Gary Gensler, chair of the U.S. Securities and Exchange Commission, has tasked his staff to come up with specific disclosure and transparency rules by the end of this year for companies and funds that call themselves “green”, “sustainable”, or “low-carbon.”
This is especially good news for investors, as it will allow for consistent and homogenous reporting of environmental, social, and governance (ESG) initiatives, risks, and action plans by public companies, ETFs, and mutual funds.
“So what does the SEC have to do with climate?” asked Gensler in a recent speech before the Principles for Responsible Investment (PRI). “When it comes to climate risk disclosures, investors are raising their hands and asking regulators for more.”
He cited how various public disclosures have been enacted across the financial markets since the Great Depression. First, there were disclosures around the firms’ financial performance. Then came investor requests for knowing more about company management. Later yet, investors wanted to understand how executives were being paid.
“The basic bargain is this: investors get to decide what risks they wish to take. Companies that are raising money from the public have an obligation to share information with investors on a regular basis,” he said. “Over the decades, there’s been debate about disclosure on things that, today, we consider pretty essential for shareholders.”
Gensler said that today’s large and small investors, representing trillions of dollars, want to see information about climate risks of companies to make informed buy, sell, or voting decisions. And they need comparable and decision-useful reporting to help them with those decisions.
As such, he has requested SEC staff to come up with several key metrics and reporting standards for public companies. Qualitative disclosures would focus on how leadership and the company’s strategy address climate risks. Quantitative metrics would include greenhouse gas emissions, financial impacts of climate change, and progress toward set goals.
“For example, some companies currently provide voluntary disclosures related to what’s called Scope 1 and Scope 2 greenhouse gas emissions. These refer, respectively, to the emissions from a company’s operations and use of electricity and similar resources,” he explained. “Many investors, though, are looking for information beyond Scope 1 and Scope 2, to Scope 3, which measures the greenhouse gas emissions of other companies in an issuer’s value chain.”
To address this, Gensler asked staff to come up with how and under what circumstances a firm would disclose Scope 1, 2, and 3 emissions. In addition, they would need to review whether certain metrics apply to specific industries.
Finally, the staff should also consider the question of companies providing scenario analyses on how they would handle legal, physical, economic, and market challenges in the future.
“Today, though, companies could announce plans to be “net-zero” but not provide any information that stands behind that claim,” he said. “For example, do they mean net-zero with respect to Scope 1, Scope 2, or Scope 3 emissions?”
In addition, he will address the funds’ claim of “green”, “sustainable”, or “low-carbon” and what information really supports those claims.
“The basic idea is truth in advertising,” he noted. “When it comes to sustainability-related investing, though, there’s currently a huge range of what asset managers might mean by certain terms or what criteria they use.”
According to a US SIF study, there were more than 800 registered investment companies that represented this sector last year, amounting to over $3 trillion in ESG assets.
“Which data and criteria are asset managers using to ensure they’re meeting investors’ targets — the people to whom they’ve marketed themselves as “sustainable” or “green”? he said. “I think investors should be able to drill down to see what’s under the hood of these funds.”Gary Gensler, SEC chair, asked his staff to develop specific ESG-related disclosure and transparency rules by the end of this year. Read more on Market Values.
