Biden’s SEC Tackles Climate Risk for Investors

The Biden-Harris administration has hit the ground running in determining that climate change poses one of the largest risks to U.S. economic and financial security. Companies need to be prepared for increased communications and a shift from voluntary to mandatory reporting on material issues related to climate change for the long-term performance and value of their business.

There is an increased demand by the administration for more accountability around financial climate risk. Biden’s climate envoy John Kerry is privately pushing for more actions by U.S. banking institutions to make climate commitments with clear quantifiable goals as the president works to frame the United States as the global leader on climate finance—the role of finance in facilitating efforts to address climate change. The new Democratic-controlled Congress is also pushing for more action on this subject and is likely to consider a range of environmental, social and governance (ESG) related bills in the next two years with one having already been introduced. Many Democratic members have been touting the need for additional ESG disclosure requirements for years and are looking for both legislative and agency driven action on this topic.

The United States Securities and Exchange Commission (SEC), in particular, is signaling the need to strengthen its existing framework to better address climate risk and beef up ESG regulatory requirements. President Biden’s nominee to head the SEC, Gary Gensler—who has already regulated securities markets as head of the Commodity Futures Trading Commission under President Obama—made clear at his confirmation hearing he considers climate change one of the largest risks to the market.

Gensler pledged he would do more to make sure companies were accounting for that risk, and to ensure truth in advertising of ESG funds and securities sold to investors. “There are tens of trillions of investor dollars that are going to be looking for more information about climate risk,” he said, adding that “issuers will benefit from such disclosures” as well.

The SEC’s focus on this issue is largely the result of market forces and capital flows that are driving companies to embed ESG and climate factors into long-term strategy and investor communications. With financial markets eager for more uniform standards and companies struggling to reconcile multiple ESG reporting frameworks and metrics, this moment could be an opportunity for regulators, companies and market participants to align on standards. The Sustainability Accounting Standards Board (SASB) has made the case for the SEC to adopt SASB given the industry-specific materiality focus of its framework. Others point to the Task Force on Climate-Related Financial Disclosures (TCFD) established by the Financial Stability Board. The CFA Institute notes that the investment community is coalescing around SASB and TCFD as the most relevant standards for addressing the materiality of climate-related risks for investors.

It’s worth noting that in 2020, the UK became the first country to mandate the use of TCFD by 2025. In December, the SEC’s Asset Management Advisory Committee, comprised of industry representatives, issued a discussion draft with potential recommendations on mandatory standards “akin to U.S. GAAP” that should be “material, limited by industry, and provide clear guidance on relevant metrics; SASB’s work currently meets these requirements.”

The SEC is already taking the direction of the administration and looking at how companies are addressing the risks of climate change in their disclosures. This includes Acting SEC Chair Allison Herren directing the Division of Corporate Finance to enhance its focus on climate-related disclosures—commenting that it’s time to move from the question of “if to “how” to obtain disclosures—announcing the release of its 2021 examination priorities that include a greater focus on climate-related risks and ensuring accuracy in ESG-related disclosure and creating a Climate and ESG Task Force in the Division of Enforcement.

Companies Will Need to Strengthen Their Climate Strategies and Communications

Many companies have been asking for more guidance around ESG for years. In 2016, when the SEC asked for public feedback and how it should change its main corporate disclosure rules, it received 26,512 comments. There is significant support for more uniform and standardized ESG framework, including an initiative by the Big Four accounting firms and over 60 major companies to advance Stakeholder Capitalism Metrics so that “investors know we really mean it when we talk about purpose and a commitment to sustainability,” in the words of Bank of America CEO Brian Moynihan.

It is clear that companies should prepare for additional reporting requirements from the SEC. The announcement of the Climate and ESG Task Force suggests the SEC is looking to examine current voluntary reporting and call out practices where companies have not lived up to their ESG claims and commitments. The task force will likely assess ESG and sustainability related statements on the websites of public companies as examples, and look at proxy disclosure statements around risk management and how boards have discussed the material consequences of climate change to ensure that the investor interests are truly represented.

In sum, companies wanting to ensure they are prepared for this new era should:

• Consider the consequences of current and upcoming climate rules and legislation;
• Understand and be prepared to communicate about climate impacts on their business; and
• Ensure that ESG claims are consistently updated and accurate on all public domains.

Finally, companies should also be thinking beyond reporting and to broader ESG investor communications to provide a net-zero roadmap.

APCO Alumna Hajar Mahmoud coauthored this piece.