The SEC's proposed climate-related disclosures face backlash from industry players, with firms grappling with cost and data uncertainty, writes Tom Pfister, managing director, compliance, regulatory and reporting, Confluence.
In March last year, the U.S. Securities and Exchange Commission unveiled plans to enhance and standardise climate-related disclosures for investors as part of a growing awareness of the importance of ESG issues amongst publicly-traded companies. These developments in enhanced disclosure regulation signal the most significant overhaul of ESG reporting requirements in almost 20 years.
Even though the proposed rules have yet to be adopted, the controversial climate-risk disclosure rule has faced major pushback from companies and investors alike. While Europe is leading the charge with the widespread adoption of the Sustainable Finance Disclosure Regulation (SFDR) and the EU taxonomy, the U.S. continues to debate the limitations of the SEC's statutory authority and that the government agency cannot regulate limits to carbon emissions.
In this article, I'll consider what the proposal would require of firms' operations and why it's facing continued widespread pushback and controversy from industry players.
What is required of firms?Historically, the SEC has not imposed standardised requirements that would require firms to disclose their climate-related financial impact. Though some companies voluntarily report this kind of information, this proposal reflects a growing global business push for more consistent, transparent ESG reporting standards by companies.
"Even though the proposed rules have yet to be adopted, the controversial climate-risk disclosure rule has faced major pushback from companies and investors alike."
The combination of climate-related events and the global pandemic has accelerated investor sentiment toward ESG-related concerns. The rules come at a time when investors are increasingly making their voices heard on their support for more ESG-aligned companies, with investors believing that companies that perform well on ESG are better positioned for the long term than those that continue to business-as-usual.
Most notably, the SEC's proposed rules would require firms to disclose direct greenhouse gas emissions (known as Scope 1) and indirect greenhouse gas emissions from purchased electricity and other forms of energy (Scope 2). The most concerning to industry players of the rules is the disclosure of indirect emissions in a company's value chains beyond the company's direct control (Scope 3), given the complexities involved in tracking and reporting this information.
Why has there been backlash?Since the SEC proposed their enhanced disclosure rule, there has been a growing legal backlash against their attempt to provide consistent and reliable climate information to investors. Last month, a group of U.S. Republican congressional leaders announced the publication of a letter to the SEC Chair Gary Gensler, arguing the rule exceeds the SEC's authority and accusing the organisation of pursuing a "progressive social agenda."
"The combination of climate-related events and the global pandemic has accelerated investor sentiment toward ESG-related concerns."
As outlined above, firms are concerned with the potentially significant costs associated with providing Scope 1, Scope 2 and Scope 3 disclosures, particularly around compliance efforts. Businesses also face a data challenge as firms grapple with managing climate-related data from across their supply chains. There are several steps that firms need to take to ensure that their data sources are in order and they're reporting accurately when the new rules are planned to go into effect. However, even if companies have the data siloed within their organisation, they may not have the internal infrastructure to report effectively or efficiently.
It's important to look aheadThe SEC is already adjusting its proposal following nearly 15,000 comments from the public, so there are questions about when the final draft will be presented.
"Since the SEC proposed their enhanced disclosure rule, there has been a growing legal backlash against their attempt to provide consistent and reliable climate information to investors."
Revisions, however, do not mean the rules aren't still coming. Forward-thinking and resilient firms will tackle their ESG data strategy now before the disclosure rules are finalised. Getting ready for the rules will be a major adjustment. The time between the final rules and implementation might be too small for an effective, well-managed transition to expanded reporting. This will separate the winners from the losers in the journey to more consistent, transparent ESG reporting standards worldwide and, ultimately, the transition to net zero.
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