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What you need to know about SEC climate risk disclosure

The Securities and Exchange Commission under the Biden administration has made no secret of the fact that climate change is high on its agenda. On March 21, the agency’s commissioners voted 3-1 to advance a hotly anticipated proposal on mandatory climate risk disclosure. This rule, if enacted, would require public companies to disclose their greenhouse gas emissions and exposure climate risk,

Tea proposed rule Spread over 506 pages, so here we have tried to throw light on its key provisions, legal basis and what happens next.

What is the SEC Proposing?

The rule would require foreign and domestic public companies to disclose a range of climate-related information in their financial reports. In particular, the SEC wants companies to provide a description of how various risks associated with warming climates — such as those arising from extreme weather events, regulatory actions or changing customer expectations — materialize their operations, strategy and approach. How to stand to impress. In addition, management will be expected to outline its own formal procedures for identifying, assessing and managing these risks.

To comply with the rule, publicly traded companies must also disclose greenhouse gas emissions generated by their direct operations and the energy they use., These emissions numbers will need to be verified by an independent verification provider. In addition, the SEC also requires large companies to disclose emissions generated across their entire value chain – including suppliers or consumers – if they can be considered financially material, or if companies have included these emissions in their public climate pledges. has been referenced.

This final warning is in line with SEC’s earlier comments on corporate climate commitments: Chairman Gary Gensler and commissioner Caroline A. crenshaw Both have previously expressed skepticism about the companies’ efforts to monitor progress towards their emissions targets and meet them. Accordingly, the SEC’s proposed rule would be is needed A company that has publicly announced a climate-related target to disclose information about a target with a “unit of measurement, defined time horizon, the target will be tracked against a baseline, and relevant data indicating it.” to see whether the registrant is making progress or not.” As part of this, companies will have to explain the extent to which their net-zero ambition depends on carbon offsets. This will probably come as welcome news environmental groupsMany of whom have cautioned that these accounting mechanisms could allow corporate polluters to delay more meaningful decarbonization efforts.

Taking a Step Back: How Did We Get Here?

In recent years, we have seen increased public awareness of climate change and its negative effects on communities around the world. consumers are realizing the limits of individual action and instead Contact Major corporations—the primary culprits behind global warming—to re-evaluate their effects on the natural world.

Faced with pressure to cut their environmental footprint, many of the world’s most powerful businesses have Unveiled ambitious plan to reach net zero emissions within a specified time frame. At the same time, financial institutions have responded to the growing demand from investors for value-aligned solutions by creating funds with attractive descriptors such as “green” or “sustainable”. The only trouble? many of these Pledges And products does not hold up to scrutiny, and their issuers have since been accused of making misleading claims about their sustainability credentials (a practice known as “greenwashing”).

As it turns out, the SEC has been paying close attention to all this and last year announced Formation of a Climate and ESG Task Force with a view to protect investors from such deceptive practices. Among the first orders of business for this task force: dusting off the existing framework of voluntary climate-risk disclosure that had been in place for more than a decade. In doing so, the commission sought public input on how best to regulate climate disclosure and subsequently attracted hundreds of comments (ethically) According to Gensler, vast majority Respondents expressed broad support for such measures.

What is the logic behind the rule?

SEC officials have Signal That their latest offer comes, in large part, as a response to investor demand. In fact, there is a growing understanding that climate change presents credible threats to the global economy—and one survey indicated that over 90% Institutional investors believe that the market is not yet priced high enough for these risks. Still, public companies have been slow to respond to demands for greater transparency, and many continue to disclose limited information about their impacts on the environment or their resilience to climate-related crises.

we often Specified Investing as a “full information investment” for environmental, social and governance. We believe that access to a wide range of reliable data related to the impacts of a company on people and the planet can facilitate more informed decision-making, enabling investors to make more informed decisions about weather-related supply chain disruptions, consumer boycotts, climate change and climate change. Helps better assess a company’s vulnerabilities to threats such as litigation and more. , The SEC’s reasoning is largely the same: Better information can lead to more educated decisions. This is the basis behind a regulatory tool known as mandatory (or mandatory) disclosure, something the SEC has had for a long time. everything as central to furthering its mission.

Gensler first Inform That companies’ current voluntary disclosures on climate risks leave a patchwork of inconsistent and incomplete information that may be of limited use to investors. By introducing its own framework for reporting climate risks, the SEC hopes to empower investors with “consistent, comparable and decision-useful information to make their investment decisions” while “consistently and consistently for issuers”. Explicit reporting obligation”.

now what happened?

It remains to be seen whether the current rule will be adopted or not. The SEC is giving the public up to 60 days to submit comment on the plan, and a final rule could take effect by the end of the year. If this happens, then the largest companies need To start reporting in 2024, while smaller entities will have until 2026.

It’s worth noting that the rule is almost certain to face legal challenges—some have Positive That the SEC is going beyond its statutory authority and that any measure to mandate climate disclosure may violate First Amendment limits on forced speech. Among the agency’s most vocal critics on the issue is its lone Republican commissioner Hester Pearce, who presented a long Statement Outlining his various objections to the proposal.

What does this mean for consultants?

This historic regulatory development comes at a time when investors are looking to companies that embrace positive environmental, social and governance practices – and not just for ethical reasons. Increasingly, investors are too Thankful The long-term financial impact of inaction on challenges such as poor management and climate change. We believe they deserve access to reliable information about how companies in their portfolio adapt or adapt to a rapidly changing natural environment, rapidly evolving regulatory landscape, and rapidly changing technologies and consumer behavior. ready to endure.

This latest rule-making activity is likely just the beginning for Gensler’s SEC — the chairman has indicated that the agency will also shift its focus to products offered by asset managers and advisors under the guise of “sustainable investments.” In prepared comments Last year, he emphasized his belief that “investors should be able to see what’s under the hood of these funds” and, absent standardized definitions for terms related to sustainability, his employees are considering whether the fund Managers should be required to disclose their criteria and underlying data.

To date, many consultants have held back ESG adoption – a trend that may, at least, be attributed to a lack of robust information and reporting standards. However, the SEC’s efforts to standardize climate risk disclosure are an important first step in helping consultants cut down on noise and effectively assess the risks and opportunities of companies in different sectors. As it has always been clear that negotiations about climate risk should form part of an advisor’s fiduciary duty to his clients, and as Evidence suggest that the same clients are hoping that their advisors will initiate the conversation, the question becomes: What are you waiting for?

Emma Smith is Director of Communications, and Alex Acosta is Chief Compliance Officer, at Policy, Ethik is an independent provider of custom direct indexing solutions. Its scalable platform enables financial advisors to deliver passive equity portfolios that meet investors’ growing demand for personalized, value-aligned solutions.

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