One step forward, two steps back

As the EU stalled on its Corporate Sustainability Due Diligence Directive, finally coming up with a watered-down version, the US has pushed ahead on an equally contentious regulation, with the announcement that the US Securities and Exchange Commission (SEC) has adopted a rule that for the first time will require company disclosures on climate risks.

The rules will enhance and standardise climate-related disclosures by public companies and in public offerings. However, as with the EU, the rules have been watered down, and the SEC dropped a requirement to disclose Scope 3 emissions from indirect sources, such as consumers or supply chain providers, apparently because of concerns over compliance costs.

For some, this will be, like the EU, a classic two steps forward, one step back. For opponents, it is still a step too far. Nevertheless, it is a significant move, especially from a politically polarised nation such as the US, and in an election year. Already there is talk of litigation to block the changes in some states.

Amid all the rhetoric from both sides, the SEC explained that the final rules reflect its efforts to respond to investors’ demand for more consistent, comparable and reliable information about the financial effects of climate-related risks.

Moody’s called it a “significant milestone in climate reporting for investors”. Diya Sawhny, managing director of strategy, Moody’s, said that physical climate risks can have financially significant effects: “For example, climate events are resulting in increasing damage and loss amounts each year, according to Moody’s analysis, stressing insurers’ capacity to manage their approximately $133trn in insured exposure to the US real estate market, and underscoring the need for attention to the escalating physical risks of climate.”

Carbon data provider Sylvera said that the rules were “hardly a giant leap forward given the exclusion of Scope 3 emissions, but it is a positive step in the right direction.”

Ben Rattenbury, VP policy at Sylvera, said: “Broadly speaking, the rules will help to drive greater transparency, build trust and channel investment to those companies taking positive climate action. In particular, enhanced carbon credit disclosures will bring greater clarity to voluntary carbon markets, allow more informed investment decision making and heighten the focus on quality.”

He added: “With price transparency often the missing piece of the puzzle, the new rules will accelerate a price-quality correlation, empowering buyers to have a stronger sense of value in their purchasing decisions. Greater disclosure will also bring deeper scrutiny, and companies will need to be ready with better, defensible data to provide assurance on credit quality.”

So we now have the EU’s Corporate Sustainability Reporting Directive, the SEC’s new rules in the US, and carbon footprint disclosure rules in California, as well as potential new disclosure rules in other territories around the world.

There is talk about multinationals adopting “regulatory arbitrage” as a result, but the overall message from all of this is that investors want full disclosure, and full transparency. Above all, it is a recognition that climate-related risks are financial risks and need to be assessed and considered.