Climate and ESG issues are being prioritized by the SEC
There was a flurry of announcements from the Securities and Exchange Commission (SEC) related to climate and ESG issues in recent weeks. Let’s take a few minutes to review what was actually announced and what it means.
By GreenPortfolio Team
Updated: March 12, 2024
Update: On March 6, 2024, the Securities and Exchange Commission (SEC) adopted a final set of climate disclosure rules. The final rules scale back earlier proposals in several key ways, most notably in the omission of Scope 3 reporting requirements.
Overall, the SEC’s climate disclosure rules do not go far enough. On the one hand, they make significant progress in allowing investors to understand the true material risks posed to companies by climate change. Reducing this information asymmetry will only be a benefit to shareholders.
However, the lack of requirements to disclose Scope 3 emissions – for instance, from downstream suppliers – shields many of the worst climate offenders from scrutiny. Banks and other financial institutions, in particular, will not have to account for their activities financing emissions-intensive projects and activities.
Previous update: April 11, 2022
On March 21, 2022, the Securities and Exchange Commission (SEC) moved forward on its proposal to mandate climate-related disclosures by public companies. The draft rule sets standards for reporting climate-related risks as well as greenhouse gas (GHG) emissions with a goal of achieving ‘consistent, comparable and decision-useful information.’ Read our recent post.
Original post: March 18, 2021
There was a flurry of announcements from the Securities and Exchange Commission (SEC) related to climate and ESG disclosure issues in recent weeks. Concerns have been voiced for many years about companies either inflating how “green” their operations were or understating how their businesses impact climate change. We’re hopeful that these concerns might actually be addressed. Let’s take a few minutes to review what was actually announced and what it means.
Focus on climate disclosures in public filings
On February 24, 2021, Acting Chair Allison Herren Lee directed “the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings.” While her notice certainly highlights renewed priorities within the SEC to ensure that companies are accurately portraying their ESG climate-related risks, there was no announcement of any actual changes in policies or procedures.
In fact, she notes that the SEC will merely review how public companies are addressing guidance previously published in 2010. This most recent announcement also indicated that they will assess if disclosures comply with current securities laws and “absorb critical lessons” on how the market is managing climate-related risks.
2021 examination priorities include climate-related risks
Next, on March 3, 2021, the SEC Division of Examinations announced its 2021 priorities. ESG and climate-related risks appeared to get top billing amid a variety of priorities included for the year. Two specific items were called out.
The first is proxy voting as it relates to climate and ESG risks to ensure that these votes align with investors’ best interests. No further explanation is given on this priority, but it could relate to increased shareholder actions pressuring companies to address behaviors related to climate change. These actions often involve proxy voting by large asset managers and it may be that the SEC is questioning if these actions are more in the interest of climate activists or shareholders. Ceres, an organization that tracks these types of climate-related proposals from shareholders, found that not only were there more of these types of proposals in 2020 than in previous years, but that they received a higher amount of support on average. This increased activity might have gotten the SEC’s attention and interest.
The second item mentioned was how companies plan to address increased physical risks to supply chains, assets, and other business operations due to climate change. This makes sense as many locations throughout the country are seeing more extreme weather events more often. Whether wildfires, power outages, hurricanes, or floods – shareholders need to know whether a company has taken proper precautions to deal with these increased risks in order to accurately assess their investments.
Creation of Climate and ESG Enforcement Task Force
On March 4, 2021, the SEC announced an Enforcement Task Force focused on climate and ESG Issues. This announcement made the biggest ripple as it indicated that they would begin to “proactively identify ESG-related misconduct.” While the SEC did not give much more color as to what they consider misconduct, they indicated that they would attempt to find “material gaps or misstatements” in public climate risk statements using more modern data analysis tools. Once again, no new rules or policies would be enacted, but instead, the SEC would be looking to enforce currently available guidelines.
On March 22, 2021, the SEC launched the SEC Response to Climate and ESG Risks and Opportunities as a resource for investors to access agency information on climate and ESG issues.
The inclusion of climate risk assessments in public disclosures is indeed a fairly new addition for both companies and investors. Yet, over the years, there has been skepticism regarding how companies conduct their climate risk assessments. GreenPortfolio is optimistic that this new Climate and ESG Task Force will bring increased compliance and transparency to the market.
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