Investors Say U.S. SEC Climate Disclosure Rule To Clarify 'Mixed Bag' Of Data

Investors, including several who run environmentally focused funds, welcomed the U.S. government's proposed new rule on corporate disclosure of climate-related risks and emissions, saying it would standardize reports that now are voluntary and vary widely in quality and breadth.

The investors said the U.S. Securities and Exchange Commission's draft regulation, if finalized, would make it easier for money managers to judge how different companies and industries are handling the challenges and opportunities of a warming planet.

U.S. environmental, social and governance-focused funds (ESG) took in a record $71 billion last year, up from $51 billion in 2020, according to Morningstar, and experts noted shareholders have been seeking better data.[nL1N2SM2EH]

Their responses to the draft could shape the final version of the rule the SEC may eventually pass.

Lack of consistent corporate disclosures to date has made such analysis difficult for investors focused on ESG concerns.

"Right now you have a lot of disparate information coming from different places. This should streamline how all investors, not just those focused on ESG investing, can look at the data," said Sarah Bratton Hughes, head of ESG and sustainable investing for American Century Investments in Kansas City.

Dan Abbasi, who runs a $200 million environmentally focused investment strategy for Douglass Winthrop Advisors in New York, said the proposed rules also could help fund managers select companies that stand to benefit from a transition to a lower-carbon economy.

"It's going to give us additional material to work with in terms of how management not only sees the risks of climate change, but how they are seizing the opportunity," he said.

The draft rule calls for companies to disclose their direct and indirect greenhouse gas emissions, known as Scope 1 and 2 emissions, and supplier and partner emissions, known as Scope 3 emissions, if material.

WIDE RANGE OF REPORTS

SEC Chairman Gary Gensler said the commission wants to simplify reporting as investor interest in climate data surges. As of February 41 U.S. shareholder proposals called for some form of new climate disclosures, according to proxy solicitor Georgeson.

Gensler cited a report that found 65% of Russell 1000 companies published "sustainability reports" in 2019. But the report, by the Governance & Accountability Institute, found only around half of companies in some sectors like communications and finance published those reports, which companies organized using a range of frameworks.

"The reporting right now is all voluntary, so you have companies that don't do any reporting, or they're doing more communications or marketing reports than comparable, reliable investor-grade material," said Gary Levante, senior vice president of corporate responsibility at Berkshire Bank.

"A 'mixed bag' is the best way to describe it," he said.

CHALLENGES REMAIN

The proposed rule was advanced by a vote of 3-1, with the dissent coming from the commission's lone Republican Hester Peirce. The Chamber of Commerce, the largest U.S. business lobby, called the proposal too prescriptive.

On the other end of the spectrum, several climate-focused activist investors said they supported the new rules even though they would prefer the SEC mandate more Scope 3 disclosures.

"It's a reasonable rule. Scope 3 is very difficult to measure, but for some sectors, like the food sector, it's where their emissions lie," said Leslie Samuelrich, president of Green Century Capital Management.

The Investment Company Institute, which represents global investors, broadly welcomed the rule but said it will "carefully study" the Scope 3 requirements.

Mark Gibbens, a Kansas City financial advisor and CEO of Erudite Capital, said the SEC struck a good balance. Whatever Scope 3 reporting burdens companies may face, he said, were unlikely to affect performance of energy-focused ETFs he holds such as the Energy Select Sector SPDR Fund.

"I'm not worried," he said.