Sen. Joe Manchin’s shock announcement that he is now backing a massive clean energy program has quickly brought President Biden’s climate agenda back from the dead. If passed, the legislation will significantly reduce greenhouse gas emissions, but alone will not put the United States on a climate-safe path. Other tools will still be needed.
One particularly powerful regulatory lever that remains available rests with the United States Securities and Exchange Commission (SEC), a federal agency responsible for overseeing financial markets. The SEC acts as a financial watchdog, protecting investors from market manipulation and fraud by enforcing financial securities laws.
In recent years, the surge in popularity of green investments, net-zero emissions targets and funds claiming to focus on environmental, social and governance (ESG) goals has raised hopes that the global capital takes the fight against climate change seriously. .
But it has also led to greenwashing, arguably allowing polluters to disguise business as usual with specious claims of environmental progress. It’s easy for a company to release a glossy sustainability report or commit to climate action at a later date, but it’s incredibly difficult for the public to tell fact from fiction.
By at least one estimate, the entire universe of sustainable investments exceeds $17 trillion. But defining what “sustainable” means has been difficult to pin down.
“Right now, the market is asking for more and more clean energy and agricultural products without deforestation. But there’s so much greenwashing, so much deception, so much hidden information, that people who want this to happen don’t have an easy way to do it,” said Sierra Club consultant John Kostyack. .
He quoted a hypothetical young professional who gets a new job and wants to open a retirement account. They access the company’s 401K options and select a fund that focuses on environmental, social and governance principles, hoping their money will be used to fight climate change.
“Most people don’t have the sophistication to know they’ve just achieved zero for climate because they’re deceived,” Kostyack said.
The SEC hopes to get all this confusion under control by proposing new regulations that could have a big impact on how the world of finance deals with the climate crisis.
A set of rules will require listed companies to disclose their climate change risks – threats to company operations from flooding, for example, or potential supply chain disruptions. In addition, companies will be required to disclose data on their Scope 1 and Scope 2 emissions, which refer to emissions emitted directly from operations (stack pollution), or indirectly through the use of electricity or employee travel. Scope 3 emissions – those emitted by consumers of a company’s product – are a much more contested part of the new rules. The SEC has proposed requiring companies to file this information if it is “material” or if the company has already explicitly announced a scope 3 goal. achieve their climate goals.
The aim is not only to provide more information to investors and the public, but also to standardize it in a comparable way.
“Today, over 90% of Fortune 500 companies publish some sort of climate disclosure on their website, but they use different methodologies. So it’s impossible if you’re a customer, if you’re an investor, if you’re employed, to really compare,” said Steven Rothstein, managing director of Ceres Accelerator for Sustainable Capital Markets, a nonprofit that focuses on sustainability in financial markets. “The free market can work, but only with good information. Right now there is an asymmetry.
While this first set of rules focuses on corporate disclosures, a separate set of SEC regulations will target investment asset managers and their ESG strategies.
So-called “ESG disclosure” would lay down rules on what exactly an ESG fund means, and furthermore, would force major investment managers to reveal a ton of information about the extent to which they fund polluters, their exposure to the financial risks of climate change, and even to what extent they push companies to clean up (or not).
“What really matters here are the large asset managers, and it’s really important to distinguish between the very large ones who manage a large percentage of the stock market, and the many other smaller asset managers,” Kostyack said. , adding that mega-corporations like BlackRock, Vanguard and State Street feature prominently. “They can make big decisions, including how hard it is to get companies to move their investments. They carry enormous weight in our system. The question is whether they exercise this power according to the wishes of their customers.
He said the “real big prize” will be information on “financed emissions”, which are the emissions associated with the polluting industries in which banks and private equity firms invest and lend. Large institutional investors have low carbon footprints themselves – the energy used in offices and employee air travel, for example, but not much else. However, this has nothing to do with the carbon impact of their investments. Large asset managers are responsible for a massive share of global greenhouse gas emissions because they essentially fund the global fossil fuel system.
For years big investors have been saying they can do more good by keeping their investments in polluting companies because it gives them a seat at the table. As shareholders or lenders, they can push oil companies to clean up their act, the argument goes.
New rules from the SEC could shed light on whether this is true or not. “If the asset manager says, ‘We’re at Exxon, but we’re really pushing them to invest in renewables. Well, now we could get a disclosure that they actually didn’t do anything to push Exxon to switch to renewables,” Kostyack said. “We’re finally going to see evidence of whether or not they’re doing something. Because so far it doesn’t look like Exxon is moving at all. »
It is important to note that companies and asset managers cannot engage in corporate rotation or greenwashing in regulatory filings. “Because they’re filing it with the SEC, they can’t lie,” Kostyack said. And everything will be accessible to the public.
The public comment period on the corporate climate disclosure rule has ended and the SEC is reviewing comments. The comment period for the ESG Disclosure Rules ends in mid-August. Final rules are expected later this year or early 2023.
There has been much speculation about what federal regulations will hold up under a hostile Supreme Court that is clearly targeting climate policies. But Rothstein said the SEC’s proposed rules are central to the agency’s mission — protecting investors — and consistent with a long regulatory history.
“There are almost 90 years of precedents where the SEC has made financial disclosure rulings,” Rothstein said.
Furthermore, the thrust of the rules is to provide information to markets and investors, not to regulate emissions. “This is a financial disclosure rule, it’s not a climate rule,” Rothstein said. “It doesn’t mean that companies have to do certain things to reduce their emissions. It will say that companies will have to disclose certain things and then the market will make certain decisions.”
But will the SEC rules advance a climate agenda, as many activists hope?
Kostyack said climate disclosures in financial markets “go hand in hand” with real climate action.
“Investors who suppress fossil fuels and make it harder for fossil fuel companies to raise funds will effectively direct funds to clean energy companies,” he said. Accurate information will empower them and retail investors who want to invest their money in good causes.
Rothstein framed the SEC rules as, at a minimum, a precondition for climate action.
“Disclosure alone will not solve the climate crisis we all find ourselves in. However, you can’t manage what you can’t measure. Disclosure is only a first step. he said. “Information alone will not lead to action, but action cannot be driven without better information.”