805\ Due to deficiencies
in current climate-reporting practices, investor demand for comparable
and reliable information does not appear to have been met.\806\ As a
result, investors may face difficulties locating and assessing climate-
related information when making their investment or voting
decisions.\807\

Below we describe some key market failures with regard to disclosure,
for example (1) disclosures are not costless; (2), there are agency
problems; \808\ (3) managers may inaccurately present information; and
(4) investor responses may be unpredictable and non-unfirm.\809\ In
addition, there may be other problems, e.g. a lack of consistency, that
may indicate Commission action.
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    \805\ See Section IV.B.2.b.
    \806\ See IOSCO, Report on Sustainability-Related Registrant
Disclosures (2021), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD678.pdf.
    \807\ See GAO, Climate-Related Risks (2018) available at https://www.gao.gov/assets/gao-18-188.pdf (reporting that ``investors may
find it difficult to navigate through the filings to identify,
compare, and analyze the climate-related disclosures across
filings'').
    \808\ Agency problems are those conflicts of interest between
shareholders (i.e., the principals) and managers (i.e., the agents)
of a firm.
    \809\ See Beyer, Cohen, Lys, and Walther, The Financial
Reporting Environment: Review of The recent Literature, J. Acct.
Econ. 296-343 (2010) for a more technical and detailed discussion of
these and other additional assumptions.
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(1) Disclosures Are Not Costless
    In practice, firms can still approach full disclosure voluntarily
if there are costs to disclosure, as long as these costs are relatively
low.\810\ This is not the case, however, if individual firms' private
benefits of disclosure are also small, yet those same disclosures
provide positive informational externalities. For example, disclosures
by one registrant may provide investors with useful information via
inference with respect to peer firms. Consistent with this theory,
research in the accounting literature has documented that earnings
announcements by one firm can provide predictive signals about the
earnings of other firms in the same industry.\811\ In these cases,
disclosures can benefit investors in the aggregate (though not
necessarily investors of a specific firm) by allowing them to make
comparisons across firms, which can aid in their capital allocation
decisions.
---------------------------------------------------------------------------

    \810\ See for example R.E. Verrecchia, Discretionary Disclosure,
5 Journal of Accounting and Economics 365-380 (1983).
    \811\ See Robert Freeman and Senyo Tse, An Earnings Prediction
Approach to Examining Intercompany Information Transfers, 15(4) J.
Acct. Econ. 509-523 (1992).
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    This illustrates how, theoretically, in the absence of mandated
disclosure requirements, registrants fully internalize the costs of
disclosure but not the benefits, which may lead them to rationally
under-disclose relative to what is optimal from the investors'
perspective.\812\ As a result, a tension can exist between investors
(in the aggregate) and managers, where investors prefer more disclosure
and managers prefer less. In such instances, there may be scope for
regulation to substantially increase information provision since absent
regulation, investors are not able to fully ascertain the risks and
opportunities that firms face.
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    \812\ It is worth noting that in some cases, undertaking costly
signals can allow agents to credibly signal their type to investors.
In these cases, costly disclosures can lead to a separating
equilibrium where it may otherwise not exist. See D. Kreps and J.
Sobel, 2(1) Signaling, Handbook of Game Theory with Economic
Applications, 849-867 (1994); J. Riley, Silver Signals: Twenty-Five
Years of Screening and Signaling, 39(1) Journal of Economic
Literature 432-478, (2001).
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(2) Agency Problems
    In order for voluntary disclosure to result in the complete
revelation of all relevant private information, there would need to be
no agency problems (i.e., no conflicts of interest between managers and
shareholders) such that managers' sole objective with respect to such
disclosures would be to maximize shareholder information and,
ultimately, shareholder value. However, if managers have other
objectives and incentives for making voluntary disclosures (i.e., there
exist agency problems), then the voluntary disclosures may not result
in the same complete information.\813\ Moreover, when agency problems
exist, investors can no longer be sure if the absence of disclosure
under a voluntary regime reflects good or bad news for the firm, given
that some managers may have self-serving incentives. For example,
managers may have career concerns which could incentivize them to
withhold disclosing information they expect to be favorably received
until it is useful to balance out bad news. In contrast, when the
disclosure requirements are mandatory, the relevant, complete
information should be disclosed regardless of managers' objectives or
incentives, and investors would accordingly have more confidence in the
completeness of the resulting disclosures. For these reasons, the
benefits of a mandatory reporting regime may be more pronounced in
settings in which disclosure-related conflicts of interests exist
between managers and shareholders.
---------------------------------------------------------------------------

    \813\ See E. Einhorn. Voluntary Disclosure Under Uncertainty
About the Reporting Objective, 43 Journal of Accounting and
Economics 245-274 (2007).
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(3) Misrepresentation by Managers
    If investors are unable to verify that managerial disclosures are
complete and truthful (e.g., if investors have difficulty in
determining the extent of managers' selective disclosure of metrics or
methods of computation, exaggeration, obfuscation, outright
misreporting, etc.), then voluntary disclosures may not be fully
revealing. For example, managers may be able to engage in misleading
reporting (i.e., they can apply a favorable bias to their disclosures),
but they incur a cost that increases with the magnitude of the
misreporting.\814\ Under these circumstances, theoretical research
suggests that, in equilibrium, they may not accurately report their
private information. This is because investors would not be able to
distinguish truthful disclosures from those that are misleading (i.e.,
favorably biased). In this setting, all managers would then have an
incentive to misreport by providing disclosures with a favorable bias,
the extent of which depends on the cost of misreporting. Furthermore,
because misreporting comes at a cost, this would violate the assumption
of costless disclosure, which can exacerbate the issue of incomplete
disclosures.\815\
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    \814\ See E. Einhorn, and A. Ziv, Biased Voluntary Disclosure,
Review of Accounting Studies 420-442 (2012) (Biases in reporting can
be any number of costs in these models. These include not only
inefficient actual investments associated with the cost of distorted
reporting, but also the risk of litigation, reputation erosion, and/
or future flexibility in reporting.).
    \815\ If misrepresentation becomes sufficiently costly, then
there may be no managers who find it advantageous to misrepresent,
despite any potential benefits. In this case, purposeful
misrepresentation would not occur, thereby fulfilling one of the
assumptions of the standard full revelation argument. Clear
guidelines for disclosure and imposed costs upon the discovery of
misrepresentation are important mechanisms for enforcing and
promoting the transmission of information to investors.
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    If, on the other hand, misreporting has no costs for managers, then
this results in what is referred to as a cheap talk equilibrium.\816\
In this setting, any misalignment of incentives between managers and
investors could again result in a situation in which not all relevant
private information is fully revealed. While this could be driven by
agency problems stemming from managerial self-interest, it also occurs
when investors have heterogeneous preferences that cause differing
incentives or if managers are concerned with strategic disclosures that
may be viewed by not only investors, but also competitors, regulators,
and customers.
---------------------------------------------------------------------------

    \816\ See V. Crawford, J. Sobel, Strategic Information
Transformation, 50 Econometrica 1431-1451 (1982).
---------------------------------------------------------------------------

    In this case, a mandatory reporting regime would be beneficial to
investors to the extent that voluntary disclosures are unverifiable and
possibly misleading. These include situations where managers obfuscate
certain information in their disclosures, convey information in a
complex or difficult manner, or conceal the discretionary choices with
respect to what was reported.

(4) Uncertain Investor Responses
    Another condition necessary for voluntary reporting to be fully
revealing is that managers must be certain of investor responses to
disclosures. However, if investors have heterogeneous prior beliefs,
such that managers cannot determine whether investors will consider a
given disclosure good or bad news, then not all managers will choose to
disclose, resulting in certain private information remaining
undisclosed.\817\ Similarly, if there are varying levels of
sophistication among investors in their ability to understand
disclosures, then again, some managers may be uncertain about how
reports may be interpreted, leading them to abstain from some
disclosures.\818\ In this respect, mandatory disclosure is more likely
to benefit investors in settings where the types of disclosures are
complex or divisive, such that managers may not be certain how they
will be perceived by investors with differing prior beliefs and/or
sophistication.
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    \817\ See J. Suijs, Voluntary Disclosure Of Information When
Firms Are Uncertain Of Investor Response, 43 Journal of Accounting
and Economics 391-410 (2007).
    \818\ See R.A. Dye, Investor Sophistication and Voluntary
Disclosures, 3 Review of Accounting Studies 261-287 (1998).
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b. Climate-Specific Factors That Exacerbate Impediments to Voluntary
Disclosure
    In the context of climate-related disclosure, these impediments may
be made worse due to agency problems arising from the potentially long-
term nature of certain climate-related risks and other issues related
to the complexity and uncertainty of climate-related factors. We
explore each of these impediments in further detail.
    Impediments to climate-related disclosures may be exacerbated due
to agency problems related to potential conflicts between short-term
profitability and long-term climate risk horizons. Physical and
transition risks can materialize over time horizons ranging from the
immediate future to several decades.\819\ Likewise, shareholders may
have interests in maximizing their investment returns over both the
short- and long-term. Agency problems can worsen to the extent that the
investment horizons of a firm's shareholders and its management are
misaligned.\820\ If management prioritizes short-term results \821\ due
to pressures to perform along certain metrics,\822\ management may fail
to assess and provide relevant disclosures on certain climate-related
risks,\823\ particularly those that are medium- or long-term in
nature.\824\ Stock-based management compensation has the potential to
mitigate this issue, provided that the stock price reflects the value
of the company in the long-run. However, under the current regime,
certain climate-related risks may be unobservable or obfuscated, and
hence not fully reflected into stock prices, giving short-term-focused
managers an incentive to initiate or continue projects exposed to these
risks to maximize their compensation at the expense of long-term
shareholder value.
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    \819\ Longer horizons, for example, tend to involve changes in
chronic physical risks--sea-level rise, drought, etc. Shorter-term
horizons may, instead, be relevant for any increase in acute
physical risks such as hurricanes, wildfires, and heatwaves. See ING
Climate Risk Report 2020, available at https://www.ing.com/MediaEditPage/ING-Climate-Risk-report-2020.htm.
    \820\ A stream of literature examines the association of
climate-related disclosures with corporate governance structures and
managerial characteristics. See, e.g., M. K[inodot]l[inodot][ccedil]
and C. Kuzey, The Effect of Corporate Governance on Carbon Emission
Disclosures: Evidence from Turkey, 11-1 International Journal of
Climate Change Strategies and Management 35-53 (2019). See also S.
Yunus, E.T. Evangeline, and S. Abhayawansa, Determinants of Carbon
Management Strategy Adoption: Evidence from Australia's Top 200
Publicly Listed Firms, 31-2 Managerial Auditing Journal 156-179
(2016).
    \821\ Henry M. Paulson Jr., Short-Termism and the Threat From
Climate Change, Perspectives on the Long Term: Building a Stronger
Foundation for Tomorrow (Apr. 2015), available at https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/short-termism-and-the-threat-from-climate-change.
    \822\ Factors including corporate executive compensation and
attention to quarterly earnings and reporting are thought to
contribute to excessive focus on short-term goals. See, e.g., Short-
Termism Revisited, available at https://corpgov.law.harvard.edu/2020/10/11/short-termism-revisited/.
    \823\ See How to Take the Long-Term View in a Short-Term World,
Moral Money (Financial Times), (Feb. 25, 2021), available at https://www.ft.com/content/5bc1580d-911e-4fe3-b5b5-d8040f060fe1.
    \824\ See Richard Mahony and Diane Gargiulo, The State of
Climate Risk Disclosure: A Survey of U.S. Companies (2019) (A recent
survey conducted on the members of the Society for Corporate
Governance (SCG) about the state of U.S. climate risk disclosures
revealed that tying executive compensation to progress on climate
goals is beginning to emerge among some companies, but it is far
from a common practice. Only 6% of respondents said their board
linked compensation to climate objectives.), available at https://www.dfinsolutions.com/sites/default/files/documents/2019-10/TCFD_II_Climate_Disclosure_V10_revisedFINAL.pdf.
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    Impediments to voluntary climate-related disclosures can also be
exacerbated due to the uncertainty and complexity of climate-related
risks and the multidimensional nature of the information being
disclosed. First, this uncertainty and complexity may lead to
misrepresentation of disclosures, which, as discussed previously,
violates a condition for the full revelation of material information in
a voluntary reporting environment. The complexity of these risks has
led to many types of methodologies, metrics, and statements that can be
provided to communicate potential economic impacts and risks.\825\ This
multitude of choices to represent such risks may therefore allow
managers substantial discretion to selectively choose metrics that
appear favorable. If this managerial discretion is more difficult to be
verified by investors, managers may face lower costs for their
misreporting. Moreover, the complex and multidimensional nature of
certain climate-related risks may further impede investors' abilities
to detect misreporting. This could lead to a cheap-talk equilibrium,
which, as previously discussed, could lead to climate-related
information remaining undisclosed.
---------------------------------------------------------------------------

