SEC Climate Disclosure Guidance Timeline Pause: Why Companies Benefit

A Conversation With Russell McIntyre

On March 6, 2024, the Securities and Exchange Commission (SEC) sent shockwaves through the financial world by mandating that publicly traded companies disclose details about how climate change affects their businesses. However, this rule hit a roadblock on April 4 when legal challenges led the SEC to pause the implementation timeline, throwing compliance requirements into uncertainty.

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Russell McIntyre:

I hate to say it, but in the U.S., the future of this climate risk disclosure conversation depends a lot on politics.

Maiclaire Bolton Smith:

Welcome back to Core Conversations: A CoreLogic Podcast where we tour the property market to investigate how economics, climate change, governmental policies, and technology affect everyday life. I am your host, Maiclaire Bolton Smith, and I'm just as curious as you are about everything that happens in our industry.

Understanding and reporting current and future climate change impacts on real estate is no small task, but it is one that publicly traded U.S. corporations may soon need to do. On March 6, the U.S. Securities and Exchange Commission passed a rule that requires publicly traded companies to disclose details on how climate change impacts business, but the regulation faced opposition almost immediately.

By April 4, Wall Street's top watchdog announced a pause on the implementation of its new climate disclosure rule while it defends the regulation in court. The SEC hopes the pause will avoid regulatory uncertainty for companies. Essentially, the rule in question would require public companies to quantify and demonstrate the financial materiality of risk across natural hazard perils. The consequences of this rule would be far-reaching. Whether or not this rule will return remains to be seen. However, companies should still be prepared for its implementation.

So to talk about what's in this new SEC ruling and how it could affect businesses, we have Russell McIntyre, a senior policy analyst at CoreLogic.

Russell, welcome to Core Conversations.

RM:

Thank you so much. Glad to be here, Maiclaire. Long-time listener, first-time caller.

MBS:

Well, I'm really happy to have you here.

Okay, let's just start off by breaking down this new rule from the SEC. It's huge. It's over 800 pages. So I want to just focus on reporting requirements.

I guess, first of all, when do they go into effect? I know this has changed recently. It initially was one thing and by a month later that's changed. So can you just talk about what do we know in terms of when it might go into effect, how that's changed? Yeah, what do we know?

RM:

Yeah. Let's look at the actual disclosure itself. The new disclosure requirements have several phase-in periods, really depending on the size of the company that's being required to report. So, the largest filers, which are those with a public float of $700 million or more, which is just an investing term, meaning any company with $700 million or more in stock held by public investors, those companies are going to be required to disclose their climate-related risks beginning with their annual reports for the year ending December 31, 2025, with smaller companies phased in over the next two years. So, when this rule was published, the largest companies would have to file their first climate disclosures in the calendar year 2026.

And then on April 4, we saw that the SEC actually issued a stay of the ruling themselves, which kind of puts a pause on it while everything's being considered in the courts.

MBS:

Interesting.

RM:

It's actually kind of a smart move on the SEC's part because a lot of the back-and-forth in the court filings were focused on the implementation date. And so by issuing the stay themselves, the SEC is saying, "Okay, let's move past that. We don't have an implementation date anymore. Let's just focus on the actual merits of the rule when we're having these discussions in court." And I think that is going to actually speed up the process, all these court battles, a little bit. It's still going to take a while. But I think that it was an effort on the SEC's behalf to speed up the process a little bit.

MBS:

Gotcha. Okay.

Erika Stanley:

Before we get into this conversation, I wanted to remind our listeners that we want to help you keep pace with the property market. To make it easy, we curate the latest insight and analysis for you on our social media, where you can find us using the handle @CoreLogic on Facebook and LinkedIn, or @CoreLogicInc on X, formerly known as Twitter, and Instagram. But now let's get back to Maiclaire and Russell.

MBS:

I guess the other thing that initially comes to mind is how are people approaching this, or what's the vibe on the Hill about this?

RM:

Honestly, it is all over the place. There are people that are very vocally supportive of this rule. There are some that are very much in opposition to it. So, on the one hand-

MBS:

Kind of like everything.

