Electric, gas utilities urge SEC to allow sector-specific ESG reporting as it develops climate risk disclosure rule

U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler announced last week that the SEC is developing a proposed rule this year to make climate change risk disclosure mandatory for companies. For the electric and gas utility industry, which implemented an Environmental, Social and Governance (ESG) reporting template with a focus on climate disclosure years ago, industry associations are recommending the SEC consider adopting industry-specific reporting standards that are more beneficial to investors rather than across-the-board standards.

The Edison Electric Institute (EEI) and the American Gas Association (AGA) developed a first-of-its-kind ESG/Sustainability reporting template. The template conveys an important concept: that ESG and climate disclosure is a dynamic process and a collaborative one, that it is not just determined in-house but includes feedback from participants from non-governmental organizations (NGOs), investment firms and credit ratings agencies, as well as policymakers and other stakeholders. The template allows subsequent reports to be responsive to new environmental developments and provide updated information for investors.

In his remarks on July 28, Gensler emphasized future reporting needs to provide consistent and comparable information that is “decision-useful,” i.e., of sufficient detail to help investors. How this reporting will be presented is under review, but Gensler did note SEC staff consideration of industry-specific metrics, say, for banking, insurance or transportation.

The industry-specific approach is a top concern for EEI and AGA officials who are closely tracking the SEC’s developments, and whose member companies have made progress in transitioning to lower-carbon energy sources. At the end of last year, the electric power sector had cut carbon emissions by 40 percent compared to 2005 levels, the lowest level in more than 40 years, while gas utilities have helped lower methane emissions from U.S. natural gas distribution by 69 percent since 1990.

In a recent interview, Richard McMahon, EEI’s senior vice president of Energy Supply and Finance, said, “We recognize this information is important to investors. We developed our template working with them. That’s probably the most important aspect of finance reporting, to make sure you’re giving investors actionable information that is relevant to their needs. That’s really what our focus has been.”

The EEI/AGA template is the only ESG industrial template in use right now, McMahon said, although development is underway in many other industrial sectors, transportation, for example, as well as oil, gas and chemicals. McMahon said that a core lesson for EEI/AGA “is that investors want information on ESG presented in a clear, comparable and, very importantly, very concise manner.”

“We were the first down this path,” McMahon said, “and generally we do believe in a sector-specific approach.” McMahon specifically noted Chairman Gensler’s July 28 sector reference, and also noted many of the comments sent to the SEC expressed support for sector reporting.

“We believe that our process is really good and that you get the best ESG reporting, that is most robust, when it is developed with issuer companies and investors collaborating.” With many stakeholders in the ESG space, pressure can develop to create a laundry-list. “What we’ve found, and what we’ve heard from investors,” he advised, “is that all-inclusive laundry-list approach kind of obfuscates the information that they are looking for and it makes it more difficult for them.”

In written comments to the SEC in response to the commission’s March 15 request for public input on ESG and climate change disclosures, EEI/AGA write: “We do not believe that disclosure across industries should be a one-size-fits-all standard. In particular, we are not aware of any single metric or small set of metrics that would apply universally.” Carbon emissions, for example, or methane intensity from natural gas networks are broadly recognized metrics for electric and gas utilities. But these would not be as relevant, say, for a publicly traded consulting firm or a restaurant chain. Furthermore, EEI/AGA write that an industry-specific approach is consistent with the Commission’s focus on principles-based disclosure.

McMahon stressed that EEI and AGA support the SEC’s initiative. As it proceeds, they want the effort to build on what is already working, not start from scratch.

One concern with financial reports is if they skew a company’s true picture, inaccurately presenting liabilities or strengths.

McMahon said he didn’t think investors were “looking for a snapshot” from new financial reports. Rather, he said investors want to see the dynamics within a company, that leadership is engaged and decisive on critical issues. New reporting, he said, “could provide a strategic window to look ahead.” Investors want to know if companies are evolving “the way the larger economy is evolving,” that companies are aligned with positive trends, not keeping their heads in the sand. “Our experience has been, that if you provide an accurate picture that is positive, that a company is embracing transition, that is the real value of this reporting.”

There are other concerns for EEI/AGA. One is that the SEC retains public oversight of new ESG reports, that there should be no delegation to an NGO or other private entity. “Even if there were legal authority for the Commission to delegate this important work to a NGO or other private entity,” EEI/AGA write, “there is simply too much opportunity for any standards that are developed to be diverted by special interests from the primary purpose of informing investors and their investment decisions.”

Another SEC question asks about reporting from privately traded companies. EEI/AGA write that new disclosure requirements should apply to all businesses. They cite authority under the Investment Company Act of 1940 and the Investment Advisors Act of 1940 requiring “many private equity firms to make these disclosures on behalf of their portfolio companies or to cause those companies to make the disclosures.”

A third concern, but a critical one, is that ESG reporting should be considered “furnished, not filed.” (These two terms reference the formal status of certain public information and each presents different liabilities for a company.) “Some of the ESG climate information is sort of forward looking,” McMahon said. “ESG is not defined anywhere in the law,” he added, “it is an evolving concept.”

When asked how much of a setback it would be if the SEC disallows the EEI/AGA template, McMahon said he thinks that is unlikely and that he is optimistic about SEC support. “They are looking to build on successful practices,” he said, adding that “investors want to see what we have done. They want others to know about it.” He is encouraged with the process so far.