    \825\ See, e.g., TCFD, Recommendations of the Task Force on
Climate-Related Financial Disclosures, at 16 (June 2017), available
at https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-2017-TCFD-Report-11052018.pdf.
---------------------------------------------------------------------------

    The uncertainty and complexity of climate-related risks may also be
an impediment to voluntary disclosure if managers are less able to
anticipate how investors may respond to such disclosures. As noted
above, predictable investor responses to disclosures is one of the key
assumptions necessary for the full revelation of material information
in a voluntary reporting environment.\826\ Uncertainty in responses
means mandatory disclosures have the potential to improve information
provision to investors. The challenge in anticipating investor
responses to climate-related disclosure may stem, in part, from the
fact that the impact of these risks on registrants' financial outcomes
and operations can vary significantly. This challenge may be compounded
by the uncertainty surrounding the future path of climate change and
the evolving nature of the science and methodologies measuring their
economic impacts.\827\ The uncertainty and complexity of climate-
related risks are likely to cause substantial heterogeneity with
respect to investors' interpretation of related disclosures and their
understanding of firms' exposures to such risks, resulting in
heterogeneous and unpredictable

investor responses. In this circumstance, managers may prefer to
withhold applicable disclosures.\828\
---------------------------------------------------------------------------

    \826\ In other words, this assumes that all investors uniformly
interpret (and react to) managers' disclosures or their absence and
that investors' interpretation and reaction is known to managers.
See, e.g., A. Beyer, D.A. Cohen, T.Z. Lys, and B.R. Walther, The
Financial Reporting Environment: Review of the Recent Literature, 50
(2) Journal of Accounting and Economics 296-343 (2010).
    \827\ See, e.g., TCFD, Recommendations of the Task Force on
Climate-Related Financial Disclosures, at 16 (June 2017), available
at https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-2017-TCFD-Report-11052018.pdf.
    \828\ See, e.g., M.J. Fishman and K.M. Hagerty, Mandatory versus
Voluntary Disclosure in Markets With Informed and Uninformed
Customers, 19 (1) Journal of Law, Economics, & Organization 45-63
(2003); P. Bond and Y. Zeng, Silence Is Safest: Information
Disclosure When the Audience's Preferences Are Uncertain
(forthcoming), Journal, of Financial Economics (2021); D. Butler,
and D. Read, Unravelling Theory: Strategic (Non-) Disclosure of
Online Ratings, 12 Games 73 (2021).
---------------------------------------------------------------------------

    Due to these impediments, companies may not report (or may report
only limited amounts of) relevant climate-related information, and
hence, the stock price that investors observe may not reflect the
companies' true exposures to physical and transition risks.\829\ Even
when companies assess and disclose climate-related risks, reporting
fragmentation can present substantial obstacles to investors in
processing this information.\830\ This is because disclosures currently
vary considerably in terms of coverage, location, and presentation
across companies, making it difficult for investors to navigate through
different information sources and filings to identify, compare, and
analyze climate-related information.\831\ Moreover, these disclosures
are often vague and boilerplate, creating further challenges for
investors.\832\ While it may seem that more information is always
better, when the incentives of investors and managers diverge, evidence
suggests such amorphous statements could reduce the quality of
communication both in theory \833\ and in practice.\834\
---------------------------------------------------------------------------

    \829\ See J.A. Bingler, M. Kraus, and M. Leippold, Cheap Talk
and Cherry-Picking: What Climate Bert Has to Say on Corporate
Climate Risk Disclosures (2021) available at, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3796152.
    \830\ Carbon Disclosure Project (``CDP''), Pitfalls of Climate-
Related Disclosures (2020), available at Pitfalls-of-Climate-
Related-Disclosure.pdf (rackcdn.com).
    \831\ See SASB, The State Of Disclosure: An Analysis of the
Effectiveness of Sustainability Disclosure in SEC Filings, (2017),
available at https://www.sasb.org/knowledge-hub/state-of-disclosure-2017/.
    \832\ The SASB reports that about 50% of SEC registrants provide
generic or boilerplate sustainability information in their
regulatory filings.
    \833\ See Vincent P. Crawford and Joel Sobel, Strategic
Information Transmission, Econometrica: Journal of the Econometric
Society 1431-1451 (1982).
    \834\ See, e.g., Robert Forsythe, Russell Lundholm and Thomas
Rietz, Cheap Talk, Fraud, and Adverse Selection In Financial
Markets: Some Experimental Evidence, 12 (3) The Review of Financial
Studies 481-518 (July 1999), available at https://doi.org/10.1093/revfin/12.3.0481.
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    The current regulatory regime leaves substantial uncertainty around
the type of climate-related information that should be disclosed and
how it should be presented. Multiple third-party climate reporting
frameworks have emerged to try to fill this reporting gap.\835\ Due to
the voluntary nature of third-party frameworks, however, companies
often disclose some but not all components, and the components that are
disclosed may not be the same across companies.\836\ The location,
format, and granularity of the information provided may also vary,
although the substance may be similar. This has resulted in
considerable heterogeneity in firms' existing disclosure
practices.\837\ The wide range of reporting practices and frameworks
makes it difficult to assess how much material climate-related
information firms currently are disclosing and may leave opportunities
for companies to omit unfavorable information.\838\ Some studies point
to the potential for substantial underreporting of material climate-
related information within the current voluntary reporting regime.\839\
---------------------------------------------------------------------------

    \835\ The TCFD, the SASB, the GRI, the Principles for
Responsible Investment, the PCAF, and the CDP (among others), have
all developed standards and systems that aim to help firms and
investors identify, measure, and communicate climate-related
information and incorporate that information into their business
practices. Multiple frameworks have emerged, in part, because each
seeks to provide different information or fulfill different
functions when it comes to disclosing information related to
climate-related risks or other ESG factors that may be important to
investors.
    \836\ See Climate Risk Disclosures & Practices, available at
https://climatedisclosurelab.duke.edu/wp-content/uploads/2020/10/Climate-Risk-Disclosures-and-Practices.pdf.
    \837\ See Section IV.A.5. A recent survey of members of the
Society for Corporate Governance (SCG) regarding the state of U.S.
climate risk disclosures revealed that companies are using many of
the existing frameworks to present emissions, environmental data,
and other information on ESG issues. Many of the respondents
indicated that their companies are now reporting using CDP, GRI,
SASB and other standards, with corporate registrants expressing a
desire for greater clarity regarding how to make adequate climate
disclosures. The survey results indicate that many companies are
grappling with how best to provide useful information to investors
regarding complex and interrelated risks. See Richard Mahony and
Diane Gargiulo, The State of Climate Risk Disclosure: A Survey of
U.S. Companies (2019), available at https://www.dfinsolutions.com/sites/default/files/documents/2019-10/TCFD_II_Climate_Disclosure_V10_revisedFINAL.pdf.
    \838\ See Lee Reiners and Charlie Wowk, Climate-Risk-
Disclosures-and-Practices (2021), available at https://climatedisclosurelab.duke.edu/wp-content/uploads/2020/10/Climate-Risk-Disclosures-and-Practices.pdf.
    \839\ A past study using ESG disclosure data in Bloomberg on US-
listed firms, found that, on average, from 2007 to 2015, firms
provided only about 18% (median: 13%) of the prescribed SASB
disclosure items (which serve as benchmark for financially material
disclosures). See J. Grewal, C. Hauptmann and G. Serafeim, Material
Sustainability Information and Stock Price Informativeness, Journal
of Business Ethics (Forthcoming) (2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2966144.
---------------------------------------------------------------------------

    The proposed rules aim to address these market failures by
requiring more specificity around the way registrants disclose climate-
related risks and their impacts on business activities and operations
in the short, medium, and long-term. By requiring comprehensive and
standardized climate-related disclosures along several dimensions,
including disclosure on governance, business strategy, risk management,
financial statement metrics, GHG emissions, and targets and goals, the
proposed rules would provide investors with climate-related information
that is more comparable, consistent, and reliable and presented in a
centralized location.

C. Benefits and Costs

    Below we discuss the anticipated economic effects that may result
from the proposed rules. Where possible, we have attempted to quantify
these economic effects, including the benefits and costs. In many
cases, however, we are unable to reliably quantify these potential
benefits and costs. For example, existing empirical evidence does not
allow us to reliably estimate how enhancements in climate-related
disclosure affect information processing by investors or firm
monitoring. Nevertheless, there is a large body of studies examining
the effects of corporate disclosure in general, as well as a subset
focusing on sustainability-related disclosures (e.g. ESG- or CSR-
related disclosures).\840\ We draw on existing empirical evidence and
theoretical arguments from these studies to the extent they are
applicable to disclosures on climate-related information specifically.
---------------------------------------------------------------------------

    \840\ See H.B. Christensen, L. Hail, and C. Leuz, Mandatory CSR
and Sustainability Reporting: Economic Analysis and Literature
Review, Review of Accounting Studies 1-73 (2021).
---------------------------------------------------------------------------

