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SEC set to change the game on ESG

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27 Apr 2022

A new proposal by the US’ stock market watchdog on mandated climate-risk disclosures could take the ESG debate to a whole new level, finds Andrew Holt.

ESG boardrooms

A new proposal by the US’ stock market watchdog on mandated climate-risk disclosures could take the ESG debate to a whole new level, finds Andrew Holt.

ESG boardrooms

The term game changer is overused, but the announcement by US regulator the Securities and Exchange Commission (SEC) that it has put forward a proposal to mandate climate-risk disclosures by public companies is a game changer in the true sense of the term.

It will have major ramifications for the reporting of ESG disclosures, probably establishing a more consistent and detailed form of ESG reporting by publicly listed companies and in the process creating greater momentum towards net-zero goals, because all companies with have to abide by it.

SEC chair Gary Gensler was not indulging in hyperbole when he said that this proposal “would provide investors with consistent, comparable and decision-useful information for making their investment decisions and would provide consistent and clear reporting obligations for issuers.”

The proposal will mean public companies registered with the SEC have to disclose their direct greenhouse gas emissions and, vitally, have them verified by a third party.

In so doing, the SEC will require a company’s annual report to include data on their direct emissions, known as scope 1 emissions, as well as emissions resulting from energy that they purchase, known as scope 2 emissions.

All companies registered with the SEC would also need to disclose plans to reduce emissions on an annual basis.

“Under the proposed rules, some registrants also would be required to disclose scope 3 emissions – the emissions from upstream and downstream activities in a company’s value chain – if such emissions were material to investors or if the company had made a commitment that included reference to scope 3 emissions,” Gensler said.

And here, on scope 3 disclosure, notes the proposal: “May be necessary to present investors a complete picture of the climate-related risks – particularly transition risks – that a registrant faces and how [greenhouse gas] emissions from sources in its value chain … may materially impact a registrant’s business operations and associated financial performance.”

Energy transition

In essence, the proposal highlights that investors could use scope 3 emission data to assess whether a particular company is actively working to ensure it will be in business during the clean energy transition.

SEC Commissioner Allison Herren Lee said: “Scope 3 disclosures are often vitally important to understanding a company’s overall greenhouse gas emissions and therefore overall climate-related risks.”

Politically, the proposals upset some Republicans. Some complained that it may result in driving up costs. Republican Trump appointee SEC Commissioner Hester Peirce was a particularly vocal opponent.

Peirce argued that a company’s “long-term financial value is only tenuously, at best, connected to such third-party emissions.”

She was the only commissioner at the four-person commission who voted against the proposal, meaning it was put forward with a 3-1 majority.

Investor enthusiasm

The majority of responses from investor, environmental and other interested groups welcomed the announcement.

Gunther Thallinger, chair of the UN-convened Net-Zero Asset Owner Alliance, said: “The UN-convened Net-Zero Asset Owner Alliance warmly welcomes the US SEC’s propped rule amendments on climate-related disclosures. A step-change in the quantity and quality of corporate disclosure of climate financial risks and opportunities is vital to provide decision-useful information to asset owners.”

Ben Pincombe, head of stewardship and climate change at the Principles for Responsible Investment, highlighted how the SEC’s intervention is vitally important.

“Institutional investors via Climate Action100+ have since 2017 been calling on companies to explain how they are addressing climate change. But voluntary disclosures need to be backed by regulatory mandates, so this SEC proposal is a welcome step in enabling the transition to a net-zero economy.”

Mindy Lubber, CEO and president of Ceres – the body looking to change capital markets to a more sustainable model – added: “The SEC is finally heeding the calls from institutional investors, companies, regulators and the public.”

And she added: “The thoughtful climate disclosure proposal announced would allow investors and companies to better tackle climate-related financial risks across investment portfolios and global supply chains and seize the opportunities that come with acting on those risks.”

Tim Mohin, chief sustainability officer at carbon footprint measurement company Persefoni, also noted: “This marks a major milestone in our fight to stem the worst effects of climate change. It has been obvious for years that climate risk is financial risk – and the SEC has recognised this fact with a ground-breaking proposal.”

Summing up the situation, Gensler added: “Companies and investors alike will benefit from the clear rules of the road proposed.”

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