The Securities and Exchange Commission’s new proposed rule for corporate disclosure on climate change risks is very significant for the US market. The SEC voted to approve it on 22 March, and there is time until the end of May for comments. Most investors, asset managers and consultants look like they are in favour. If the rule is approved by the end of the year, a large issuer would need to comply for its fiscal year 2023 and file with the SEC in 2024.

The process started a year ago, just after Joe Biden took office as US president, with the SEC acting chair Allison Herren Lee issuing a request for comment on climate disclosures. Now under the leadership of the new chairman, Gary Gensler, the SEC has moved on with the proposal that requires mandatory Scope 1 and 2 disclosures, and for the largest companies, material Scope 3 disclosures.

Alignment with other countries

“The proposed rules would align the US with a growing list of countries that have begun to mandate the Task Force on Climate-Related Financial Disclosures-aligned climate requirements,” points out Linda-Eling Lee, global head of esg and climate research at MSCI. “At least 12 jurisdictions – including the EU, Canada, China and Japan – have implemented some form of regulations that are aligned to the TFCFD.”

“The new SEC’s rules give us a key thing we need – a disclosure framework that is comparable to what has been adopted in other countries. It’s similar to the UK, while the EU has gone a bit further,” confirms Gregory Hershman, head of US policy at Principles for Responsible Investment (PRI). “The important thing is that all regulators are talking with each other and speaking the same language.”

Linda-Eling Lee

“It is a watershed moment for the US,” says Sarah Bratton Hughes, head of ESG and sustainable investing at American Century Investments. “Many companies already disclose climate risks, but they do it in very different places, not in a streamlined way. With this rule the SEC moves ESG investing away from being a ‘fad’ to being a policy that acknowledges material risks linked to climate changes that affect all companies.”

Hershman adds: “Investors and markets want this framework. It is in their interest to have a more transparent regulatory environment. We have not heard any investors saying that it hurts or that it is wrong. To increase disclosure of climate risks is for everyone, not only for ESG strategies; some asset managers may use it to invest more in new opportunities. Even passive managers will benefit, because it will make better the broad marketplace by reducing systematic risks from climate change.”

Gregory Hershman

“We at American Century are active managers and we’ll take advantage from better and more transparent data,” explains Hughes. “To integrate ESG principles in all our strategies is very helpful and offers better investing opportunities. We also expect the Department of Labor to issue a new rule about using ESG principles for 401(k) pension plans. It will be another significant step forward.”

Talking about pension funds, New York State Comptroller Thomas P DiNapoli, sole trustee of the $279.9bn (€256.5bn) NYS Common Retirement Fund, said in a statement that access to “consistent, comparable and reliable information, across the marketplace, will greatly improve the state pension fund’s ability to assess and address risks and opportunities as we navigate our path to net zero by 2040”.

Support from consultants

The SEC proposal is also applauded by consultants such as WTW. “The current rules leave a lot of discretion about disclosing material risks,” says Chris Thompson, leader of the global equity manager research team at WTW. “All our business is aligned with the zero-emission goal. We believe that ESG principles apply to all managers; we expect all our clients to think about that. We must increase the level of conversation about these topics, for example about the cost of transitioning to zero emissions.

“It is true that for small companies and small teams of asset managers the new rule will require [them] to think of costs and resources,” says Thompson. “But we do not expect increasing costs and fees for clients. Most asset managers come from quite large profit margins and maybe they can just re-direct resources.”

Hershman says: “Critics claim that the SEC tries to do the job of the US Environmental Protection Agency.… to regulate carbon emission, but that is unfairly said, because the SEC doesn’t ask companies to take actions; [it] only asks [them] to tell the markets what they do.”

Legendary investor Warren Buffett is one of the sceptics. He does not believe it is necessary that his Berkshire Hathaway discloses climate change risks, because they are already reported by many of its subsidiaries.  

Guy Spier, manager of Aquamarine Capital and a follower of Buffett’s investment philosophy, says: “If the SEC makes a rule that just generates more paperwork but does not help the environment, then nobody wins. I think that Warren Buffett is calling them out on this. In general, there is too much virtue-signaling and not enough real action. Calling for companies to report in this way is not a productive step.