    Similarly, we qualitatively describe the factors that may affect
disclosure costs but we are unable to accurately quantify these costs.
Costs related to preparing climate-related disclosures are generally
private information known only to the issuing firm, hence such data are
not readily available to the Commission. There is also likely
considerable variation in these costs depending on a given firm's size,
industry, complexity of operations, and other characteristics, which
makes comprehensive estimates difficult to obtain.
    We encourage commenters to provide us with relevant data or
empirical evidence related to the costs of preparing climate-related
disclosures and, more generally, to provide us with

any type of data that would allow us to quantitatively assess the costs
and benefits of the proposed rules.
1. Benefits
    The primary benefit of the proposed rules is that investors would
have access to more comparable, consistent, and reliable disclosures
with respect to registrants' climate-related risks. As discussed in the
previous sections, investors currently face obstacles in accessing
comparable, consistent, and reliable climate-related information due to
a combination of registrants not disclosing this information at all, or
registrants disclosing this information but with varying degrees of
coverage and specificity and in varying formats and locations,
including company websites, standalone reports, and SEC filings.
    Investors are expected to benefit from the required disclosures
given that material climate-related information would be provided to
the market more consistently across registrants of different sizes and
filer status, whether domestic or foreign issuers, and regardless of
industry. Investors are also expected to benefit from the more
consistent content of the disclosures. Specifically, the proposed rules
would enhance comparability by requiring registrants to provide
disclosures on a common set of qualitative and quantitative climate-
related disclosure topics in their filings.
    In addition to the standardized content, investors are expected to
benefit from a common location of the disclosures in regulatory
filings. The proposed rules would require registrants to place all
relevant climate-related disclosures in Securities Act or Exchange Act
registration statements and Exchange Act annual reports in a separately
captioned ``Climate-Related Disclosure'' section, or alternatively, to
incorporate by reference from another section, such as Risk Factors,
Description of Business, or MD&A. By mandating that standardized
climate-related information be disclosed, and requiring it to be placed
in a centralized location within regulatory filings, the proposed rules
could reduce investors' search costs and improve their information-
processing efficiency. These factors can also lead to positive
information externalities--as more firms disclose how measures of
climate risk affect their business operations, investors would gain a
better understanding of how those same climate risks may affect other
similar firms.\841\
---------------------------------------------------------------------------

    \841\ One study documents how investors can use information from
one firm to make inferences of other similar firms in the context of
earnings announcements. See supra note 812.
---------------------------------------------------------------------------

    Furthermore, by requiring this information to be filed with the
Commission as opposed to posted on company websites or furnished as
exhibits to regulatory filings, the proposed rules are expected to
improve the reliability of information provided to investors moving
forward.\842\ Several commenters indicated that the treatment of
climate-related disclosures as filed would help improve investor
confidence in the accuracy and completeness of such disclosures.\843\
Recent academic work provides evidence of firms' engagement in
obfuscation and other misleading efforts (so-called ``greenwashing'')
\844\ to manipulate the set of information available on corporate
websites and sustainability reports with the goal of attaining higher
ESG ratings, which are relied upon, in particular, by unsophisticated
investors for the value of institutional certification.\845\ Direct
disclosures may also reduce reliance on these ESG ratings, which are
not necessarily standardized nor fully transparent with respect to
their methodologies. In fact, several studies found low correlations of
classifications across ESG providers.\846\ Additionally, a study
suggested that models and metrics used by ESG providers for
appropriately classifying funds are not always transparent and
consistent across ESG providers.\847\
---------------------------------------------------------------------------

    \842\ By proposing to treat the proposed required climate-
related disclosures as ``filed,'' we are therefore subjecting them
to potential liability under Exchange Act Section 18, except for
disclosures made on Form 6-K. The proposed filed climate-related
disclosures would also be subject to potential Section 11 liability
if included in or incorporated by reference into a Securities Act
registration statement. See Section II.C.4 (discussions within).
    \843\ See Section II.H.k.
    \844\ A review of several academic papers reveal that there is
no universally accepted definition of ``greenwashing.'' Though the
term ``greenwashing'' is often used in industry discussions
regarding ESG, the Commission does not define ``greenwashing'' in
this proposal, rules, or form amendments. Greenwashing is typically
described as the set of activities conducted by firms or funds to
falsely convey to investors that their investment products or
practices are aligned with environmental or other ESG principles.
    \845\ See Ruoke Yang, What Do We Learn From Ratings About
Corporate Social Responsibility?, R&R Journal of Financial
Intermediation (2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3165783.
    \846\ Florian Berg, Julian K[ouml]lbel, Roberto Rigobon,
Aggregate Confusion: The Divergence of ESG Ratings, MIT Sloan School
(Working Paper 5822-19) (May 17, 2020), available at https://ssrn.com/abstract=3438533 or http://dx.doi.org/10.2139/ssrn.3438533.
Authors found that the correlations between six different ESG
ratings are on average 0.54, and range from 0.38 to 0.71, while the
correlations between credit ratings were 0.99. See also OECD, OECD
Business and Finance Outlook 2020, Sustainable and Resilient Finance
(Sept. 29, 2020), available at https://www.oecd.org/daf/oecd-business-and-finance-outlook-26172577.htm. OECD analyzed different
rating providers, such as Bloomberg, MSCI and Refinitiv and found
wide differences in the ESG ratings assigned, with an average
correlation of 0.4. When OECD analysis then compared ESG ratings
with the issuer credit rating by major providers, it found that
credit scores for selected issuers vary much less. See also
International Monetary Fund, Global Financial Stability Report (Oct.
2019), available at https://www.imf.org/en/Publications/GFSR/Issues/2019/10/01/global-financial-stability-report-october-2019. It found
that only 37% of Lipper ethical funds also carry a sustainable
designation by Bloomberg.
    \847\ See OECD Business and Finance Outlook 2020, Sustainable
and Resilient Finance (Sept. 29, 2020); H. Friedman, M. Heinle, and
I. Luneva, A Theoretical Framework for Environmental and Social
Impact Reporting (Working Paper) (2021).
---------------------------------------------------------------------------

    As discussed in Section IV.B.1, surveys of institutional investors
indicate that climate risk is one of the most prominent issues driving
their investment decisions and engagements with companies. Evidence
from the stock market response appears consistent with this, with
increased mandatory ESG disclosure being associated with aggregate
stock price movement.\848\ Such stock price effects tend to display
cross-sectional heterogeneity with, for example, firms disclosing large
GHG emissions experiencing price declines.\849\ Similar effects have
also been observed in derivatives markets.\850\ Investor responses in
real estate markets potentially affected by physical risks,\851\ as
well as revealed preferences from flows into mutual funds with
environmental goals in their investment mandates,\852\ provide further
evidence of investors' interest in disclosures pertaining climate
risks. Taken together, the mandatory and standardized nature of the
proposed climate-related disclosures could benefit investors by
improving their ability to assess these risks and their impact on
registrants' financial condition and operations, thereby allowing
investors to make better-informed investment decisions and enhancing
investor protection.
---------------------------------------------------------------------------

    \848\ See J. Grewal, E.J. Riedl, and G. Serafeim, Market
Reaction to Mandatory Nonfinancial Disclosure, 65 (7) Management
Science 3061-3084 (2019).
    \849\ See V. Jouvenot and P. Kruger, Mandatory Corporate Carbon
Disclosure: Evidence from a Natural Experiment (Working Paper)
(2021); P. Bolton and M. Kacperzcyk, Signaling through Carbon
Disclosure (Working Paper) (2020).
    \850\ E. Ilhan, Z. Sautner, G. Vilkov, Carbon Tail Risk, 34 (3)
Review of Financial Studies 1540-1571 (2021).
    \851\ See supra note 802.
    \852\ See supra note 804.

---------------------------------------------------------------------------

    Improving and standardizing climate disclosures also could mitigate
adverse selection problems that may arise in the presence of asymmetric
information \853\ by making more accurate and standardized information
available to the general public.\854\ Improved disclosure could make it
easier for investors to process information more effectively and
improve the estimation of firm's future cash flows, leading to more
accurate firm valuation.\855\ In particular, the enhanced disclosures
may yield further benefits for the disclosures of financial firms.
Because financial firms can have significant exposures to climate-
related risks through their portfolio companies, any enhancements in
the portfolio companies' disclosures can subsequently be leveraged by
these financial firms in assessing the risks to their portfolios and to
the firm as a whole.\856\
---------------------------------------------------------------------------

    \853\ Asymmetric information occurs when one party to an
economic transaction possesses greater material knowledge than the
other party. Adverse selection occurs when the more knowledgeable
party only chooses to transact in settings that, based on their
private information, is advantageous for them. Less informed parties
aware of their informational disadvantage might be less inclined to
transact at all for fear of being taken advantage of. See George
Akerlof, The Market for `Lemons, Quality Uncertainty and the Market
Mechanism, 84 (3) Quarterly Journal of Economics 488-500 (1970).
    \854\ See R.E. Verrecchia, Essays on Disclosure, 32 Journal of
Accounting and Economics 1-3, 97-180 (2001).
    \855\ See R. Lambert, C. Leuz, and R.E. Verrecchia, Accounting
Information, Disclosure, and the Cost of Capital, 45 (2) Journal of
Accounting Research 385-420 (2007).
    \856\ In 2021, the CDP coordinated with 168 financial
institutions, with a combined AUM of $17 trillion USD, to engage
over 1,300 companies to request climate-related information, among
other topics. See CDP Non-Disclosure Campaign: 2021 Results,
available at https://cdn.cdp.net/cdp-production/cms/reports/documents/000/006/069/original/CDP_2021_Non-Disclosure_Campaign_Report_10_01_22_%281%29.pdf?1642510694.
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    Another benefit of the proposed rules is that it could allow firm's
shareholders to better monitor management's decisions and mitigate
certain agency problems stemming from management's discretionary
choices with respect to climate disclosure. Agency problems could occur
when management act opportunistically in their own self-interest at the
expense of shareholders by disclosing only certain climate-related
information at their discretion. As previously discussed in Section
IV.B.2.b, management may be motivated to selectively disclose only
climate-related information,\857\ while omitting harder to verify
risks.\858\ In the context of climate-related risks, agency issues may
be exacerbated by the potential conflicts between short-term
profitability and long-term climate risk horizons \859\ and the
misalignment of interests and incentives between long-term shareholders
and management,\860\ whereby the latter may unduly focus on short-term
results \861\ given pressures to demonstrate performance.\862\ Under
the current regime, many climate-related risks may be unobservable or
obfuscated, giving short-term-focused managers an incentive to initiate
projects exposed to these risks without properly informing investors.
---------------------------------------------------------------------------

