On March 21st the Securities and Exchange Commission (SEC) published its first set of proposed climate-related disclosure rules for public companies. The proposal marks the first significant action towards new reporting and control standards and has potentially disruptive implications for Asset Managers and Owners.
The proposed rule changes (currently under public consultation and not yet written into law) will require all listed companies with a market capitalization greater than $250m to include certain climate-related disclosures in their registration statements and periodic reports, including information about material climate-related risks and Greenhouse Gas (GHG) emissions. These proposed disclosures, which broadly align with existing frameworks (i.e., TCFD & GHG protocol), will be phased in over the next four years and varied by firm size, if accepted.
Under the proposed disclosure rules, the following must be reported:
- Climate-related risks and actual or likely material impacts on the business, strategy, and outlook
- Governance of climate-related risks and relevant risk management processes
- Certain climate-related financial metrics and disclosures in a note to audited financial statements
- Information about climate-related targets and goals, and transition plans (if any)
- Scope 1 & 2 emissions by disaggregated GHG gases, i.e., carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride, and nitrogen trifluoride; as well as in aggregate in terms of intensity
- Scope 3 emissions, if material or if a GHG emission reduction target or goal has been established that includes Scope 3 emissions
- Additionally, a “reasonable assurance” opinion will be required for some of the above disclosures”
Given the alignment of the proposed rules to other emerging standards and requirements, Asset Managers and Owners should be preparing for the impact these additional disclosures will have, both on their own businesses as well as the evolving expectations of investors.
Some key questions that asset management firms should be considering now include:
- How will these new regulatory requirements, if implemented, shift the demand for new “lower carbon” products?
- What changes will be required to our data governance processes and overall data architecture to support integration of these new climate data points into our overall operating model?
- Do we have a developed process for identifying, measuring, and monitoring sustainability and climate related risks and compliance with climate related products / mandates?
- Will this regulation create large cap bias in trading strategies and how will funds with a mix of large, mid, and smaller caps account for reporting discrepancies?
- What physical and transition risk analysis is required to support better investment decision making and how does this vary across asset classes?
- How ready are engagement processes and data compilation capabilities to enable effective engagement with investee companies to further reduce these emissions factors?