ESG

SEC Fires Starting Gun On ESG Disclosures; Mixed Reactions

Tom Burroughes, Group Editor, 23 March 2022

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While a US story, the actions by the regulator of the world’s largest economy will spark commentary and possible emulation around the world. Already, the suggestion that firms should describe in detail their environmental impact is prompting pushback in some quarters. The move comes at a challenging time for global energy policy.

Moves by the Securities and Exchange Commission to make US-listed companies explain what their climate-related risks and greenhouse gas emissions are have so far received a positive response – at least from specialists in the ESG field, if not from some politicians worried about the costs.

The SEC’s move is part of the Biden administration’s drive to encourage the use of more renewable energy sources – a tricky issue at a time when some lawmakers have called for more, not less, oil and gas extraction to handle skyrocketing energy prices made worse by Russia’s invasion of Ukraine.

The SEC unveiled its draft rule under which companies would disclose their own direct and indirect greenhouse gas emissions, otherwise dubbed Scope 1 and Scope 2 emissions. Under the proposals, firms would also have to disclose greenhouse gases generated by suppliers and partners – or Scope 3 emissions, if these are material or included in any emissions targets the company has set (source: Reuters, others). 

The initiative is an example of how current SEC chair Gary Gensler is proving to be an aggressively activist head of the powerful regulator. As reports noted, Republican legislators say the watchdog is exceeding its authority and saddling companies with costs at a time of rising inflation and supply chain disruptions. Such steps also highlight how ideas on “sustainability” have moved from the fringes to be central concerns of Wall Street. A point in question is whether burdens of disclosures, adding to other regulatory requirements, will hit US corporate competitiveness and discourage risk-taking.

The SEC’s proposals have been submitted for public feedback and should be put into final form later in 2022, reports said. 

The proposals are already proving politically controversial. Senator Patrick Toomey, the Senate Banking Committee's top Republican, blasted the rule, saying it "extends far beyond the SEC's mission,” a report said (source: Reuters). Texas Congressman Dan Crenshaw, a Republican, has argued, for example, that US policy to press down on fossil fuels has made the US less able to stand up to the likes of Russian president Vladimir Putin, and has also added to high gasoline prices. Around the world, countries are moving rapidly to reconsider their so-called "green" policies. In Germany, which under former Chancellor Angela Merkel took steps to wind down nuclear energy, a rapid rethink is taking place. The country has been a large user of Russian oil and gas.

Even so, as wealth managers know, the noise around ESG investment ideas has been considerable. It is now almost odd or even commercially dangerous not to have ESG offerings on the menu, or genuflect towards ideas about sustainability in public.

Details
The SEC said the Scope 3 requirement would include carve-outs based on a company's size, and that all the emissions disclosures would be phased in between 2023 and 2026.

Patricia Pina, head of product research and innovation at Clarity AI, a business using statistical methods in environmental, social and governance-themed (ESG), praised the SEC’s move.

“It is good to see the SEC finally establish emission reporting rules that align the United States with other nations pursuing climate goals and investor transparency. These rules will increase the quantity and quality of companies’ accurately reporting Scope 1 and Scope 2 emissions and are a step in the right direction regarding Scope 3 emissions,” Pina said.

“At Clarity AI, we believe there is no pathway to net zero without fully incorporating Scope 3 emissions into regulation and reporting standards. And even then, regulation will only take us so far. Technology allows investors to access robust and transparent Scope 3 emission data at scale, which will be critical to check the reliability of the reported data and to start to understand the key drivers of those emissions. Deep granularity and full transparency will be needed for investors to manage their paths to decarbonization, while also keeping companies "on track"; to meet the Paris targets,” she said. 

The Forum for Sustainable and Responsible Investment, an association for the sustainable investment industry, hailed the move.

“Today’s (SEC) vote to propose consistent, comparable and reliable information on climate-related risks is a critical step forward in providing the needed data to make investment decisions. This rule will create a framework to structure climate-related information already reported by most large companies,” the body said.

“The proposal includes important elements of disclosure including climate-risk strategy, management and governance, the impacts of climate-related events on financial statements, and metrics for company-set climate-related targets or goals, assurance standards. It covers Scopes 1 and 2, and, for all but the smallest companies, Scope 3 as well,” it added. 

Patrick Wood Uribe, CEO of Util, a business using machine learning to measure the effect companies have on the environment, was similarly upbeat about the SEC’s proposals.

“The SEC’s proposal on corporate climate disclosures is a major step for the world’s largest economy. Increasingly, shareholders want social and environmental context in their financial analysis of companies. It’s not a question of being ‘green’: today, environmental risk is no less material than financial risk. And, while emissions were once fiendishly difficult to track, technology makes it easier for businesses to report on – and data availability, for investors to understand – environmental impact,” Uribe said. 

“While stopping short of a Scope 3 disclosure mandate, the proposal requires companies to report indirect emissions if `material’ or included in climate targets, which companies must release annually. At Util, we use other data sources to fill the Scope 3 data gap but approaching ubiquitous Scope 3 reporting marks real progress from both an information and perspective gap: we’re finally moving away from the idea that companies operate in a social and environmental vacuum (with the commensurate responsibility),” he added.

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