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ESG

ESG Newsletter published on July 1, 2022

SEC Proposes Climate-Related Reporting Requirements

Summary

  • The Securities and Exchange Commission recently closed the public comment period for its proposed rule titled The Enhancement and Standardization of Climate-Related Disclosures for Investors.
  • If approved, the proposed rule would require registrants to include certain climate-related disclosures in their registration statements and periodic reports.
  • Breckinridge, in a comment letter to the SEC, highlighted key priority areas in the proposed rule that it supports.

The Securities and Exchange Commission (SEC) recently closed the public comment period for its proposed rule titled The Enhancement and Standardization of Climate-Related Disclosures for Investors. If approved, the proposed rule would require registrants to include certain climate-related disclosures in their registration statements and periodic reports.

In announcing the proposed rules, SEC Chairman Gary Gensler said, “I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance. Today’s proposal thus is driven by the needs of investors and issuers."

Breckinridge, in a comment letter to the SEC, highlighted key priority areas that it supports in the proposed rule.

  1. Alignment with Task Force on Climate-Related Financial Disclosures (TCFD) reporting. TCFD’s broad based support among companies, investors, and securities regulators worldwide has increased since it was originally published in 2017. As of October 2021, over 2,600 entities have publicly endorsed the TCFD, and it is included in official reporting requirements for eight countries including Brazil and the UK.
  2. Reporting of Scopes 1, 2 and 3 greenhouse gas (GHG) emissions in line with the GHG Protocol, the most widely used GHG accounting standards. A GHG emissions reporting requirement and reporting alignment with the GHG Protocol will assist investors as they assess climate risks and the veracity of a company’s public net zero GHG-emission commitments.
  3. Requiring disclosures in financial filings. Requiring climate-related information disclosure in a separate section of a company’s 10-K filing or annual report will enhance the reliability of what is being disclosed, as it is part of the auditing process and involves certification by the CEO and CFO. Further, under the proposal, a third-party will attest to Scope 1 and Scope 2 emissions, further supporting credibility.
  4. Alignment with the developing International Sustainability Standards Board (ISSB) climate risk disclosure standards. Aligning the SEC’s proposed climate rule with ISSB’s draft climate disclosure standard may reduce disclosure complexity and confusion while helping to clarify corporate climate preparedness across countries and regions.

“The new information would greatly enhance our ability to assess climate risk, a material and pervasive credit risk and therefore make more informed investment decisions on behalf of our clients,” Breckinridge stated in its comment letter to the SEC on the proposed rule. “The proposed SEC disclosure will provide important informational benefits to investors and other stakeholders. If enacted, it will contribute to the disclosure of consistent, comparable, and reliable climate data and related information, which Breckinridge will directly incorporate into our investment decisions.”

Since the SEC released its proposed rules on climate related risk reporting rules, commenters from many sectors of business as well as non-governmental organizations have supported and opposed the proposals. Among opponents, some contend the requirements are excessive and will increase costs while others believe that the proposal is not extensive or comprehensive enough considering the threat that climate change poses.

Breckinridge acknowledged the divergent points of view in its letter saying, “We understand that representatives of certain companies have voiced their opposition to the proposed rule characterizing it as a burdensome mandate,” while adding, “Breckinridge encourages companies to view the proposed rule as an opportunity.”

The Breckinridge letter closed with the following, “The proposed reporting guidelines would promulgate decision-useful, comparable climate information that is vastly improved compared to the disclosures that are currently available. The new information would greatly enhance our ability to assess a material and pervasive credit risk.”

 

DISCLAIMER: The opinions and views expressed are those of Breckinridge Capital Advisors, Inc. They are current as of the date(s) indicated but are subject to change without notice. Any estimates, targets, and projections are based on Breckinridge research, analysis and assumptions. No assurances can be made that any such estimate, target or projection will be accurate; actual results may differ substantially.

Nothing contained herein should be construed or relied upon as financial, legal or tax advice. All investments involve risks, including the loss of principal. Investors should consult with their financial professional before making any investment decisions.

While Breckinridge believes the assessment of ESG criteria can improve overall credit risk analysis, there is no guarantee that integrating ESG analysis will provide improved risk-adjusted returns over any specific time period.

Some information has been taken directly from unaffiliated third-party sources. Breckinridge believes such information is reliable but does not guarantee its accuracy or completeness.