RM:

Yeah, exactly. It's like exactly how everything is in D.C. these days, right? No matter how middle of the road you think something is, it's going to have both supporters and detractors regardless.

On the one hand, for this one, we've had numerous Republican attorney generals file lawsuits from the right, which questioned the SEC's actual authority to issue this rule, and they claim that the SEC has overstepped or otherwise exceeded their rule-making authority in requiring these disclosures. But then, on the other hand, we've seen a number of environmental advocates file lawsuits arguing that the disclosure rule doesn't go far enough in providing investors with actionable climate risk information.

In fact, there were so many lawsuits to this final rule, they span six different U.S. appeals courts, and they had to have a U.S. judicial panel condense them all and hold a random lottery to determine where the challenges would be heard. The St. Louis-based Eighth U.S. Circuit Court of Appeals was chosen as the random lottery winner, and so now all the challenges to the rule are going to go through that circuit court. So that's where all the focus turns now.

MBS:

So what changed? We've been talking about climate change for decades already, and you just mentioned this has been going on for a really long time. What happened to make the SEC put these rulings into effect now?

RM:

Yeah. Well, honestly, I think that our scientific capabilities have just progressed so much in recent years that we've been able to better understand and accurately measure the impact that we as humans have on our environment. And while there are plenty of reasons to care about that impact from an environmental standpoint or a conservationist standpoint, over the past decade or so, we've also realized that there are some very real economic and financial implications that stem from climate change, which is something that investors and publicly traded companies really care about, and we've seen that interest grow drastically in recent years.

MBS:

Interesting. Yeah. We've had our Chief Scientist Dr. Howard Botts, on the podcast before, and he's talked a lot about our climate risk analytics and how these are being used specifically for companies, businesses, governments, to really understand what their risk to climate change was. I think for so many years, it was an environmental issue. It wasn't expected to be a business or a monetary issue. It was all about saving the environment. And that's really changed in the last couple of decades, in the last couple of years. Yeah.

RM:

Absolutely.

ES:

So what is Climate Risk Analytics you ask? Climate Risk Analytics helps protect your property, prepare accurate climate compliance, and lessen the impact on your bottom line. This comprehensive climate model predicts the future of physical risk by combining industry-leading property data with replacement cost valuation elements and natural hazard information to calculate the likelihood of future risk.

RM:

Yeah. You've seen this really increased appetite among investors for climate-related financial information. And this might be a newer concept for our federal government here in the U.S., but the rest of the world has been dealing with this for the better part of a decade. I think the Bank of England was the first to really get the ball rolling back in 2015, and then other European nations quickly followed. And over the past decade, we've seen a number of international organizations, like the Intergovernmental Panel on Climate Change and the Financial Stability Board, they've really taken the lead in understanding how climate change manifests as a financial risk, and they've been working with companies and central banks around the world to improve all of their disclosure requirements.

MBS:

So, while this might seem novel to us here in the U.S., because it is rolling out new, it's not. This has been happening globally for quite some time.

RM:

Yeah, absolutely. The European Union has had their corporate sustainability reporting directive for a couple of years now, and I believe it actually went into effect back on January 1 of this year. So, there are already a number of American-based companies doing business over there in Europe that are already compliant-

MBS:

Sure, they have to follow these compliance… Yeah.

RM:

Yeah, they're already there. And we're not the only ones looking at this right now. Even just the past couple of months, Australia has released draft legislation that would introduce mandatory reporting requirements. So they're doing the exact same thing we are right now.

MBS:

Wow, interesting.

Okay, I want to dive into what are these reporting requirements? We've talked about physical risk disclosures, but what exactly does a publicly traded company have to report?

RM:

Sure. Under the new rule language, companies will have to disclose their climate-related physical risk that have had or are reasonably likely to have a material impact on their strategy, their operations, or their financial condition, both in the short term, which is defined as the next 12 months, and the long term, so beyond those 12 months. And there's a lot to unpack there, so I can break this down a little bit more, starting with some definitions.

First, the SEC defines physical risk to include both acute physical risk and chronic physical risk. Acute risks, those are event-driven. Those are shorter-term weather events that we think of, like hurricanes, floods, tornadoes, wildfires, et cetera. And then you also have your chronic risks, which are more long-term weather patterns, thinking of higher temperatures, sea level rise, drought-

MBS:

Sea level rise. Yeah.