    \857\ See supra note 830 (A recent study, for example, shows
that absent mandatory requirements from regulators, voluntary
disclosures following third-party frameworks are generally of poor
quality and that firms making these disclosures cherry-pick to
report primarily non-material climate risk information.).
    \858\ See World Economic Forum, How to Set Up Effective Climate
Governance on Corporate Boards: Guiding Principles and Questions
(2019), available at https://www3.weforum.org/docs/WEF_Creating_effective_climate_governance_on_corporate_boards.pdf.
In addition, there are a number of academic studies examining the
association of climate-related disclosures with corporate governance
structures and managerial characteristics. See, e.g., M.
K[inodot]l[inodot][ccedil] and C. Kuzey, The Effect of Corporate
Governance on Carbon Emission Disclosures: Evidence from Turkey, 11-
1 International Journal of Climate Change Strategies and Management
35-53 (2019); S. Yunus, E.T. Evangeline, and S. Abhayawansa,
Determinants of Carbon Management Strategy Adoption: Evidence from
Australia's Top 200 Publicly Listed Firms, 31-2 Managerial Auditing
Journal 156-179 (2016); Caroline Flammer, Michael W. Toffel, and
Kala Viswanathan, Shareholder Activism and Firms' Voluntary
Disclosure of Climate Change Risks, 42-10 Strategic Management
Journal 1850-1879 (Oct. 2021).
    \859\ Physical and transition climate risks can materialize over
time horizons ranging from the immediate future to several decades.
Long horizons, for example, tend to involve changes in chronic
physical risks--(sea-level rise, drought, etc.). Shorter-term
horizons may, instead, be relevant for increase in acute physical
risks such as hurricanes, wildfires, and heatwaves. See ING Climate
Risk Report 2020,  available at https://www.ing.com/2021-Climate-Report.htm.
    \860\ A report by the Environmental Audit Committee of the UK
House of Commons on Greening Finance, issued in June 2018, found
that short-termism is a pervasive problem in corporate decision
making and leaves business ill-equipped to consider and incorporate
long term risks, such as climate change and sustainability. See
Envtl. Audi Comm., House of Commons, U.K. Parliament, Greening
Finance: Embedding Sustainability in Financial Decision Making (June
6, 2018), available at https://publications.parliament.uk/pa/cm201719/cmselect/cmenvaud/1063/106302.htm.
    \861\ See Henry M. Paulson Jr., Short-Termism and the Threat
From Climate Change, Perspectives on the Long Term: Building a
Stronger Foundation for Tomorrow (Apr. 2015), available at https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/short-termism-and-the-threat-from-climate-change.
    \862\ Factors including corporate executive compensation and
attention to quarterly earnings and reporting are thought to
contribute to excessive focus on short-term goals. See, e.g.,
https://corpgov.law.harvard.edu/2020/10/11/short-termism-revisited.
---------------------------------------------------------------------------

    Agency problems might be exacerbated by registrants' use of
boilerplate language or selective disclosure (i.e., ``cherry
picking''),\863\ which might reduce transparency and impair investors'
ability to effectively monitor firm management. The lack of a
standardized disclosure framework could make it easier for registrants
to forego the use of certain metrics or scopes and omit information
that might otherwise indicate shortcomings.\864\ Previous studies have
found that more detailed reporting can mitigate agency problems as it
facilitates the scrutiny and discipline of firm management, allowing
investors to monitor firms' operations more closely and thus evaluate
whether managers have acted in the best interests of shareholders.\865\
By requiring registrants to provide comprehensive and detailed climate-
related information to investors, the proposed rules are expected to
reduce the likelihood of unreliable or boilerplate disclosures. This
can enable investors to better monitor firm's management, reducing
agency problems and ultimately strengthening investor protection. In
the following sections, we discuss how specific aspects of the proposed
rules could contribute to the aforementioned benefits.
---------------------------------------------------------------------------

    \863\ See supra note 806; see also Morningstar, Corporate
Sustainability Disclosures (2021), available at https://www.morningstar.com/en-uk/lp/corporate-sustainability-disclosures.
(``Companies will disclose the good and hide the bad while
disclosure remains voluntary.'').
    \864\ See JE Fisch, Making Sustainability Disclosure
Sustainable, 107 Georgetown Law Journal 923-966 (2019). See Climate
Risk Disclosures & Practices: Highlighting the Need for a
Standardized Regulatory Disclosure Framework to Weather the Impacts
of Climate Change on Financial Markets, (2020), available at https://climatedisclosurelab.duke.edu/wp-content/uploads/2020/10/Climate-Risk-Disclosures-and-Practices.pdf.
    \865\ See C. Kanodia and D. Lee, Investment and Disclosures: The
Disciplinary Role of Performance Reports, 36(1) Journal of
Accounting Research 33-55 (1998); P. Healy, and K. Palepu,
Information Asymmetry, Corporate Disclosure, and the Capital
Markets: A Review of the Empirical Disclosure Literature, 31 (1-3)
Journal of Accounting and Economics 405-440 (2001); Huang Pinghsun
and Yan Zhang, Does Enhanced Disclosure Really Reduce Agency Costs?
Evidence from the Diversion of Corporate Resources, 87(1) The
Accounting Review, 199-229 (2012); R.M. Bushman and A.J. Smith,
Financial Accounting Information and Corporate Governance, 32 (1-3)
Journal of Accounting and Economics 237-333 (2001); R. Lambert, C.
Leuz, and R.E. Verrecchia, Accounting Information, Disclosure, and
the Cost of Capital, 45 (2) Journal of Accounting Research 385-420
(2007).
---------------------------------------------------------------------------

    The proposed rules would mandate more detailed and comprehensive
disclosure with respect to climate-related risks. More consistent,
comparable, and reliable disclosures could lead to capital market
benefits in the form of improved liquidity, lower costs of capital, and
higher asset prices

(or firm valuations).\866\ These benefits would stem from reductions in
information asymmetries brought about by the required disclosure of
climate-related information, both among investors and between firms and
their investors. In the first case, less information asymmetry among
investors could mitigate adverse selection problems by reducing the
informational advantage of informed traders. This is likely to improve
stock liquidity which, in turn, can attract more investors, thereby
reducing the cost of capital. In the second case, less information
asymmetry between firms and their investors could allow investors to
better estimate future cash flows, which could reduce investors'
uncertainty, as well as the risk premium they demand, thus lowering the
costs of capital for registrants. Economic theory illustrates how, all
else equal, a drop in the cost of capital leads to a boost in equity
valuation, which can further benefit investors.
---------------------------------------------------------------------------

    \866\ See Section IV.D for more information on capital market
benefits.
---------------------------------------------------------------------------

a. Disclosure Regarding Climate-Related Risks and Their Impacts on
Strategy, Business Model, and Outlook
    The proposed rules would require registrants to identify their
climate-related risks that are reasonably likely to have a material
impact on the registrant's business or consolidated financial
statements over the short, medium, and long-term and describe the
actual and potential impacts of those risks on its strategy, business
model, and outlook. Registrants would specifically be required to
disclose impacts on, or any resulting significant changes made to,
their: (i) Business operations, including the types and locations of
its operations; (ii) products or services; (iii) supply chain or value
chain; (iv) activities to mitigate or adapt to climate-related risks;
and (v) expenditures for research and development.
    If, as part of its net emissions reduction strategy, a registrant
uses carbon offsets or RECs, the proposed rules would require it to
disclose specific information around the role that carbon offsets or
RECs play in the registrant's climate-related business strategy. If a
registrant uses an internal carbon price, the proposed rules would
require it to disclose information around the boundaries for
measurement of overall CO2e, the price per metric ton of
CO2e, as well as how the total price is estimated to change
over time, if applicable. Similarly, to the extent that the registrant
uses analytical tools such as scenario analysis, the proposed rules
would require a description of those analytical tools, including the
assumptions and methods used.
    The specific disclosures required by the proposed rules are
expected to improve investors' understanding of what the registrant
considers to be the relevant short-, medium-, and long-term climate-
related risks that are reasonably likely to have a material impact on
its business, taking into consideration the useful life of the
organization's assets or infrastructure and the fact that climate-
related risks may manifest themselves over the medium and longer terms.
Compared to the baseline, investors would be better able to identify
and assess how climate-related risks may affect a registrant's
businesses, strategy, and financial planning in several areas,
including products and services, supply chain and/or value chain,
adaptation and mitigation activities, investment in research and
development, operations (including types of operations and location of
facilities), acquisitions or divestments, and access to capital.
Investors would gain insight into how climate-related risks may serve
as an input to the registrant's financial planning process and the time
period(s) used for this process.
    For example, investors may gain better insights into the
registrant's estimated costs of any operational changes expected to be
implemented to achieve emission reduction targets. Alternatively,
investors may gain valuable information on how certain climate events
may impact the registrant's property, workforce, or its production
schedule across the different physical sites where the registrant
conducts business. Adverse climate-related events may impact the useful
lives and/or valuation reserves of balance sheet assets. For example,
sea level increases and other climate related patterns may adversely
impact the estimated useful lives of coastal facilities. Similarly,
more extreme weather patterns may adversely impact agricultural regions
and the value of related equipment and lands. This information is
expected to be useful for investors in assessing how climate-related
risks are managed, and whether and how these risks may affect a
registrant's financial condition and results of operations. The
required disclosure around the role that carbon offsets or RECs play in
the registrant's climate-related business strategy could help investors
better understand that strategy, including how resilient it is to
changes in costs or the availability or value of offsets or RECs over
the short, medium and long-term. The required disclosures around
internal carbon price, when used by a registrant, could provide
investors with more standardized and detailed information regarding how
the registrant developed a particular business strategy and help
investors assess whether a registrant's internal carbon pricing
practice is reasonable and whether its overall evaluation and planning
regarding climate-related factors is sound. The required disclosure
around the assumptions and methods used by a registrant when employing
analytical tools or conducting scenario analysis can improve investors'
assessment of the resiliency of a registrant's strategy and business
model in light of foreseeable climate-related risks and improve
investors' ability to compare said resiliency among registrants.
    The proposed requirement to identify material climate-related risks
over the short-, medium-, and long-term could also help mitigate agency
problems deriving from the potential misalignment of planning horizons
between the firm's shareholders and its managers. The information
required to be disclosed about the firm's business operations, products
or services, supply or value chain, activities to mitigate or adapt to
climate-related risks, and expenditure for research and development
could allow investors to assess how climate-related issues may impact
the registrant's financial performance (e.g., revenues, costs) and
financial condition (e.g., assets, liabilities). These disclosures
should allow investors to gain valuable insights on how resources are
being used by management to mitigate climate-related risks and to
facilitate investors' evaluation of whether managers are taking
appropriate steps to address such risks.
b. Governance Disclosure
    The proposed rules would require a registrant to disclose
information concerning the board's oversight of climate-related risks
as well as management's role in assessing and managing those risks. The
proposed rules would require a registrant to disclose whether any
member of its board of directors has expertise in climate-related
matters and the processes and frequency by which the board discusses
climate-related factors. When describing management's role in assessing
and managing climate-related factors, a registrant would be required to
disclose whether certain management positions are responsible for
assessing and managing climate-related factors and the processes by
which the responsible managers are informed

about and manage climate-related factors.
    The disclosures required by the proposed rules should enable
investors to better understand how the firm is informed about climate-
related factors and how frequently the firm considers such factors as
part of its business strategy, risk management, and financial
oversight. Investors would be expected to gain better information
around whether the organization has assigned climate-related
responsibilities to management-level positions or committees and, if
so, whether those responsibilities include assessing and/or managing
climate-related risks. As a result, investors may be better able to
understand and evaluate the processes by which management is informed
about and monitors climate-related risks. For example, investors may be
better positioned to assess whether and how the firm's board and
management consider climate-related risks when reviewing and guiding
business strategy and major plans of action, when setting and
monitoring implementation of risk management policies and performance
objectives, and when reviewing and approving annual budgets.
    With detailed information about climate expertise among the
registrant's directors, investors could more effectively evaluate the
firm's governance practices related to the identification and
management of climate-related risks. In particular, investors may be
able to exercise closer oversight of management's actions as they
assess implementation of risk management policies and performance
objectives, review and approve annual budgets, and oversee major
capital expenditures, acquisitions, and divestitures.
c. Risk Management Disclosure
    The proposed rules would require registrants to describe their
processes for identifying, assessing, and managing climate-related
risks. This includes disclosure on how registrants assess materiality,
whether they consider likely future regulatory actions, how they
prioritize, mitigate, or adapt to climate-related risks, and overall
how climate-related factors are integrated into the registrants' risk
management systems or processes. Registrants would also be required to
provide detailed descriptions on any transition plans,\867\ as
applicable, including relevant targets and metrics, how physical and
transition risks are managed, and actions taken and progress made
toward the plan's targets or goals.\868\
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    \867\ Transition plans would be defined as a registrant's
strategy and implementation plan to reduce climate-related physical
and transition risks and increase climate-related opportunities,
including by reducing its own emissions. If the registrant has made
a public commitment to reduce its GHG emissions by a certain date,
it must disclose such date and its plan to achieve its public
commitment.
    \868\ See Section IV.C.1.f for a more detailed discussion of the
potential benefits of targets and goals disclosure.
---------------------------------------------------------------------------

