‘Comply or Explain’ and the Pushback Against the SEC Climate Disclosures

What does ‘Comply or Explain’ refer to?

During March of this year, the SEC proposed new rule changes that would require companies to include climate-related disclosures in their registration statements and periodic reports. A move that would further standardize climate-related disclosures for investors concerned about how the growing climate crisis affects their investments. While many investors and regulators welcomed the change, some major asset management companies were left displeased with the new regulations. They argued that these new rules would increase compliance costs for firms and may make it harder for ‘investors to discern information that’s significant to a company’s bottom line’. They instead suggested that the SEC provide more flexibility to the way companies can report the information the SEC requires, such as implementing a ‘comply and explain’ framework.

A ‘comply and explain’ framework would provide an option for companies to explain why they can’t comply with a given criterion, which these companies argue would incentivize registrants to want to eventually improve their internal reporting capabilities when they find that they comply less than their peers. Regardless of whether this would be the case or no, there is a major concern with having a ‘comply and explain’ framework, mainly that companies will overuse the ‘explain’ portion of the framework to get away with not fully complying to the SEC regulations.

Pushback Against new SEC disclosures

Companies, such as Blackrock, have pushed back against the new disclosures for a myriad of reasons. One of their main arguments concerns investors, and the belief that the new regulations will actually ‘decrease the effectiveness of the commission’s overarching goal of providing reliable, comparable, and consistent climate-related information to investors’. This is because, according to these companies, the new regulations would obscure material information, increase compliance costs and reduce the ability to compare across companies and regions.

But what do actual investors say about the new regulations? According to them, it seems to be the opposite case. Many investors welcomed the change, saying that it would standardize reports that are currently voluntary and vary widely in quality. Many also commented on the fact that the new regulations would make it easier for money managers to judge how well a company is currently handling the climate crisis more than current reporting. 

Real concern for investors?

Many companies are using the potential effect on investors as one of the reasons for their push back against it and suggest that the SEC should implement a ‘comply or explain’ framework instead. Yet investors themselves seem to disagree with this assertion that these companies are applying to them, and actually want climate disclosures to be more standardized so they have a better idea of how these companies are handling their money. Adding flexibility to the new disclosures with a ‘comply or explain’ framework will only continue to make things more confusing for investors and won’t help anyone hold these companies accountable for participating in unsustainable activities that’ll harm the environment, and eventually themselves.

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