RM:

Exactly. That's what they define physical risk to be. So what does that mean for companies?

The first step that companies have to take is to assess their current and future physical risk exposure to determine if it meets a 1% materiality threshold. And that in and of itself, we could spend several podcasts discussing, because the definition of materiality is a conversation in and of itself.

There are a lot of caveats and additional rules, but essentially for the purposes of this conversation, the SEC defines a risk as being material if it has a financial impact that is equal to or greater than 1% of the company's pre-tax income for the given reporting period. So that's what companies are going to have to be able to calculate is-

MBS:

To quantify. Yeah.

RM:

Yeah, they're actually going to have to quantify what their physical risks are and how that relates to their bottom line.

MBS:

So this is specifically for publicly traded companies at this point. I know I've also personally heard a lot of rumblings in the insurance industry as well. Do you know if anything's coming down beyond publicly traded companies? Or at this stage, is it just publicly traded companies or is the writing on the wall for everybody else?

RM:

At this stage in the U.S., I think it's going to be limited to publicly traded companies for a little while. I think just the effort to get this rule out in and of itself from the SEC was very difficult, and they're already facing a bunch of push back from both sides of the aisle on this final rule. So we're not even done with this final rule yet. There's going to be years worth of probably court challenges. It's going to be a process in and of itself.

So I don't necessarily see that coming here in the U.S. However, you could see those European counterparts of ours leading the way on that side, like they have in the past.

MBS:

Yeah, and definitely I know we look a lot to the international as leading indicators of what might happen for us here in the U.S. as well.

Okay. You alluded to the fact that this is very likely will change over time. It is a process. I know you've been following this since the beginning, and probably what's now the situation is not what they initially were planning for because things evolve by the time they go through all these different steps to get something to finally be a new rule. How has it changed since originally, and did anything get left out or put in?

RM:

Oh, absolutely. The document that the SEC published containing this final rule was almost 900 pages. However, only about 45 pages of that is the actual rule language. The other 800 plus pages are all explanations of how the final rule is either similar to, or different, from the original proposal. Yes, there were so many adjustments made, several of which relate to, for instance, the level of granularity required for these disclosures. So a couple of quick examples.

The original rule proposal would've required a company to disclose the zip code of the properties, processes, or operations subject to physical risk. However, the final rule pulls that back to only require the general geographic location of the properties to give companies a little more leeway there.

MBS:

Interesting. Okay.

RM:

Yeah. And then, additionally, another example. The proposal would've required a company that faces a material physical risk due to flooding or other water stresses to disclose the percentage of buildings or properties that are located in flood hazard areas. However, this percentage calculation requirement was also pulled out of the final rule.

I think both of these, in addition to other changes, were largely done to decrease the burden on companies reporting this information and to give them a little more flexibility given their specific situations to determine their own level of granularity based on their own facts and circumstances.

MBS:

Sure. Yeah.

ES:

Before Maiclaire and Russell continue the conversation about the new ruling from the SEC, it's that time again. Grab a cup of coffee or your favorite beverage, we're going to do the numbers in the housing market. Here's what you need to know.

Although mortgage rates dropped at the beginning of the year, they have since incrementally increased. 2024 began with high housing market expectations, but things have had a weaker start than many had hoped. However, new listings are finally showing positive increases on an annual basis in the recent months. This additional inventory could prevent another home price spiral similar to spring of 2023.

Currently, home prices are up by 1% compared with the June 2022 peak. Compared to January 2023 when prices bottomed out, home prices are up 6%. Eleven metros saw annual price gains higher than the national 6% increase. Among the top 100 metro areas, the five with the highest rate of home price appreciation this year are in the Northeast. These include Camden, New Jersey, up by 13%, Hartford, Connecticut, up by 13%, and Newark, New Jersey, up by 11%. On the other hand, Portland, Oregon saw the slowest rate of home price gains; up by 1% compared with January 2023.

And that's the Sip. See you next time.

MBS:

For you being in the situation that you're in, is there anywhere you wish that they hadn't pulled back, and they had maybe kept in? I mean, I've got some opinions myself on this just hearing what you just said, but yeah, I'd love your thoughts.