    The disclosures required by the proposed disclosures could inform
investors regarding how proactive and diligent registrants may be with
respect to climate-related risks. Investors can use this information to
acquire a more detailed understanding of how resilient registrants'
risk management systems may be towards climate-related risks, which
could contribute to better-informed investment or voting decisions.
These disclosures could allow investors to better monitor and assess
whether registrants have in place adequate risk management systems and
whether they are aligned with investor preferences.
    Conversely, investors may be better able to detect whether certain
registrants' risk management systems would fail to account for certain
types of climate factors such as change in consumer preferences,
adjustments of business models, and technological challenges or
innovations, which may have implications on companies' operations and
financial conditions. These disclosures may also allow investors to
assess whether registrants are evaluating these risks over specific
time horizons, which may be particularly relevant in cases in which
management may be more concerned with short-term performance while
neglecting longer term risks. Accordingly, this provision could help
address agency problems related to the misalignment of planning
horizons.
d. Financial Statement Metrics
    The proposed rules would require registrants to disclose certain
disaggregated climate-related metrics in its financial statements under
the following categories: (i) Financial impact metrics; (ii) financial
expenditure metrics; and (iii) financial assumptions. The proposed
rules would require a registrant to disclose the impact of climate-
related events (severe weather events and other natural conditions and
physical risks identified by the registrant) and transition activities
(including transition risks identified by the registrant) on its
consolidated financial statements, if the disclosure threshold is met.
For each type of metric, the provisions would require the registrant to
disclose contextual information to enable the reader to understand how
it derived the metric, including a description of significant inputs
and assumptions used to calculate the specified metrics, thus providing
the necessary transparency for facilitating investors' understanding
and peer comparisons. To avoid potential confusion and to maintain
consistency with the rest of the financial statements, the proposed
financial statement metrics would be required to be calculated using
financial information that is consistent with the scope of the rest of
the registrant's consolidated financial statements included in the
filing. The proposed rules would specify the basis of calculation for
the climate-related financial statement metrics and clarify how to
apply these accounting principles when calculating the climate-related
financial statement metrics.
    With respect to financial impact metrics, the proposed rules would
require a registrant to disclose the impacts arising from climate-
related events, including physical risks identified by the registrant
and severe weather events and natural conditions, such as flooding,
drought, wildfires, extreme temperatures, and sea level rise. In
addition to physical risks, registrants also would be required to
disclose the financial impact of transition activities (including
transition risks identified by the registrant), such as efforts to
reduce GHG emissions or otherwise mitigate exposure to transition risks
on any relevant line items in the registrant's consolidated financial
statements. The proposed rule would require registrants to reflect the
impact of the climate-related events or transition activities on each
line item of the registrant's consolidated financial statements (e.g.,
line items of the consolidated income statement, balance sheet, or cash
flow statement) unless the aggregate impact of the events and
transition activities is less than one percent of the total line item.
By exempting such line item reporting when the aggregate impact of the
events is less than one percent, the proposed rule would reduce overall
costs for firms associated with disclosures for instances where the
impact is likely to be quite small, while providing assurance to
investors that more significant impacts are reflected in line item
reporting.\869\
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    \869\ The choice of a one percent threshold is consistent with
what the Commission currently uses in other contexts for disclosure
of certain items within the financial statements and without (e.g.,
Sec. Sec.  210.5-03.1(a), 210.12-13, and 229.404(d)).
---------------------------------------------------------------------------

    We expect that the proposed financial statement metrics impact
would provide additional transparency into the nature

of a registrant's business and the significance of many of the climate-
related risks and impacts on its overall financial condition. Such
disclosures are expected to provide investors with valuable insights
into potential changes to, among others, revenue or costs from
disruptions to business operations or supply chains; impairment charges
and changes to the carrying amount of assets due to the assets being
exposed to physical risks; revenue or cost due to new emissions pricing
or regulations resulting in the loss of a sales contract and;
operating, investing, or financing cash flow from changes in upstream
costs, such as transportation of raw materials. Separately reporting
the financial statement impacts from the specified climate-related
events and transition activities could improve comparability of both
the registrant's year-to-year disclosure and between the disclosures of
different registrants. Because the risks presented by the climate-
related events and transition activities may be correlated across
different registrants and across time, future climate-related risks
could manifest in such a way that a large subset of registrants are
affected, making them potentially a non-diversifiable risk. In this
case, separate financial impact disclosures could inform investors of
their exposure to these risks not just for a single registrant, but
across all the registrants in their portfolios. Such disclosures could
be beneficial as they would be informative of both individual
registrant exposures to climate-related risks, and the level of
climate-related risks in the aggregate, thus allowing investors to more
effectively evaluate and manage the risk of their entire portfolio.
Moreover, to the extent that registrants are not aware of climate-
related risks in the aggregate, these disclosures would allow for a
greater understanding of the climate-related risks they face, providing
them the opportunity to make more informed investment decisions taking
into account such risks.
    With respect to financial expenditure metrics, the proposed rules
would require a registrant to disclose the positive and negative
impacts associated with the same climate-related events and transition
activities as the proposed financial impact metrics. The expenditure
metrics would require a registrant to separately aggregate amounts of
expenditure expensed and capitalized costs incurred during the fiscal
years presented. For each of those categories, a registrant would be
required to disclose separately the amount incurred during the fiscal
years presented toward positive and negative impacts associated with
the specified climate-related events and to mitigate exposure to
transition risks. The expenditure metrics would also be subject to the
same disclosure threshold as the financial impact metrics, which should
promote consistency and clarity.
    Together, these disclosures are expected to provide investors with
information about the total expenditure toward or capitalized costs
incurred for specified climate-related events. As such, they are
expected to increase the resilience of assets or operations, retire or
shorten the estimated useful lives of impacted assets, relocate assets
or operations at risk, or otherwise reduce the future impact of severe
weather events and other natural conditions on business operations. The
proposed rules also would provide investors with information about the
amount of expenditure expensed or capitalized costs incurred for
climate-related transition activities related, among others, to
research and development of new technologies, purchase of assets,
infrastructure, or products that are intended to reduce GHG emissions,
increase energy efficiency, or improve other resource efficiency.
    With respect to financial assumptions, the proposed rules would
require registrants to disclose whether the estimates and assumptions
used to produce the consolidated financial statements were impacted by
risks and uncertainties associated with, or known impacts from, severe
weather events and other natural conditions, such as flooding, drought,
wildfires, extreme temperatures, and sea level rise. If so, the
registrant would be required to provide a qualitative description of
how such events have impacted the development of the estimates and
assumptions used to prepare such financial statements. Similarly, if
the estimates and assumptions were impacted by potential transition
risks, the registrant would be required to provide a qualitative
description of how the development of the estimates and assumptions
were impacted by such a transition. We expect that the proposed
disclosures would provide transparency to investors on the impact of
climate-related events and transition activities on the estimates and
assumptions used by the registrant to prepare the financial statements
and allow investors to evaluate the reasonableness of the registrant's
estimates and assumptions.
    Prior evidence shows that existing climate-related disclosures
often contain boilerplate language or are ``cherry-picked'' to present
information that is favorable to the company.\870\ Accordingly,
registrants under the current regulatory regime may choose to provide
only brief, qualitative descriptions of certain climate-related factors
while omitting concrete, quantitative information on how climate-
related factors can impact individual financial statement line items.
The proposed rule may mitigate these types of agency problems by
requiring registrants to disclose specific, quantitative metrics
according to standardized scopes and methodologies, thereby helping
investors processing information more effectively.
---------------------------------------------------------------------------

    \870\ See supra note 830 and 806.
---------------------------------------------------------------------------

    The proposed financial metrics would be part of the financial
statements and thus audited by an independent public accounting firm in
accordance with existing Commission rules and PCAOB auditing
standards.\871\ Subjecting these climate-related disclosures to
reasonable assurance pursuant to an audit would require the auditor to
assess the risk of material misstatement related to the estimates and
judgments, including through evaluation of the method of measurement
and reasonableness of the assumptions used, and to understand
management's risk management processes, including the accuracy of the
proposed disclosure, thereby alleviating possible concerns about the
data's reliability and comparability, and improving investor confidence
in such disclosure.\872\ Academic research finds that assurance
procedures can increase the relevance and reliability of disclosures,
particularly for those involving significant estimation uncertainties.
\873\
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    \871\ Such audits could increase the probability of discovering
and penalizing any misrepresentation. Since this would increase the
expected costs of engaging in misrepresentation, as discussed in
Section IV.B.2, this would also be likely to increase the odds of
accurate revelation of material information.
    \872\ See Section II.F.5.
    \873\ See M. DeFond and J.A. Zhang, A Review of Archival
Auditing Research, 58(2-3) Journal of Accounting and Economics 275-
326 (2014); V.K. Krishnan, The Association Between Big 6 Auditor
Industry Expertise and the Asymmetric Timeliness of Earnings 20
Journal of Accounting, Auditing and Finance 209-228 (2005); W.
Kinney and R. Martin, Does Auditing Reduce Bias in Financial
Reporting? A Review of Audit-Related Adjustment Studies, 13
Auditing: A Journal of Practice & Theory 149-156 (1994); K.B. Behn,
J.H. Choi, and T. Kang, (2008), Audit Quality and Properties of
Analyst Earnings Forecasts 83 The Accounting Review 327-349 (2008).
Some commenters expressed similar views. See, e.g., Comment Letters
from CAQ, Ceres; Impax Asset Management; San Francisco Employees'
Retirement System; and UNEP-FI.
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e. GHG Emissions Metrics
    The proposed rules would require all registrants to disclose Scope
1 and Scope 2 GHG emissions. Given the

