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SEC Proposes Broad Emissions Disclosure Rules

21st Apr 2022

The proposed rules cover information provided to investors related to greenhouse gas emissions and climate change risks

On March 21st, 2022, the United States Securities and Exchange Commission proposed a set of rules that would require companies to include information in registration statements and periodic reports pertaining to climate-related risks. This highly-anticipated part of the Biden Administration’s climate plan could help investors be more aware of ESG policies and the environmental risks associated with their investments.

There are two major parts of the proposal: the first requires companies to disclose information about “governance of climate-related risks and relevant risk-management processes,” how climate-related risks “have had or are likely to have a material impact on its business,” including in strategy, business model, or outlook in the short, medium, and long term, and the impact of climate-related changes on “the line items of a registrant’s consolidated financial statements” and financial estimates.

This means companies must disclose their climate-related ESG policies, as well as how they expect changes in climate to affect their core business practices and prospects in the future. If a company lacks an adequate ESG policy or chooses to ignore the potential effects of climate change, it could be a big red flag for conscious investors who might shy away from businesses that don’t take these problems seriously.

The other part of the proposal pertains to greenhouse gas (GHG) emissions. These emissions are divided into three “Scopes,” all of which must be reported on:

  • Scope 1: Direct GHG emissions.
  • Scope 2: Indirect emissions from purchased electricity or other forms of energy.
  • Scope 3: Emissions from upstream or downstream activities in the value chain if material, or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.

Much of the debate is likely to pertain to the rules surrounding Scope 3, which would require reporting on the emissions of a company’s entire supply chain. The term “material” could be interpreted in a variety of ways, and the wording of the rule could discourage companies from setting Scope 3 targets if they feel the reporting requirements would be too difficult. “Smaller reporting companies” would be exempt from the Scope 3 rules, and we don’t yet know what the threshold for “smaller” will be.

As the proposed rules have just been announced, there will be plenty of time for debate and refining in the coming months. In fact, discussion has already begun thanks to a series of opinions provided by individuals within the SEC on the merits and possible dangers of the proposal.

In his “Statement on Proposed Mandatory Climate Risk Disclosures,” SEC Chair Gary Gensler rebutted those who say the SEC is overstepping its bounds with such broad requirements. “Companies and investors alike would benefit from the clear rules of the road proposed in this release,” he said. “I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance.”

As for the suggestion that these standardized rules would place too much of a burden on some companies and get in the way of their providing more pertinent information to investors, he added: “I am guided by the concept of materiality. As the Supreme Court has explained, information is material if ‘there is a substantial likelihood that a reasonable shareholder would consider it important’ in making an investment or voting decision.”

However, not everyone at the SEC agrees with Gensler. Commissioner Hester M. Peirce, in her statement, “We are Not the Securities and Environment Commission – At Least Not Yet,” argues that the new disclosure rules give regulators too much say in what managers ought to treat as important.

“It forces investors to view companies through the eyes of a vocal set of stakeholders, for whom a company’s climate reputation is of equal or greater importance than a company’s financial performance,” says Perice, who also has specific criticisms of the Scope 3 rules, which she believes are bound to violate the materiality standard.

While Perice seems to have her focus on a company’s management and their ability to run their business as they see fit (and target investors who are not impact-focused if they wish), Commissioner Allison Herren Lee takes a different angle.

In her statement, “Shelter from the Storm: Helping Investors Navigate Climate Change Risk,” she makes it clear that she views this proposal through the eyes of investors who want as much information as possible when making their investment decisions:

“We have a responsibility to help ensure that investors have the information they need to accurately price risk and allocate capital as they see fit.”

While we don’t know yet how this proposal will evolve in the coming months, the strong support for these measures demonstrates that investors, more and more, want to know the effect their investments are having on the environment. From a fund perspective, providing those investors with the most accurate and comprehensive impact information possible (regardless of what is required) will be a differentiator in attracting impact-focused investors.

JTC takes impact seriously, and strives to help our clients provide the best reports and information possible. Our third-party fund administration solutions for impact and ESG track and document important impact metrics and can not only help your fund meet current and future reporting requirements, but can provide information to investors through a 24/7 online portal. Regardless of your goals, we can make reporting and disclosures easier for all types of funds.

Download our Impact Funds Collateral!

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