Sustainable or ‘green’ finance is increasingly recognized as a crucial lever to achieve the aims of the Paris Agreement. To be successful, investors need high-quality standardized environmental, social, and governance (ESG) data.
Recently, the Securities and Exchange Commission (SEC) announced its proposed rule change to force publicly traded companies to include certain climate-related disclosures in their registration statements and periodic reports. The proposed rule change will be a positive step forward to enhance and standardize climate-related disclosures for investors.
Reliable ESG data is in high demand
Corporate disclosure on ESG issues is more extensive than ever, but it is not uniform. Meanwhile, investors are looking for high-quality ESG datasets to help them make portfolio decisions. Over the past decade, there has been a sustained effort to force greater disclosure of climate-related information and persuade companies that disclosure is in their best interest.
The SEC has come under considerable pressure from Wall Street to take a stronger stance on disclosure standards. The proposed rule change will require listed companies to explain how climate risks will likely impact their business as well as the companies’ own efforts to limit their carbon footprint. Companies will also be required to disclose their Scope 1 and 2 emissions. Those with public emissions reduction targets will be required to disclose their Scope 3 emissions. These requirements are largely similar to the guidance provided by the Task Force on Climate-Related Financial Disclosures (TCFD). For companies already reporting in line with TCFD, the rule change will not present any significant challenges. Still, it will be a significant wake-up call for those who are not.
It is widely regarded that the European Union (EU), with its EU Green Taxonomy and the Non-Financial Reporting Directive, has been pulling ahead in terms of sustainability regulation but, if adopted, this move will help the United States to get up to speed.
A market-based mechanism for climate action is emerging
Unfolding in front of us is a market-driven mechanism for tackling climate change. The financial industry is adding more pressure for net-zero, warning that climate risk is financial risk. Large asset managers are beginning to vote against the management of companies they believe are not adequately addressing climate risk in their business strategies.
Together, these forces create a market-based mechanism in which climate action is becoming a competitive differentiator. Companies taking climate action can expect to attract more—and more loyal—customers, partners, and employees. Other things being equal, this will drive profits and win favor with investors. These interlocking forces create what we call a ‘climate action feedback loop’ that rewards and reinforces corporate climate action, prompting more of it.
The proposed reporting requirements will strengthen this feedback loop by providing investors with more reliable information for making investment decisions and forcing companies to consider their impact on the environment and the impact of climate change on their operations. When it comes to sustainability, companies now have a question to answer, are they all in, or are they out?