possibility of a transition to a lower-carbon economy, investors and
other market participants may be concerned about registrants that have
high GHG emissions since these registrants may be more exposed to
certain transition risks, such as regulations that restrict emissions
or the potential impacts of changing consumer preferences or market
conditions. Should a transition to a low-carbon economy gain momentum,
registrants with higher amounts of Scope 1 and 2 emissions may be more
likely to face sharp declines in cash flows, either from greater costs
of emissions or the need to scale back on high-emitting activities,
among other reasons, as compared to firms with lower amounts of such
emissions.
    Understanding the extent of this potential exposure to transition
risks could help investors in assessing their risk exposures with
respect to the companies in which they invest. Greater consistency in
emissions disclosures can further benefit investors as it can
facilitate comparisons between the registrants and their peers and
assist in understanding the overall risk of their portfolios. As
described below, emissions disclosures would also help inform investors
about the extent to which a company has been or is following through
with its disclosed strategies and transition plans. As further
discussed in Section IV.D, we expect this provision to lower
uncertainty for investors, thereby reducing the cost of capital. This
may make it easier to raise equity and debt, or to obtain loan
financing.
    Besides the direct risk to cash flows through cost of emissions or
the need to scale back on high-emitting activities, such a transition
could also cause a registrant's assets to suffer from unanticipated or
premature write-downs, devaluations, and/or adverse adjustments in
reserves. The proposed Scope 1 and 2 emission disclosures would allow
investors to identify registrants whose assets may be more likely to
become obsolete or non-performing or lose economic value ahead of their
anticipated useful life due to a potential transition to a lower-carbon
economy, and more generally allow investors to discern whether certain
investments are unlikely to earn the anticipated economic return due to
such transition. The proposed disclosures would also allow investors to
more closely monitor whether a firm's management is properly accounting
for the impairment of such stranded assets to ensure that they are
recorded on the balance sheet as a loss of profit and are not carried
at more than their recoverable amount. Given the significant
possibility that Scope 1 and 2 emissions will affect the valuation of
the registrant through impacts on earnings, cost of capital, investor
demand, or potentially some other channel, investor protection would be
enhanced by requiring disclosure of this information.
    Moreover, by specifying that the information should be provided by
all registrants, investors would benefit from having access to a more
comprehensive set of emissions data against which to measure a
registrant's progress in meeting any stated emissions goals or
otherwise managing its climate-related risks, as a part of assessing
the registrant's overall business and financial condition. In the
absence of the proposed rules, some registrants may choose to
selectively omit quantitative emissions metrics. The resulting state of
disclosures is less meaningful and less transparent, making it
significantly more difficult for investors to assess the degree of risk
in individual firms, to compare across firms, and to value securities.
    As discussed in Section IV.A, some registrants currently report
emissions via the EPA's 2009 mandatory Greenhouse Gas Reporting
Program.\874\ However, the nature of the reporting requirements and the
resulting data is more suited to the purpose of building a national
inventory of GHG emissions, not of assessing emissions-related risks to
individual registrants. Specifically, direct emitters must report their
emissions at the facility-level (not registrant-level) and suppliers of
certain products must report their ``supplied emissions,'' conditional
on these emissions exceeding a specified threshold.\875\ In addition,
as previously discussed, the EPA emissions data does not allow a clean
disaggregation across the different scopes of emissions for a given
registrant.\876\ From the point of view of an investor seeking greater
information regarding a registrant, the EPA's emissions data may be
difficult for investors to use, because the data are made public by
facility and not by company. While each facility is matched to its
parent company, this company may not be the entity registered with the
SEC and thus of interest to investors. Taken together, the EPA
emissions data is not well suited to enabling investors to fully assess
the degree to which each registrant is exposed to transition risks.
---------------------------------------------------------------------------

    \874\ See Section IV.A.3.
    \875\ See supra note 737.
    \876\ See Section IV.A.3.
---------------------------------------------------------------------------

    The proposed rules would result in more comprehensive and tailored
emissions information by requiring disclosure of Scope 1, Scope 2, and
in some cases Scope 3 emissions by registrants in SEC filings. Prior
evidence has shown that when information that is already publicly
available elsewhere is included within SEC filings, the public becomes
more aware of the information.\877\ While there are numerous
differences with regard to EPA reporting, this evidence suggests that
even were these differences not to exist, and the only change were to
be inclusion in SEC filings, there would nonetheless be an advantage in
improving consistency and reliability and decreasing search costs.
---------------------------------------------------------------------------

    \877\ See H.B. Christensen, E. Floyd, L.Y. Liu, and M Maffett,
The Real Effects of Mandated Information on Social Responsibility in
Financial Reports: Evidence from Mine-Safety Records, 64 (2-3)
Journal of Accounting and Economics 284-304 (2017).
---------------------------------------------------------------------------

    The proposed rules would also provide informational benefits beyond
the voluntary disclosure of emissions in sustainability reports. While
currently disclosed information reflects investor demand, the overall
information disclosed to the market may be biased due to its voluntary
nature, in that companies that have more favorable data (e.g., lower
emissions) may be more likely to make these voluntary disclosures.
Requiring all registrants to provide consistent disclosures, as
proposed, would reduce the bias that can result from a voluntary
regime. Moreover, as discussed above, locating the information in SEC
filings may make it more accessible to investors and contribute to
greater consistency and reliability.
    Specific provisions are designed to facilitate comparability across
registrants and industries. For example, requiring the disclosure of
GHG intensity in terms of metric tons of CO2e per unit of
total revenue and per unit of production would allow investors to
directly assess the efficiency of the registrant's operations and
compare across different industries and firms of varying size.
Increased standardization in the reporting of these metrics may allow
investors to assess more effectively a registrant's transition risk
against that of its competitors. As another example, the proposed rules
would require a registrant to set the organizational boundaries for its
GHG emissions disclosure using the same scope of entities, operations,
assets, and other holdings within its business organization structure
as those included in its consolidated financial statements. Requiring a
consistent approach would

avoid potential investor confusion about the reporting scope used in
the financial statements and enhance comparability across
registrants,\878\ helping investors in assessing a registrant's
transition risk against that of its competitors.
---------------------------------------------------------------------------

    \878\ Unlike the GHG Protocol, which currently provides
different options for setting organizational boundaries, the
proposed rules would require that the scope of consolidation and
reporting be consistent for financial data and GHG emissions data.
---------------------------------------------------------------------------

    The proposal would also require non-SRC registrants to disclose
Scope 3 emissions if material or if the registrant has a target or goal
related to Scope 3.\879\ In addition, specified registrants would also
be required to disclose the methodology used to compute emissions, the
breakdown of the different GHGs, as well as upstream and downstream
activities, and data quality.\880\ Scope 3 emissions GHG emissions can
represent the majority of the carbon footprint for many companies, in
some cases as high as 85% to 95%.\881\ For example, according to Morgan
Stanley Capital International (MSCI), the Scope 3 emissions of the
integrated oil and gas industry are more than six times the level of
its Scope 1 and 2 emissions.\882\ Companies may have indirect control
over their Scope 3 emissions through choices they make, for example in
selecting suppliers, designing products, or sourcing inputs more
efficiently. Nevertheless, the majority of companies do not typically
report this information. As of July 10, 2020, for example, within the
sample of companies belonging to the MSCI ACWI Investable Market Index
(IMI),\883\ the total Scope 3 average intensity was almost three times
greater than the combined Scope 1 and 2 intensity. Yet, only 18% of
constituents of the MSCI ACWI IMI reported Scope 3 emissions, with even
lower reporting percentages when looking at the individual Scope 3
categories.\884\
---------------------------------------------------------------------------

    \879\ The proposed rules include a safe harbor for Scope 3
emissions disclosure from certain forms of liability under the
federal securities laws.
    \880\ In calculating Scope 3 emissions, registrants have the
flexibility to choose a methodology they deem fit, however, the
specific methodology must be disclosed. Estimates or ranges are
permitted. Emissions reporting must be presented as CO2e
as well as disaggregated into the different types of GHGs.
    \881\ See Eric Rosenbaum, Climate experts are worried about the
toughest carbon emissions for companies to capture (Aug. 18, 2021)
available at https://www.cnbc.com/2021/08/18/apple-amazon-exxon-and-
the-toughest-carbon-emissions-to-
capture.html#:~:text=Scope%203%20carbon%20emissions%2C%20or,as%2085%2
5%20to%2095%25.
    \882\ See also MSCI, Emissions: Seeing the Full Picture (Sept.
17, 2020), available at https://www.msci.com/www/blog-posts/scope-3-carbon-emissions-seeing/02092372761.
    \883\ The MSCI ACWI Investable Market Index (IMI) captures
large, mid and small cap representation across 23 Developed Markets
and 25 Emerging Markets countries, covering approximately 99% of the
global equity investment opportunity set.
    \884\ Ibid.
---------------------------------------------------------------------------

    The reporting of Scope 3 emissions for these registrants would
provide additional benefits for investors. Scope 3 emissions
information may be material in a number of situations to help investors
gain a more complete picture of the transition risks to which a
registrant may be exposed. Relative to registrants with substantial
Scope 1 and 2 emissions, future regulations that restrict emissions may
impact registrants with high Scope 3 emissions differently. In certain
industries, a transition to lower-emission products or processes may
already be underway, triggered by existing policies, a shift in
consumer preferences, technological changes, or other market forces.
    Registrants with significant Scope 3 emissions may be more likely
to face disruptions not only in their cash flows, but also in their
business models or value chains to the extent that these registrants
are compelled to make changes in their products, suppliers,
distributors, or other commercial partners.\885\ Moreover, if consumer
demand changes to favor less carbon intensive products, companies with
high Scope 3 emissions may see a marked reduction in demand for their
products, and companies that are not aware of these risks could be less
profitable relative to those that understand these risks and are
prepared to mitigate them. Alternatively, companies that can source
inputs that involve less GHG emissions could achieve potential cost
savings and those that could produce products that generate less GHG
emissions by the end user could potentially enjoy higher demand. Some
registrants may plan to shift their activities to capitalize on these
changes and thus may need to allocate capital to invest in lower
emissions equipment or to create new types of products. Investors would
need information about the registrants' full GHG emissions footprint
and intensity to determine and compare how exposed a registrant is to
the financial risks associated with a transition to lower-carbon
economy.
---------------------------------------------------------------------------

    \885\ Scope 3 upstream and downstream emissions represents a
substantial portion of global GHG emissions. For example, according
to a recent report, Scope 3 downstream emissions that happen after a
product or service leaves a company's control/ownership represented
about 49% of global GHG emissions in 2019. Capital goods (87%),
banks (81%) and retailing (80%) were among the industries with the
highest percentage of Scope 3 downstream emissions relative to their
total emissions. These downstream emissions can come from a variety
of sources. For example, capital goods activities include emissions
from raw material manufacturing and transport. Banks emit few GHGs
to run their operations--but finance the emissions of other
companies through loans and investments. See State of Green Business
2021, available at https://www.spglobal.com/marketintelligence/en/news-insights/research/state-of-green-business-2021.
---------------------------------------------------------------------------

    Over the last few years, a number of studies have shown that firms
try to reduce their local carbon footprints by outsourcing their carbon
emissions to suppliers in states or countries with weaker environmental
policies.\886\ These studies provide evidence of the substitutional
relationship between direct and outsourced GHG emissions. Recent
studies have also analyzed the substitution effects between Scope 1 and
Scope 3 GHG emission activities of U.S. firms. The findings show that
the relative share of Scope 1 emissions out of a firm's total emissions
tend to fall at the expense of the rising proportion of its supplier-
generated Scope 3 emissions and that a firm's imports further augment
the substitutional relationship between its Scope 1 and Scope 3
emissions.\887\ In addition to the outsourcing incentives related to
regulatory arbitrage, the authors of these studies posit that firms may
also be outsourcing emissions abroad to exploit investors' current
difficulties in assessing the firm's carbon emissions through imports
along the upstream supply chain. By requiring the disclosure of Scope 3
GHG emissions, the proposed rules would make it more difficult for non-
SRC registrants to avoid investors' scrutiny by outsourcing all or part
of their activities abroad.
---------------------------------------------------------------------------

