Wall Street’s top regulator is preparing to issue what figures to be an expansive climate risk disclosure proposal by year end.
The U.S. Securities and Exchange Commission’s widely expected plan to require publicly-traded companies to release more information about their environmental impact has started to take shape within the agency, SEC Chair Gary Gensler said Wednesday. The regulator is currently weighing a mix of “qualitative and quantitative” disclosure requirements, Gensler said, including if companies should report the greenhouse gas emissions of their supply chains and whether the climate disclosures should be included in companies’ annual reports filed with the regulator.
Underscoring Gensler’s push for a rule proposal is a mounting frustration in the investment community around the lack of standardized and consistent data from corporate issuers on how their businesses stand to be hit by a changing climate. And while some organizations like the Task Force on Climate-Related Financial Disclosures and the Sustainability Accounting Standards Board have created frameworks that issuers can adopt, a climate risk disclosure mandate from the SEC would impose a new form of accountability onto corporate America and provide unprecedented clarity for investors.
“It’s sort of like the Olympics,” Gensler said during the event held by the Principles for Responsible Investment. “Fans can compare athletes across heats, countries, and generations. It’s not like some sprinters run a 100-meter dash and others run 90 meters. Investors today are asking for that ability also to compare companies with each other.”
Sustainability has taken on a newfound importance at the SEC in recent months, just as it has at other regulatory agencies since President Joe Biden took over. Even before Gensler’s swearing in as SEC chair in April, the agency, under the leadership of Commissioner Allison Herren Lee, unleashed a bevy of environmental, social, and governance (ESG)-related announcements on corporate America. It ramped up its examinations into whether companies were considering extreme weather events in their business continuity and disaster recovery plans, launched an ESG-related fraud enforcement task force, and opened up a public comment period regarding climate risk disclosures.
Of the more than 550 comments received by the SEC, Gensler said 75% of them spoke in favor of mandatory climate disclosure rules.
Gensler, a former Goldman Sachs partner who became known as a hard-charging regulator at the helm of the Commodity Futures Trading Commission in the immediate wake of the 2008 financial crisis, has made no secret that climate risk is a top priority for the SEC under his leadership. The SEC chair has often spoken about the trillions of dollars represented by investors who are looking for more comparable ESG data to help them make decisions about their holdings.
ESG inflows have been one of the defining financial trends of the last year. In the second quarter, sustainable fund assets grew by 12% worldwide to $2.24 trillion, a record high, according to Morningstar’s Sustainable Fund Flow Report. Europe continued to dominate the market, with 82% of those flows coming from the continent.
Net inflows did fall 24% in Q2 to $139 billion, though, a reflection of broader slowdowns in market flows globally, according to the report. In Q1, net inflows had climbed to a record high, the fourth consecutive quarter to do so. But even the slowdown in Q2 still reflects higher ESG inflows compared to 2020.
The last few months have marked a regulatory push globally to better define ESG investing, and restrict misleading financial products that claim to be “green.” In March, the EU passed regulation that requires fund managers to disclose how their products meet ESG standards, and in June, the U.K. Government launched a new watchdog to tackle greenwashing. At the SEC, Gensler has asked the staff to look into reviewing the regulator’s fund names rule.
The SEC is likely still facing a long road before any climate disclosure rule proposal would go into effect, though. Republicans on Capitol Hill have already started to zero in on concerns about why the SEC should be looking at the issue altogether. Meanwhile, the agency’s two Republican representatives, Commissioners Hester Peirce and Elad Roisman, have raised questions about if such ESG factors are material — the gold standard in U.S. Securities laws that mandates an issue be reported — then why are companies not reporting them.
“I feel like a broken record, but our disclosure framework already requires public issuers to provide information that is material to investors, including information one might categorize as ‘E,’ ’S,’ or ‘G,’ Roisman said in a June speech. “To the extent that other material risks to a company can be classified as ‘E,’ ’S,’ or ‘G,’ I do not see a legal justification for failing to disclose that information under our existing rules.”
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