Creating a Framework for Impactful ESG Data

Blaine Townsend, CIMA®, Director of Bailard’s Sustainable, Responsible, and Impact Investing Group, dives into the SEC’s proposed rule for the enhancement and standardization of climate-related disclosures to better inform investors.

June 30, 2022

For long-term investors, understanding risks associated with climate change has become more than just a driving force behind ESG investing. It now stands as a central focus in the capital markets. In fact, the importance of digging into climate-related risks has helped ESG investors put a spotlight on the need for better disclosure across a broad array of environmental, social, and governance issues. Much of the ESG-related data is disclosed voluntarily by corporations—and certainly not standardized—which poses a real data reliability challenge to investors. Particularly for data that relates to climate, the stakes are too high to keep disclosures voluntary.

Creating a standardized framework for disclosure is no easy task, but the Securities and Exchange Commission (SEC) is attempting to do it this year via The Enhancement and Standardization of Climate-Related Disclosures for Investors. This Proposed Rule would require companies to disclose their greenhouse gas emissions so that investors can utilize that information in their decision-making.

The material financial risks associated with climate change are two-fold. The risk of future regulation could affect a company’s bottom line if they’re not compliant. Additionally, climate change also poses a physical risk to a company’s facilities, operations, and supply chain. At this point, some companies are releasing their greenhouse gas emissions data and some are not. For those that are, the way they’re releasing the data or making the calculations is inconsistent. Investors want consistent, comparable greenhouse gas emissions data in order to make the most financially-sound investment decisions.

The SEC’s Proposed Rule was published in March and investors were given 90 days to review and comment. Bailard—along with its stakeholder partners, ICCR, Ceres, As You Sow, CDP, and PRI—submitted comment letters to the SEC first and foremost to support the rule. But the comment letters also served to provide input on how to strengthen the rule further, including:

• • All companies, no matter their size, should be required to disclose their scope 3 (supply chain and customer) emissions, if they are deemed material

• • The SEC should guide materiality determinations, and companies should disclosure their rationale when scope 3 emissions are deemed immaterial

• • Phase out the safe harbor from liability for scope 3 emissions data over time, as it reduces the motivation to seek and report precise information

• • Corporate boards should be required to assess the alignment of climate lobbying and advocacy positions with climate transition plans

• • Companies should disclose which board directors and committees have climate lobbying and policy oversight and accountability

• • Climate change and emissions-related risks to fenceline communities caused by corporate operations should be disclosed

• • Corporate disclosure of whether or not (and, if so, how) executive compensation is tied to climate-related performance

The SEC’s Proposed Rule is already strong and would fill a crucial gap for investors as they attempt to make informed, long-term decisions about investment portfolios. These amendments would create an even more robust, standardized Final Rule, allowing investors to better assess climate-related risks.

Now that the public comment period is over, the SEC is assessing the comment letters received and will incorporate the feedback into its Final Rule, which would take effect by year-end. With that, larger public companies would start reporting in 2024 with the smaller companies beginning to report in 2026.