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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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