Skip to main content

Why Fashion’s ‘Acutely’ Worried About SEC’s Climate Disclosure Proposal

America’s biggest fashion brands and retailers are asking the U.S. Securities and Exchange Commission (SEC) for more time to meet a proposed climate-related disclosure rule that would require businesses to provide, for the first time, detailed reporting about their climate-related emissions and risks.

While the American Apparel & Footwear Association (AAFA), which represents more than 1,000 companies, including Adidas, Gap Inc. and Hanesbrands, said it “generally supports” the annual disclosure of greenhouse-gas emissions, it also urged the agency to give companies in the industry an additional one to three years to comply with Scope 1 and 2 measurement demands, “given that the majority of companies in our industry will need to staff up in order to have the needed expertise in this space, develop and implement new systems, and in many cases obtain outside assistance to ensure reliability and comparability of the information,” it said in a letter dated June 16.

The trade group, which submitted its views as part of the proposal’s open comment period, is also pushing for the delay of Scope 3 emissions and targets by more than 18 months beyond that so calculations can be “less assumptions-based.” Because there is no “consistent, widely recognized” methodology for making such calculations, the AAFA said, requiring Scope 3 disclosure prior to this point is “likely to cause investor confusion” as a result of the range of possible assumptions.

“Scope 3 data is calculated using available emissions factors, but clear and universally adopted methodologies don’t exist for every category,” the organization said. “The lack of consistent calculation methodologies means that scope 3 data between peer companies would not be consistent, reliable, or comparable. Furthermore, the nature of companies’ Scope 3 emissions means that we would be asking our suppliers for the emissions from their tier 1 and tier 2 suppliers. At a certain point the data is no longer reliable and, if required, would not be useful for investors.”

Related Stories

Meanwhile, the SEC should limit the disclosure of what constitutes a material risk, the AAFA said. The materiality of climate-related risks, it said, should be determined in “totality to a company” versus “line item by line item and business by business.”

“The focus should be on a qualitative discussion of climate-related risks including governance, strategy, and risk management with inclusion of metrics, targets, and financial impacts only if relevant to understanding and management of material climate-related risks,” the trade group said. “Requiring extensive information to be filed instead of furnished also requires companies to dedicate substantial resources and processes for information that may not be material for investors’ understanding of significant risks.”

While material information should be incorporated into filings, information that is not material is more appropriately included separately, such as in a corporate social responsibility report, the AAFA said. It also wants the SEC to eliminate both the 1 percent threshold for reporting any line-item impact and the requirement to disclose the risks of storms, droughts and other weather-related events.

“The 1 percent threshold is not consistent with longstanding concepts of materiality, [and] would require immense amounts of work and expense (e.g., companies would have to monitor, track, and make financial assumption[s] about a wide variety of non-material items to determine if the 1 percent threshold had been met),” the organization said. “It should be replaced with a ‘financially material’ standard. Similarly, the definition of ‘materiality’ for Scope 3 emissions should be amended to account for materiality to overall emissions.”

In addition, the proposed rule should capture information in a standalone document, and not filed through a company’s Form 10-k, “thereby providing a safe harbor from liability for the disclosure and allowing extra time for disclosure,” the AAFA said.

“The proposed rule would require climate-related disclosures as ‘filed’ and therefore subject to potential liability under Exchange Act Section 18, 707 except for disclosures furnished on Form 6-K,” it said. “We want corporate efforts to ‘naturally spin out the information that is required’ to be more sustainable. Even if the staff determines to require information that is not material in SEC filings, as opposed to on company websites, information should only be furnished and not filed if it isn’t required under existing disclosure and financial rules.”

If this is not possible, the trade group requests a phased-in approach of three to five years from furnished to file to “give companies adequate time to obtain the relevant expertise, develop and implement the necessary systems, and for the development of accepted methodologies.”

Overall, the proposed rule should offer “clear, prescriptive” guidance that requires companies to quantify and describe the effects of climate-related events and transition activities, as well as disclose the impacts of these events and activities on estimates and assumptions used in preparing financial statements to the extent financially material, the AAFA said.

“We appreciate the SEC acknowledging that companies may set longer-term goals without having full knowledge of the path to getting there,” it added. “This is particularly important for Scope 3, which will take significant effort in mass and across countries to achieve. Setting a goal with the ability to acknowledge unknowns is preferred over not setting any goal at all.”

The AAFA said the industry supports the goals of the SEC’s proposal but it is concerned that the rule, as written, will add “considerable” costs and impose “impossible” hurdles to submit accurate information in certain cases while shifting a “considerable” amount of resources from mitigation, reduction and adaptation to achieve compliance.

The AAFA said it and its members not only acknowledge the importance of tracking and reducing greenhouse gas emissions but they also appreciate the consistency that the proposed SEC mandate seeks to promote.

“However, we are acutely worried about the proposal’s lack of specificity on details for achieving and meeting these disclosure goals, the substantial increase in costs that would be imposed by the proposal, numerous aspects of the proposal that ignore traditional concepts of materiality, and the proposal’s unworkable timelines,” the trade group said. “We look forward to working with the SEC to address these concerns and make the proposed ruling as effective as possible.”