US regulator takes important step towards addressing climate-related financial risks

Photo by Maxim Tolchinskiy on Unsplash

On Monday, the U.S. Securities and Exchange Commission released a proposed Climate-Related Disclosure Rule that would require public companies to publish their climate-related financial risks. This includes disclosure of their exposure to physical and transition climate-related risks and management strategies to address that exposure; disclosure of both direct and indirect greenhouse gas emissions, including from their supply chains (‘Scope 3’); and disclosure of whether they have adopted a transition plan, and if so a description of it.

The proposed rule will now be subject to a 60-day comment period, during which it will be critical for the SEC to maintain and expand its ambition, especially concerning emissions disclosure. Although the inclusion of Scope 3 is welcome, the SEC has proposed this be mandatory only where deemed “material” or pertinent to a company’s transition plan.

It comes at a crucial time as other key jurisdictions such as the U.K. and the European Union have recently augmented their strong disclosure requirements with the introduction of mandatory transition plans in the coming years. Disclosure of climate-related risks and transition planning is an imperative step towards building macro-financial resilience and for driving and managing the energy transition. Transparency concerning risk exposure, greenhouse gas emissions, and transition planning is critical for effective governance of the financial system and to enable financial system participants—from private investors to governments to regulators with global macro-financial stability responsibilities—to plan their investments and management strategies to align with a warming world and transitioning economy.

Moving forward, it will be critical for the SEC to coordinate with the global community of regulators to establish new norms and create globally aligned frameworks that will reduce friction and fragmentation in the global financial system. Moreover, as companies begin to undertake their transition planning it will be important that other aspects of the U.S. government support private capital reallocation through coordination and financing mechanisms where necessary.

Claire Healy, Head of Washington DC office at E3G said:

“This has been a long time in the making and there is still a lot of work to do to strengthen and implement the SEC recommendations. This rule by the SEC is a powerful step towards making it easier for private investors to do the right thing and more swiftly shift their investments to build a low carbon economy. Embedding this information in investment decisions makes common sense and should lead to a fast tracking of clean energy and a more robust framework to manage economic and financial risks. Recent events have shown the need for both so today’s move is most welcome.”

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