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SEC Disclosure Rules Welcomed but Unlikely to Fill Data Gaps

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In finally announcing its long-awaited code on corporate reporting of climate-related data, the Securities and Exchange Commission (SEC) has both delighted and annoyed participants in sustainability markets.

While SEC chair Gary Gensler’s announcement last week of the US’s first-ever rule on ESG disclosures will help fill a gaping chasm in the global regulatory landscape, many believe it doesn’t go far enough to fill the gaps in the wider sustainability data record.

Most perplexing is the decision to relieve listed companies of any obligation to report on their Scope 3 emissions – those produced by businesses’ and portfolio companies’ suppliers and distributors. In the earliest proposal for the rule announced in 2022, Scope 3 reporting was included. Additionally, obligations for the disclosure of Scope 1 and 2 emissions – which include greenhouse gases produced by firms’ own activities, or investments, as well as those from their energy use – are more limited than had originally been indicated.

The rule has been created largely to provide investors with comparable data that they can use to make decisions on their portfolios and risk management strategies. It puts in place measures that observers have applauded; it will require companies to assess the risks they and their assets face from a changing climate and will guarantee a degree of standardisation in reported data.

Relief

Notwithstanding legal challenges that have been launched by several US states that are opposed to the ESG project more generally, the rules should be implemented within three months. Compliant companies will be subject to a phased-in reporting schedule, which should be fully in place by 2028, later than originally proposed.

The final rule was published following 24,000 comments, of which more than 8,000 were sent in the few days before Gensler’s announcement last Wednesday. Many observers are relieved that the US has at last agreed on a reporting plan.

“Despite the delay and the watering down of the requirements, this is still a win,” said David Carlin, founder of Cambium Global Solutions, an adviser to governments, corporates and financial institutions on climate and sustainability. “It is a win for better data to help markets and capital allocators deal with climate change, a win for US firms to narrow the regulatory gap with their international peers, and a win for risk management,” Carlin told ESG Insight. “However, it could have been a bigger one.”

Alexandra Mihailescu Cichon, chief commercial officer for RepRisk agreed.

“The new climate disclosure rule will provide more clarity and comparability on material business risks and opportunities related to climate change,” she told ESG Insight.

Comparable Data

The US response to the clamour for better climate disclosure data had been eagerly anticipated especially since the European Union had unveiled a suite of regulations under its green finance programme. The EU’s corporate-focused regulation, the Corporate Sustainability Reporting Directive (CSRD), came into force this year and will eventually compel companies to report their Scope 1, 2 and 3 emissions. It’s hoped that doing so will load into institutions’ systems climate data from the estimated 70 per cent of global trade that is accounted for by supply chain providers. They are largely excluded from any such disclosure obligations.

It’s this information that many in the ESG space believe will finally improve the quality and completeness of the sustainability data record and help institutions more accurately identify the best companies and assets to fulfil their sustainability mandates.

The exclusion of Scope 3 data from the SEC rule, however, has left some observers feeling that the regulator has taken two steps forward and one step back. Carlin, for instance, fears that the move will deprive institutions of incentives to engage with polluters and to help them drive down their carbon footprints. RepRisk’s Mihailescu Cichon said it would do little to close data gaps.

“The exclusion of Scope 3 misses the target,” said Mihailescu Cichon. “Only reporting on Scope 1 and 2 is like only seeing the tip of the iceberg – it misses the massive impact that comes from a company’s value chain.”

She said that the omission of Scope 3 disclosures was in keeping with a general pushback in the ESG space. That has come amid growing criticism from conservative political groups and as concern about greenwashing rises. One lawyer from a leading global bank even thinks that the SEC’s decision would colour the eventual content of under-consultation sustainability disclosure rules in other jurisdictions, including the UK.

“The pressure is only going to come from United Nations forums and broader forums for [other jurisdictions] to adopt these policies,” the lawyer said. “But if they don’t adopt them they can say, ‘well, the United States isn’t and Washington is one of the big polluters on the planet so why should we?’ It’s normative.”

Optimism

No matter the implications for data quality, the SEC rule is likely to have a positive impact that will bode well for future disclosures.

Lindsey Snow, vice president for sustainability and purpose at values-focused marketing firm Porter Novelli said that while the SEC’s final rule lacks some of the substance of the original proposal, it must be looked at in the context of other sustainability rules that American companies are obliged to follow.

“Many companies are already reporting data that goes well beyond the SEC’s new requirements in their voluntary ESG reporting,” said Snow, whose brief takes in ESG data for financial institutions. “Many remain subject to other stringent disclosure regulations such as the California bills and CSRD or they must meet supplier emissions data requirements from key customers.

“Because we anticipate further developments in this area over the next few years, companies should ready themselves to go above and beyond current regulations,” she told ESG Insight.

Mihailescu Cichon also saw some hope for future disclosures in the rule.

“It will be interesting to see what companies report as the current US regulation permits companies to decide what their material emissions are,” she said. “Companies would be wise to remember that just because Scope 3 isn’t included now, it doesn’t eliminate the possibility in the future.

“To be clear, there is only one path on climate – but also on interconnected biodiversity and social issues: forward.”

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