    \886\ See, e.g. I Ben-David, Y. Jang, S. Kleimeier, and M.
Viehs, Exporting Pollution: Where Do Multinational Firms Emit CO2?
36 (107) Economic Policy 377-437 (2021); X. Li and Y.M. Zhou,
Offshoring Pollution While Offshoring Production? 38 Strategic
Management Journal 2310-2329 (2017).
    \887\ See R. Dai, R. Duan, H. Liang, and L. Ng, Outsourcing
Climate Change (SSRN Working Paper) (2021), available here https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3765485.
---------------------------------------------------------------------------

    Finally, as described in Section IV.A5.d, many companies have set
emissions targets, and it is not always clear whether these targets
pertain to Scope 3 emissions or not. As explained in Section IV.C.1.g,
registrants would be required to disclose whether the targets pertain
to Scope 3 emissions, and as described above, if they do, they would
need to report such emissions. Without reporting of Scope 3 emissions
amounts and categories, investors would not have the information they
need to understand the scale and scope of actions the company may need
to take to fulfill its commitment, and thus the overall financial
implications of a registrant's targets. For example, a registrant's
disclosure of its Scope 3

emissions, together with the proposed financial statement metrics,
could allow investors to assess the potential (additional) investments
the registrant may need to make to meet a certain goal. Moreover, as
described further below, reporting of Scope 3 emissions gives a
quantitative metric for investors to track, thus reducing opportunities
for misleading claims on the part of the registrant.
    Because the value of a firm's equity is largely derived from
expected future cash flows, disclosure of Scope 1, 2, and 3 emissions
can help investors incorporate risks associated with such future cash
flows into asset values today. Indeed, the academic literature
indicates that equity is a long-term asset, meaning that even risks
related to regulatory changes in the distant future could be priced
today.\888\ Thus, for many registrants, reasonable investors may view
GHG emissions as necessary to assess the registrants' exposure to
climate-related risks, particularly transition risks, and whether they
have developed strategies to reduce their carbon footprint in the face
of potential regulatory, policy, and market constraints. This may be
particularly important in light of the investor demand documented in
IV.B.1 and the potential price impact, as discussed in IV.D.
---------------------------------------------------------------------------

    \888\ See J. van Binsbergen, Duration-Based Stock Valuation:
Reassessing Stock Market Performance and Volatility (2021),
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3611428; D. Greenwald, M. Leombroni, H.
Lustig, and S. van Nieuwerburgh, Financial and Total Wealth
Inequality with Declining Interest Rates (2021), available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3789220. Both of
these papers find that the Macauley duration of equity, the weighted
average length of time which investors will receive the cash flows
from the asset, is in excess of 35 years as of 2019. This indicates
that changes in cash flows in the distant future can impact equity
prices today.
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f. Assurance of GHG Scopes 1 and 2 Emissions Disclosures for Large
Accelerated Filers and Accelerated Filers
    The proposed rules would require registrants that are large
accelerated filers and accelerated filers to provide an attestation
report for the registrant's Scope 1 and 2 GHG emissions disclosures.
Large accelerated filers constitute approximately 31% of the universe
of registrants that filed annual reports during calendar year 2020
(1,950 out of 6,220), but account for 93.6% of market cap within the
same universe. Accelerated filers constitute approximately 10% of the
universe of registrants that filed annual reports during calendar year
2020 (645 out of 6,220) and account for 0.9% of market cap within the
same universe.
    The proposed rules provide specific transition periods for
obtaining attestation reports. Large accelerated filers would be
required to provide Scopes 1 and 2 emissions disclosures in the fiscal
year immediately following rule adoption. Next, they would be required
to obtain limited assurance over these disclosures in fiscal years 2
and 3 after adoption. They would then be required to obtain reasonable
assurance over these disclosures in fiscal year 4 after adoption and
going forward. Accelerated filers would follow the same timeline but
with a delay of one fiscal year. Specifically, accelerated filers would
be required to provide Scopes 1 and 2 emissions disclosures in fiscal
year 2 after adoption. Next, they would be required to obtain limited
assurance over these disclosures fiscal years 3 and 4 after adoption.
They would then be required to obtain reasonable assurance over these
disclosures in fiscal year 5 after adoption and going forward.
    The proposed transition periods for assurance over large
accelerated filers' and accelerated filers' Scopes 1 and 2 GHG emission
disclosures are intended to provide these registrants time to
familiarize themselves with the GHG emissions disclosure requirements,
develop the relevant DCP, and provide the market with an opportunity to
develop enough expertise to satisfy the increased demand for GHG
emission assurance services. We expect that during the proposed
transition periods, the market for assurance services would further
mature with respect to institutional knowledge, procedural efficiency,
and overall competition, thus lowering costs for registrants and
improving the quality of service. Although Scope 3 GHG emissions can
constitute a large portion of a registrant's total emission, the
proposed rules would exclude Scope 3 GHG emission disclosures from the
attestation requirement due to the unique challenges associated with
their measurement, which is based on data sources not owned by the
registrant,\889\ as well as the potential higher costs associated with
their verification.
---------------------------------------------------------------------------

    \889\ See Section II.G.3.
---------------------------------------------------------------------------

    Section IV.A.5.e above discusses survey evidence on the frequency
with which firms obtain assurance in sustainability reports. This
evidence suggests that a significant fraction of large companies
already obtain some form, albeit limited, of assurance. Practices
appear to be fragmented with respect to the levels of assurance
provided, the assurance standards used, the types of service providers,
and the scope of disclosures covered by the assurance. One consequence
of such fragmentation has been a lack of clarity about the nature of
assurance provided, which can lead to confusion for investors when
assessing the quality of disclosures. Moreover, as noted above, the
voluntary nature of the reporting could result in biased or incomplete
data. The fact, however, that a significant proportion of large
companies already obtain some form of assurance over this information
is indicative of investors' and companies' need for such disclosures to
be reliable.
    The importance of assurance for climate-related information also is
highlighted by the International Federation of Accountants, which
recently published its Vision for High-Quality Sustainability
Assurance.\890\ As discussed earlier, contrary to other quantitative
information that is provided outside of the financial statements, and
which is typically derived from the same books and records that are
used to generate a registrant's audited financial statements, GHG
emissions disclosures are not developed from information that is
included in the registrant's books and records.\891\ Accordingly, such
quantitative disclosure is not be subject to audit procedures as part
of the audit of the financial statements in the same filing. Because of
this, the proposed requirement of a third-party attestation report may
be particularly beneficial to verify the reliability of such
quantitative information and enhance its accuracy. In general,
subjecting climate-related disclosures to assurance would require the
assurance provider to assess the risk of material misstatements related
to the estimates and judgments, including through evaluation of the
method of measurement and reasonableness of the assumptions used, and
an understanding of management's risk management processes, including
the risks identified and the actions taken to address those risks.\892\
Moreover, by specifying minimum standards for the assurance provided
with respect to GHG Scope 1 and 2 emissions disclosures, we expect the
proposed rules to promote accuracy and consistency in the reporting of
this information, while also providing investors with a baseline level

of reliability against which to evaluate the disclosures.\893\
---------------------------------------------------------------------------

    \890\ See IFAC Charts the Way Forward for Assurance of
Sustainability Information (Dec. 6, 2021), available at https://www.ifac.org/news-events/2021-12/ifac-charts-way-forward-assurance-sustainability-information.
    \891\ See Section II.H.1 for more information.
    \892\ See PCAOB, AS 2110 Identifying and Assessing Risks of
Material Misstatement (2010).
    \893\ See K. Hodge, K., N. Subramaniam, J. Stewart, Assurance of
Sustainability Reports: Impact on Report Users' Confidence and
Perceptions of Information Credibility, (19) Australian Accounting
Review 178-194 (2009), available at https://doi.org/10.1111/j.1835-2561.2009.00056.x.
---------------------------------------------------------------------------

    Academic research finds that assurance procedures can increase the
relevance and reliability of disclosures,\894\ particularly for those
involving significant estimation uncertainties. While most of this
academic evidence focuses on the effects of reasonable assurance
procedures, we cannot preclude the possibility that such findings may
have implications for limited assurance as well. Experimental evidence
has found that both limited and reasonable assurance can increase
perceived reliability of sustainability reports, but those same studies
do not find a statistically significant difference between limited and
reasonable assurance.\895\ Obtaining assurance for sustainability
reports, which as noted above is typically limited assurance, has also
been associated with firms with lower costs of capital, increased
analyst coverage, and decreased analyst forecast errors and forecast
dispersion.\896\
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    \894\ See supra note 874.
    \895\ See, e.g., K. Hodge, K., N. Subramaniam, and J. Stewart,
Assurance of Sustainability Reports: Impact on Report Users'
Confidence and Perceptions of Information Credibility, 19 Australian
Accounting Review 178-194 (2009), available at https://doi.org/10.1111/j.1835-2561.2009.00056.x; Mark Sheldon, User Perceptions of
CSR Disclosure Credibility with Reasonable, Limited and Hybrid
Assurances (Dissertation) (2016) available at https://vtechworks.lib.vt.edu/bitstream/handle/10919/65158/Sheldon_MD_D_2016.pdf. This absence of evidence, however, is not
necessarily evidence of absence. It is possible that reasonable
assurance can have benefits over limited assurance that are not
easily identifiable.
    \896\ See R.J. Casey and J.H. Grenier, Understanding and
contributing to the enigma of corporate social responsibility (CSR)
assurance in the United States, 34(1) Auditing: A Journal of
Practice & Theory 97, 97-130 (2015). The authors also find that the
lower costs of capital are in excess of estimated assurance costs
(i.e., 5% to 10% of total audit fees) for the majority of companies.
We acknowledge, however, that the benefits cited in this study may
be overstated to the extent that they reflect a selection bias.
Specifically, companies that anticipate a net loss due to assurance
would choose to forgo obtaining such assurance, thereby removing
themselves from the treatment group. This potential limitation in
interpreting such findings is also supported by evidence of
systematic differences in companies voluntarily reporting higher
assurance levels. See C.H. Cho, G. Michelon, D.M. Patten, and R.W.
Roberts, CSR report assurance in the USA: An empirical investigation
of determinants and effects, 5(2) Sustainability Accounting,
Management and Policy Journal 130, 130-148 (2014), available at
https://doi.org/10.1108/SAMPJ-01-2014-0003.
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    The proposed rules would require the attestation report to identify
the criteria against which the subject matter was measured or
evaluated, the level of assurance provided, the nature of the
engagement, and the attestation standard used. In particular, the
proposed rules would require the attestation report to include a
description of the work performed as a basis for the attestation
provider's conclusion and for that conclusion to be provided pursuant
to standards that are established by a body or group that has followed
due process procedures, including the broad distribution of the
framework for public comment. We expect this provision would help
ensure that the standards upon which the attestation report is based
were the result of a transparent and reasoned process. In this way, the
requirement should help to protect investors who may rely on the
attestation report by limiting the standards used to those that are
appropriate for the subject matter and purpose. Further, we expect this
provision to enhance the transparency of the GHG emissions attestation
report for investors by providing them with additional information
about the general procedures undertaken by the attestation provider.
For example, under the proposed rules, an attestation report providing
limited assurance would need to state that the procedures performed
vary in nature and timing from, and are less extensive than, a
reasonable assurance engagement, thus helping investors understand the
level of assurance provided.
    The GHG emissions attestation report would also be required to
include a statement that describes any significant limitations
associated with the measurement or evaluation of the subject matter
against the criteria. The provision would require disclosure about the
estimation uncertainties inherent in the quantification of GHG
emissions, driven by reasons such as the state of the science and
assumptions used in the measurement and reporting processes. By
eliciting disclosure with respect to the procedures undertaken by the
attestation provider, such as inquiries and analytical procedures, and
the methodology used in the attestation process, the proposed provision
would enhance the transparency of the GHG emissions attestation
quality, thus allowing investors to gain a better understanding of the
emission related information. This could help investors process
emission related information more effectively. More informed investment
decisions by investors also may benefit registrants by lowering their
cost of capital.
    The proposed rules would also require registrants to disclose
whether the attestation provider has a license from any licensing or
accreditation body to provide assurance and whether the GHG emissions
attestation engagement is subject to any oversight inspection program
and record-keeping requirements with respect to the work performed for
the GHG emissions attestation. These requirements are expected to
benefit investors by helping them to better understand the
qualifications of the GHG emissions attestation provider, which in turn
would allow them to make better informed decisions about the
reliability of such information.
    Finally, the proposed rules would require that the GHG emissions
attestation report be prepared and signed by a provider that is an
expert in GHG emissions and independent with respect to the registrant,
and any of its affiliates, for whom it is providing the attestation
report. These qualification and independence requirements should help
ensure that the attestation provider is capable of exercising informed,
objective and impartial judgment. Academic research has found that the
independence of assurance providers can be important in certain
settings for disclosure quality.\897\ Academic research has also found
that equity prices respond to analyst forecast even after management
has released the exact same information, highlighting more generally
the perceived value of external evaluations of firm disclosures and
resulting investor confidence in the related disclosures.\898\
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    \897\ See N. Tepalagul, and L. Lin, Auditor Independence And
Audit Quality: A Literature Review, 30(1) Journal of Accounting,
Auditing & Finance 101-121 (2015) (for a more detailed discussion on
academic evidence on independence in auditing).
    \898\ See Marco Grotteria, and Roberto Gomez Cram, Do Financial
Investors Underreact To Voluntary Corporate Disclosure? (Working
Paper) (2022).
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g. Targets and Goals Disclosure
    The proposed rules would require a registrant to disclose whether
it has set any climate-related targets or goals and, if so, how it
intends to meet those targets and goals. Such climate-related targets
or goals might relate to the reduction of GHG emissions or address
energy usage, water usage, conservation or ecosystem restoration.
Associated disclosure would include the scope of activities and
emissions included in the target, the unit of measurement, and the
defined time horizon. Additionally, disclosures include the baseline
emissions for measuring progress, any interim targets, how it intends
to meet these targets or goals, and data showing any progress toward
achieving these targets, including how that progress was