RM:

Yes and no. I personally, as a public policy wonk and a climate change nerd, yes, I would love to see these disclosures get a little more granular in regards to the physical risk information included. However, I also understand the complexities associated with acquiring this information, ingesting this information, and making those forward-looking projections, which are-

MBS:

It's a lot.

RM:

… very real challenges for the majority of these companies.

So honestly, in the end, I really do think the SEC struck a pretty good balance here between requiring enough detailed actionable information for investors, while also not overburdening companies for these reporting requirements that'll be costly to comply with.

MBS:

Sure. That's the other thing. They're costly. They're time-consuming. They're costly. It's an extra burden that's being put on them that they have not had to do thus far, potentially need new products, potentially need new staff to be able to do this reporting that they haven't had before. So it is potentially a burden. It's an impact on their business, very much so.

RM:

It is. And it's not just purchasing data or something like that. They've also got to be able to change their overall risk management processes to incorporate climate risk. They've got to begin thinking of climate risk the same way they've traditionally thought of credit risk and liquidity risk and market risk, because it has the same-

MBS:

It's a great analogy. Yeah.

RM:

… impact on their bottom line.

MBS:

Yeah. And it's not going away.

RM:

Not at all.

MBS:

It's going to be around for a long time, and I think we're just going to continue to see this evolve.

RM:

Yep, absolutely.

MBS:

Yeah. Is there anything else noteworthy in the rule that stands out to you that you think we need to make sure that we mention?

RM:

Yeah, I mean 900 pages, there's a lot in there, but I think we've covered a lot of the major items, especially from a physical risk perspective. However, one additional aspect that stood out to me was the inclusion of this new recoveries rule in the final rule language. So this provides that if a company discloses their costs, expenses, losses incurred as a result of a severe weather event, it must also disclose the amount of recoveries recognized during the fiscal year and payouts from their insurance claims.

In the final rule, the SEC says that the existence of recoveries, such as insurance proceeds, is important information for investors because without it investors could be under the misperception that severe weather events and other natural hazards have a greater effect on the company than is actually the case.

This really just stood out to me in general as it relates to the larger insurance crisis that our country is currently dealing with, most of which is stemming from homeowners insurance companies that are raising rates or pulling out geographic areas altogether. But the crisis has much broader implications for the property and casualty industry as well as commercial insurance and the reinsurance market. And I think just this inclusion of this recoveries requirement is the SEC kind of planting a flag on the ground that insurance information is investor information.

I'm really interested to see where the conversation goes from there. And not just with the SEC, but other agencies more broadly as we kind of work through this current insurance crisis we're going through.

ES:

Interested to see the full ruling from the SEC? A link to the text is in the show notes.

MBS:

Yeah, absolutely. Me too. I know we kind of touched on insurance a little bit ago, and we thought that maybe they weren't going in the same direction as the government regulations with this rule, but there definitely is an intersection and a connection with the insurance to what needs to be the publicly traded companies need to report out on.

RM:

Yeah, absolutely. I think a lot of people are realizing that having insurance data is very helpful in understanding not just how to manage your current risk, but how to project for your company going 10, 20 years in the future, insurance is going to be a part of the conversation when it comes to climate change.

MBS:

Yeah, we definitely are seeing this. I'm glad they included that, because it is such a huge part from the payback of claims and the understanding of what the risk actually is and the impact that it can have. So this is going to be interesting.

RM:

Yep.

MBS:

What do you think are some of the first steps that companies are going to start to take?

RM:

Yeah. Unfortunately, not every company has this data already in-house, but it's definitely out there and accessible, which is good news because-

MBS:

How accessible is it? How are you seeing accessible is it?

RM:

It gets more and more accessible every year. And that's good news because these companies need to have this data or be able to access the data and understand it, like we said. So between now and then, companies are going to have to learn how climate risk affect their physical assets, and to do so, many of them are going to need to partner with third-party service providers that have both the asset level data and the climate risk expertise needed to conduct these forward-looking analysis.

And then additionally, these companies, as I alluded to earlier, they need to start integrating their climate risk into their overall risk management policies, which might be a more intensive process for some companies.

