By Zetian (Tim) Zhang, M.Eng. ’19
This article was written in response to the new proposed rule from SEC on The Enhancement and Standardization of Climate-Related Disclosures for Investors released on March 21, 2022. This article voices one alumnus’ perspective and does not necessarily represent the views of Duke University.
On Monday, March 21, the U.S. Securities and Exchange Commission (SEC) released a proposed new rule on corporate climate risk disclosure. The proposal mainly involves two aspects: one is corporate climate risk information disclosure; the other is corporate carbon emission information disclosure. The proposal will be open for public comment for at least two months before the SEC begins developing a final rule. However, it has already aroused great attention and heated discussions among U.S. investment institutions and enterprises.
The core problem the rule is trying to solve?
This rule is expected to change the current situation of voluntary disclosure of ESG information by U.S.-listed companies and, at the same time, standardize the information disclosed. The core issues involved in the proposal: corporate climate risk and carbon emission information are also core ESG topics that capital is concerned about. Therefore, this proposal is expected to encourage investors to conduct more effective ESG risk analyses of companies, which can also be more effective.
However, the draft also presents some ambiguities, such as: whether to include Scope 3 carbon emissions in the scope of mandatory information disclosure? This is the main question many enterprises have concerns about.
In terms of the implementation, once adopted, the proposed rule will include a phased-in approach for companies to comply.
Potential difficulties with the rule?
It is expected that the proposed rule will present several challenges, primarily on two fronts: (1) how will companies ensure the reliability of basic information on climate risks and carbon emissions (that is, the availability and quality of data sources) and (2) how will SEC ensure that companies have consistent and clear carbon accounting standards. If the proposed rule is eventually promulgated, these two aspects will be the main challenges enterprises face when they start the implementation of this new rule.
Additionally, the proposed rule mentions materiality in a few places, including defining the material climate risk and whether or not the company needs to report Scope 3 emission based on its materiality for the reporting company. It’s still not clear how SEC will define materiality assessment in these key metrics. Will it rely on existing materiality assessment standards (e.g., SASB standards), or will it define a new set of methods? It’s possible that SEC will leverage the existing resources, including the ongoing development of the International Sustainability Standards Board (ISSB) established by the IFRS Foundation, but this remains unclear for now.
The repercussions for investors and companies?
The proposal has sparked heated discussions from both investors and businesses. On the side of investors, there is a generally supportive attitude. According to a recent NPR report:
“Anne Finucane, who oversaw Bank of America’s work on Environmental, Social, and Governance (ESG) matters as the bank’s vice chairman, supports enhanced climate rules. She says that reporting on climate risk is demanding and can be duplicative. ‘Right now, there at least a dozen third parties, NGOs, that measure companies — all companies, not just financial institutions,’ she said in an interview with NPR before she retired in December. “It’s like a Venn diagram. Eighty percent is the same, but 20 percent is different.”
Indeed, a recent article by Environmental Defense Fund (EDF) summarized: “Ninety-three percent of institutional investors believe that climate-related financial risk ‘has yet to be priced in by all the key financial markets globally.’ ” EDF also noted that “BlackRock, the world’s largest asset manager, has called for strong, mandatory climate disclosure rules to improve their ability to prudently manage investments.”
Other reactions are less favorable towards the rule. A Reuters article noted:
“The Chamber of Commerce, the country’s biggest business lobby, called the proposal too prescriptive and complained it would force companies to disclose information that was largely immaterial at the expense of more meaningful data. ‘The Supreme Court has been clear that any required disclosures under securities laws must meet the test of materiality, and we will advocate against provisions of this proposal that deviate from that standard,’ Tom Quaadman, an executive vice president with the group, said in a statement.”
What does it mean for corporations?
- Enterprises in the upper reaches of the industry value chain should proactively start to analyze the climate risk factors they face, including physical climate risk and transitional climate risk, and prepare for potential climate disclosure requests from their clients in the US. For example, suppliers from Asia and other developing markets should pay attention to this new rule and be prepared.
- For U.S. stock market-listed companies, conducting a climate risk materiality assessment is not an optional step anymore.
- The biggest challenge is coming from Scope 3 emissions accounting, which mostly comes from upstream (suppliers) and downstream (customers) value chains. U.S. companies should start engaging their suppliers to better understand their value chain emissions and make concrete plans to improve scope 3 data quality.
- Industry-leading companies should start to set science-based carbon emissions reduction targets as soon as possible, such as participating in groups like the Science-Based Targets initiative (SBTi), RE100, and other initiatives.
- All companies, if they are not reporting already, should consider participating in third-party voluntary disclosures, such as the CDP climate questionnaire, in preparation for upcoming mandatory disclosures.
What does it mean for students and job seekers?
Potential job opportunities:
Undoubtedly, the climate and ESG industry is booming, and there will be lots of job opportunities in this field. Below are a few job categories that could have most job position increases in the future due to the SEC proposed rule.
- In-house corporate climate disclosure roles. This category of positions typically requires some practical experience in the industry either through an internship or previous full-time job experience.
- ESG and sustainability consulting roles. This category of new job postings usually spans from junior level to experienced senior-level rules. This category’s companies include specialized environmental & ESG consulting firms (e.g., WSP, ERM) as well as the big four accounting firms or management consulting firms’ ESG advisory&consulting teams.
- ESG investment roles. Most investment institutions are hiring for ESG investing or climate financing positions to build their climate risk assessment capability to structure their investment portfolios better.
- ESG rating agency roles. As mandatory climate disclosure is approaching, it’s possible we will see a big jump from the ESG rating agency side, too, due to more and better data being disclosed in the future. This category includes firms like MSCI, ISS ESG, Sustainalytics, and other regional level ESG rating companies, like Miotech in Hong Kong and mainland China.
- Roles at climate risk data startups. Additionally, there is a new category of jobs that’s emerging quickly in the ESG industry and gaining momentum — climate risk data providers, like Silicon Valley-based Jupiter Intelligence and Durham-based The Climate Service [acquired by S&P Global in Jan 2022].
For students who are interested in the technical side of the proposed rule, it would be worth paying attention to the new sustainability accounting standards being developed by the International Sustainability Standards Board (ISSB). As elaborated earlier, it’s possible SEC will leverage some of the existing or to-be-released internationally accepted standards as its technical guidance.
Though some uncertainties and ambiguities exist, the proposed SEC rule is undoubtedly already an important milestone for the ESG and climate disclosure. For investors, it will help to better analyze their investing portfolios’ climate risk. For companies, it will create a good mechanism to assess material climate risk and ensure all companies report the climate information in a consistent process that uses reliable frameworks. Whether or not it will be passed or revised, this rule is important for the private sector’s contribution to addressing climate change and a healthy U.S. financial system.