What the SEC Climate Disclosure Rules Mean for Asset Managers
According to Time Magazine, “vast swaths of the planet will be increasingly inhospitable to humans” within a decade. The Securities and Exchange Commission (SEC)’s historic ruling on climate change disclosure rules underscores the significance of the climate crisis.
While companies are already required to disclose information about their financial performance and perceived risks to investors and consumers, this latest push by the Biden Administration towards standardized climate-related reporting is new within the U.S.
While companies begin to adhere to the SEC climate disclosure rule and increase their climate-related reporting, asset managers may change their investment decisions and philosophies accordingly.
What is the SEC Climate Disclosure?
On March 21, 2022, the SEC gave initial approval for a proposed rule that would require standardized climate reporting for publicly traded companies, including information on the environmental impacts of their operations and climate-related risks to their business.
About one-third of companies already make disclosures of this nature when they deem it material. However, this new rule would require all publicly traded companies to include a minimum level of climate-related disclosures alongside their other mandatory reporting of registration statements and annual reports.
The SEC Climate Disclosure isn't the first effort by a large governing body towards increased transparency and uniform climate reporting for businesses. The E.U.'s Sustainable Finance Disclosure Regulation (SFDR), enacted in 2021, was the first to seek out more effective reporting on these issues. Following suit, the SEC is now imposing a standardization of how domestic public companies report climate-related issues, metrics, carbon footprints, etc.
Why did the SEC implement a climate disclosure?
The SEC noted the ruling follows the request of many investors who demand increased transparency from companies about their environmental impact and climate-related risks. As companies with better environmental, social, and governance (ESG) ratings continue to outperform their peers, investors still prefer putting their money in sustainable companies.
Because it’s in the best interest of investors to fully understand the financial risks associated with their investment, a company's practices and environmental impacts are essential for investors to know.
Allowing investors to price climate risk during their analysis of potential investments is necessary for today's environment. The provided guidelines will give organizations a straightforward way to report climate-related issues that are useful for companies, asset managers and investors, and standardized across industries. With all public companies adhering to these rules and providing climate-related disclosures, they will be easier to compare and be analyzed through the lens of a less carbon-reliant economy.
As mentioned, the E.U.'s SFDR has already made motions to implement a similar rule on foreign companies. The proposed SEC climate disclosure rule would expand mandatory climate-related reporting to publicly-traded domestic businesses. If approved, this rule will likely not require reporting until 2024 for the largest companies and 2026 for smaller corporations due to the more significant reporting burden imposed on them.
What does the SEC Climate Disclosure Mean for Asset Managers?
Investors are demanding more transparency on the climate risks of the companies whose stock they own or might buy. By having consistent, comparable, and insightful climate-related financial information, investors can have more confidence in the companies they choose.
With the rise in ESG-focused funds in recent years, the proposed SEC climate disclosure rule will likely impact all investors as they become more aware of the climate-related risks associated with these businesses. As both consumers and companies continue to focus on climate change and the environment, asset managers will need to reassess their investment approach and philosophies and price the climate risk of their portfolio.
The SEC Climate Disclosure's Impact on Asset Managers
Acting in the best interest of their clients, asset managers and investors need to make informed decisions by finding opportunities in the market and accurately assessing risk. Quarterly filings and mandatory reports by companies are highly valuable for investors, as that's where they can find details about the business's financials, supply chain risks, legal battles, and more that can all have an impact on the company's future performance and bottom line.
Under the new SEC climate disclosure rule, investors are one step closer to increasing transparency about businesses' climate-related risks in today's environment. Details around the company's greenhouse gas emissions, potential impacts from a future carbon tax, or how their operations could be affected by rising sea levels are all pieces of valuable information that would be pertinent to asset managers.
The more that businesses’ environmental risks are outlined for investors, the more they may avoid investing in companies that are overexposed to environmental risks or have disproportionate carbon footprints. Maintaining a portfolio with a balanced risk-reward tradeoff is fundamental for asset managers—especially when it comes to climate impact. Therefore, this extra layer of transparency will undoubtedly change how investors view certain companies’ climate awareness.
What the New SEC Climate Rules Require Companies to Disclose
The new SEC Climate Disclosure rules can impact an asset manager's investment strategy as companies reveal the climate risks of their operations. Asset managers would then have to inform their investors of a company's climate risks, which could prevent investors from adding certain publicly-traded companies into their portfolios.
The SEC wants to know more about what companies are doing to tackle climate change. Therefore, the new SEC Climate Disclosure rules will require mandatory disclosures from companies about their activities and how it impacts the climate.
The SEC requires both qualitative and quantitative disclosures, which would fall into various levels, including some of the following elements:
- Scope 1 & 2 greenhouse gas emissions (direct and indirect)
- Scope 3 greenhouse gas emissions on the material from suppliers and partners
- The internal price of carbon, if applicable
- Physical risks (severe weather, storms, etc.)
- Transition risks (how can they operate in a more carbon-neutral economy)
- Climate-related risks that are likely to have a material impact on the business
- Information on climate-related targets, goals, or transition plans (if applicable)
How No-Code AI Can Help Identify Companies Complying with SEC Climate Disclosure Rules
With the approval of the SEC climate disclosure rule, it would be tedious and time-consuming for asset managers to determine which companies are complying with the new regulation.
Manually researching and analyzing climate-related information on companies will continue to be time-consuming. However, these mandatory disclosures can benefit asset managers if they efficiently process and analyze the data to provide actionable insights for investors.
With a no-code AI platform like Accern, asset managers can easily access real-time data on companies complying with the SEC climate disclosure requirements.
With Accern's ESG frameworks, investors can quickly find information on companies' ESG behaviors without manually coding the model to extract such data. Accern offers models following the three most popular ESG frameworks—U.N. SDG, SASB, and MSCI—which can help asset managers stay on top of ESG regulations, the new SEC climate disclosure rules, and how companies adhere to them.
Learn more about how no-code A.I. can help asset managers identify ESG behaviors and provide their clients with more insightful information on their portfolio companies' ESG practices by downloading our ESG eBook today.
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