achieved, and details about any carbon offsets of RECs that have been
used.
    For example, in 2019 Amazon and Global Optimism co-founded The
Climate Pledge, a commitment to net zero carbon by 2040. Since then, a
growing list of major companies and organizations have signed on to the
Climate Pledge, which indicates a commitment to the following three
principles: (i) Measure and report greenhouse gas emissions on a
regular basis; (ii) Implement decarbonization strategies in line with
the Paris Agreement; (iii) Neutralize any remaining emissions with
additional offsets to achieve net zero annual carbon emissions by
2040.\899\ The proposed rules would help to make such commitments more
transparent by requiring disclosure on the unit of measurement, time
horizon, and baseline for measuring progress, including how that
progress was achieved (e.g., through efficiency improvements, renewable
energy adoption, materials reductions, and other carbon emission
elimination strategies).
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    \899\ As of Jan. 25, 2022, The Climate Pledge has acquired 217
signatories. See The Climate Pledge, available at https://www.theclimatepledge.com/us/en/Signatories.
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    Such standardized reporting as a form of an oversight or monitoring
mechanism might be critical in overcoming agency problems in the
presence of asymmetric information. Investment in achieving targets
could be value-enhancing in the long-run, but reduce cash flow in the
short-run. Companies may decide that it is an optimal strategy to bear
the costs up front of shifting its operations to those that have fewer
emissions or upgrading their equipment, rather than bearing the risk
that these costs will be borne in an unpredictable and possibly
disorderly way in the future. In the absence of a means to credibly
convey that efforts to achieve these long-term targets are being
undertaken diligently, however, investors might be unable to observe
which registrants are actually following through on such actions. For
example, if registrants are incurring costs in the short-run to
undertake investments to reduce Scope 1, 2, and 3 emissions, reducing
short-run profitability, but are unable to convey to investors that
they are meaningfully following through on achieving potential long-
term value-enhancing strategies, there could be a disincentive for
investors to invest in the firm, thus undermining its value in the
long-run. This has been put forth as one potential explanation for some
private sector attempts at addressing these problems, such as green
bonds, which commit firms to recurring, more standardized disclosure
requirements for progress in achieving stated targets and goals.\900\
The proposed rules would provide enhanced transparency about targets
and goals so that investors can identify registrants with credible
goals and track their progress over time. This can not only reduce
incentives for misleading goal disclosures, but can also allow
investors to recognize goals that generate long-term value despite
short run costs, which can attract capital and increase firm value.
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    \900\ See S. Lu, The Green Bonding Hypothesis: How do Green
Bonds Enhance the Credibility of Environmental Commitments? (2021),
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3898909.
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    As explained above, the pursuit of targets could have a material
impact, either in the short-term or long-term, on a registrant's
operations or financial condition.\901\ At this time, however, there is
little consistency with respect to the extent of disclosure and the
relevant details concerning such climate-related targets and goals.
This can result in insufficient information for investors' monitoring
or decision-making needs. The proposed disclosure could provide more
comparable, consistent, and reliable metrics of any climate-related
targets or goals. It would require a registrant to clearly define
baselines for targets, the scope of activities and emissions covered by
the target, the unit of measurement, the defined time horizon, and how
progress is made towards the targets. For example, the disclosure would
require the registrant to state whether or not the targets pertain to
Scope 3 emissions. If targets do include Scope 3 emissions, disclosure
of Scope 3 emission sources and amounts would be required so that
investors would understand the scale and scope of changes the company
would need to undertake, and thus the full financial impact of meeting
the target.\902\ Such disclosures would also enable investors to
monitor progress firm management has made and plans to make towards
achieving climate-related targets or goals, assess the credibility of
its goal, and evaluate the effectiveness of the company's investments
to achieve its goals. As described above, this required disclosure
could make targets more credible and serves as an oversight or
monitoring mechanism.
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    \901\ See supra Sections II.G.1.b. and III C.1.e.
    \902\ See id.
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h. Structured Data Requirement
    Under the proposed rules, the new climate-related disclosures would
be tagged in the Inline XBRL structured data language. The provision
requiring Inline XBRL tagging of climate-related disclosures would
benefit investors by making those disclosures more readily available
for aggregation, comparison, filtering, and other enhanced analytical
methods.\903\ These benefits are expected to reduce search costs and
substantially improve investors' information-processing
efficiency.\904\ XBRL requirements for public company financial
statement disclosures have been observed to reduce information-
processing costs, thereby decreasing information asymmetry and
increasing transparency by incorporating more company-specific
information into the financial markets.\905\ In addition, the proposed
Inline XBRL requirement for the climate-related disclosures may further
limit agency problems, as XBRL requirements for financial statement
tagging have been observed to facilitate external monitoring of firms
through the aforementioned reduction of information processing
costs.\906\
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    \903\ For example, structuring climate-related disclosures would
enable more advanced analyses than those described in the
aforementioned Commission staff review that used keyword searches
and NLP. See supra IV.A.5.a.
    \904\ The findings on XBRL cited in the following paragraphs are
not necessarily focused on climate-related disclosures and metrics,
but we expect the findings to be generally applicable and to result
in similar benefits for investors.
    \905\ See, e.g., Y. Cong, J. Hao, and L. Zou, The Impact of XBRL
Reporting on Market Efficiency, 28 J. Info. Sys. 181 (2014) (finding
support for the hypothesis that ``XBRL reporting facilitates the
generation and infusion of idiosyncratic information into the market
and thus improves market efficiency''); Y. Huang, J.T. Parwada, Y.G.
Shan, and, J. Yang, Insider Profitability and Public Information:
Evidence From the XBRL Mandate (Working Paper) (2019) (finding XBRL
adoption levels the informational playing field between insiders and
non-insiders); J. Efendi, J.D. Park, and C. Subramaniam, Does the
XBRL Reporting Format Provide Incremental Information Value? A Study
Using XBRL Disclosures During the Voluntary Filing Program, 52
Abacus 259 (2016) (finding XBRL filings have larger relative
informational value than HTML filings); J. Birt, K. Muthusamy, and
P. Bir, XBRL and the Qualitative Characteristics of Useful Financial
Information, 30 Account. Res. J. 107 (2017) (finding ``financial
information presented with XBRL tagging is significantly more
relevant, understandable and comparable to non-professional
investors''); S.F. Cahan, S. Chang, W.Z. Siqueira, and K. Tam, The
Roles of XBRL and Processed XBRL in 10-K Readability, J. Bus. Fin.
Account. (2021) (finding Form 10-K file size reduces readability
before XBRL's adoption since 2012, but increases readability after
XBRL adoption, indicating ``more XBRL data improves users'
understanding of the financial statements'').
    \906\ See, e.g., P.A. Griffin, H.A. Hong, J.B. Kim, and J.H.
Lim, The SEC's XBRL Mandate and Credit Risk: Evidence on a Link
between Credit Default Swap Pricing and XBRL Disclosure, 2014
American Accounting Association Annual Meeting (2014) (attributing
the negative association between XBRL information and credit default
swap spreads to ``(i) a reduction in firm default risk from better
outside monitoring and (ii) an increase in the quality of
information about firm default risk from lower information cost'');
J.Z. Chen, H.A. Hong, J.B. Kim, and J.W. Ryou, Information
Processing Costs and Corporate Tax Avoidance: Evidence from the
SEC's XBRL Mandate, 40 (2) J. Account Pub. Pol. (2021) (finding XBRL
reporting decreases likelihood of firm tax avoidance, because ``XBRL
reporting reduces the cost of IRS monitoring in terms of information
processing, which dampens managerial incentives to engage in tax
avoidance behavior'').

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    Investors with access to XBRL analysis software may directly
benefit from the availability of the climate-related disclosures in
Inline XBRL, whereas other investors may indirectly benefit from the
processing of Inline XBRL disclosures by asset managers and by
information intermediaries such as financial analysts.\907\ In that
regard, XBRL requirements for public company financial statement
disclosures have been observed to increase the number of companies
followed by analysts, decrease analyst forecast dispersion, and, in
some cases, improve analyst forecast accuracy.\908\ Should similar
impacts on the analysts' informational environment arise from climate-
related disclosure tagging requirements, this would likely benefit
retail investors, who have generally been observed to rely on analysts'
interpretation of financial disclosures rather than directly analyzing
those disclosures themselves.\909\
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    \907\ Additional information intermediaries that have used XBRL
disclosures may include financial media, data aggregators and
academic researchers. See, e.g., N. Trentmann, Companies Adjust
Earnings for Covid-19 Costs, but Are They Still a One-Time Expense?
The Wall Street Journal (2020), available at https://www.wsj.com/articles/companies-adjust-earnings-for-covid-19-costs-but-are-they-still-a-one-time-expense-11600939813 (citing XBRL research software