The SEC’s Proposed Climate Disclosure Rules

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Last week, the SEC issued its long-awaited proposed mandatory climate-related disclosure rules. Quite extensive at over 500 pages, the draft proposal builds upon existing global frameworks, the Greenhouse Gas (GHG) Protocol and the Task Force on Climate-Related Financial Disclosures (TCFD), as widely expected. There is a sixty day comment window, with the SEC expected to finalize the rules before December 2022.

SEC chair Gensler said the agency was responding to investor demand for consistent information on how climate change will affect the financial performance of companies. While hundreds of firms have already started reporting data concerning carbon emissions, the SEC noted that current disclosures are inconsistent and thus hard for investors to compare.

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Threats to companies from global warming fall into two buckets—first, physical risks to a company’s operations and facilities by increased extreme weather events, and second, transition risks resulting from efforts to reduce usage of fossil fuel and prepare for climate change. The SEC proposal would require publicly traded companies to include an estimate for the impact of both sets of risks. And the SEC would phase in the timing of these climate disclosures between 2023 and 2026.

The two primary focuses in the SEC approach:

1) companies disclosing their direct and indirect greenhouse gas emissions, or Scope 1 and Scope 2 emissions, as well as disclosing supplier and partner emissions, or Scope 3 emissions.

2) companies disclosing “actual or likely material impacts” that climate-related risks will have on their business, strategy and outlook, including physical risks, for instance, to actual physical manufacturing plants.

Companies with announced climate goals must also include details of how and when they expect to meet their goals.

The SEC commissioners and staff have spent months navigating the details of the proposal. One contentious point was on Scope 3 emissions and how companies can provide accurate estimates of the emissions from their suppliers. In answer to the Scope 3 sticking point, the SEC will not hold companies liable for Scope 3 estimates provided in good faith—the same legal safe harbor that already exists for companies’ other forward-looking statements.

The SEC climate disclosure rules focus on the corporate sector. For traditional asset managers, there is no immediate requirement to report on underlying stocks and bonds in investment portfolios.

However, under the SEC directive, public private equity firms such as Carlyle and Blackstone will need to make climate disclosures for their portfolio companies. Industry players are thus keen to be a part of early discussions on benchmarking protocols, along with their competitors. A couple of initiatives to help standardize benchmarking have formed, such as the non-profit Data Convergence Project (DCG), led by Carlyle and CalPERS, which seeks to standardize ESG metrics and provide a mechanism for comparative reporting for the private market industry. Boston Consulting Group is aggregating the data for the DCG initiative. A second initiative around benchmarking is Novata, a for-profit supported by Hamilton Lane.

Not surprisingly, the creation of data/tools around standards for evaluating and disclosing climate is one of the fastest growing businesses at MSCI and other investment research firms. Great demand is expected from the corporate sector.

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Credit: www.forbes.com /

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