MBS:

Right.

ES:

Before we end this episode, let's take a break and talk about what's happening in the world of natural disasters. CoreLogic's Hazard, HQ Command Central reports on natural catastrophes and extreme weather events across the world. A link to their coverage is in the show notes.

This spring started off with record-breaking wildfires blazing in the Texas Panhandle. Within 48 hours of the Smokehouse Creek fire igniting, the blaze grew to over 500,000 acres and crossed the Oklahoma border. As Governor Greg Abbott declared a disaster across 60 counties, the Smokehouse Creek fire had burned more than the combined acreage of all Texas fires in 2023.

Then mid-March brought record-breaking hailstorms to the central U.S. From March 13 to March 14, the storm broke single-day records from 2023, a year infamous for record setting ensured severe convective storm losses. CoreLogic estimated one inch or greater hail fell on over 660,000 homes from March 13 to 14. The National Weather Service even reported hailstones as large as softballs in certain locations. The states of Kansas and Missouri were most impacted by these storms.

MBS:

Wow. Well, I can't wait to see where things go. And I guess crystal ball moment to wrap up here, Russell. What do you think is in the future of what's yet to come? This is just the first step in many and in a larger effort to disclose climate risk?

RM:

I definitely think so. That's kind of where the more global trend is that we are just moving in this direction of more disclosure. Although, here in the U.S., a lot of it, I think, depends on the upcoming election. I think there's plenty of energy on the left side of the aisle, both in Congress and the Biden administration to continue these efforts to quantify and disclose climate-related financial risks. So if President Biden were to win a second term, I think you'd see a number of additional agencies working on ways to inject climate risk information into our economy writ large.

I think the mortgage industry is a great example, where you have the Federal Housing Finance Agency and the Department of Housing and Urban Development have already begun looking at ways to assess climate-related financial risk. And I think this would just really be heightened in the second term.

And if Democrats were to take control of the House and retain the Senate, you could see legislation introduced that seeks to further codify these disclosure requirements. However, if the White House changes parties, you could see a Republican president much more willing to pump the brakes on these types of disclosures.

And we've kind of gotten a preview of that already in the past couple of weeks since the rule was announced. You've had the Republican majority in the House of Representatives holding numerous hearings in recent weeks focused on SEC overreach, potential consequences of the rule. So you kind of get a little taste of what might happen if the White House were to change parties and this rule were to be administered by a Republican president.

So I hate to say it, but in the U.S., the future of this climate risk disclosure conversation depends a lot on politics.

MBS:

Wow. It's going to be really interesting to see where we go from here.

RM:

Yes.

MBS:

Russell, thank you so much for joining me today on Core Conversations: A CoreLogic Podcast.

RM:

Of course. Thank you so much for having me, Maiclaire.

MBS:

All right, well, we'll definitely have you back again because this has been really interesting, and I know that nothing ever happens in your domain. So, as soon as we get more exciting things, I'd love to chat with you again.

RM:

Absolutely. Looking forward to it.

MBS:

All right, and thank you for listening. I hope you've enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts and subscribe wherever you get your podcasts to be notified when new episodes are released.

Thanks to the team for helping bring this podcast to life. Producer, Jessi Devenyns; editor and sound engineer, Romie Aromin; our Facts Guru, Erika Stanley; and social media duo, Sarah Buck and Makaila Brooks. Tune in next time for another Core Conversation.

ES:

You still there? Well, thanks for sticking around. Are you curious to know a little bit more about our guest today?

Well, Russell McIntyre is an expert in public policy and industry relations for CoreLogic. He is responsible for researching government and industry issues of importance to the organization and its clients. He also coordinates the CoreLogic PAC activities and assists leadership with appointments, events, and projects with partner organizations.

The CoreLogic statements and information in this blog post may not be reproduced or used in any form without express written permission. While all the CoreLogic statements and information are believed to be accurate, CoreLogic makes no representation or warranty as to the completeness or accuracy of the statements and information and assumes no responsibility whatsoever for the information and statements or any reliance thereon. CoreLogic® is the registered trademark of CoreLogic Solutions, LLC.

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