NORTHAMPTON, MA / ACCESSWIRE / October 11, 2022 / Ceres
By Steven M. Rothstein, Managing Director, Ceres Accelerator for Sustainable Capital Markets
Investors have spoken-they are strongly in favor of the disclosure rule proposed by the U.S. Securities and Exchange Commission to require companies to disclose climate risk information, whether physical or transitional. Their comments to the SEC solidly underscore their support for standardizing climate risk disclosures so that the SEC can fulfill its mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. Ceres analyzed the comment letters of 320 institutional investors, including both asset owners and asset managers, who collectively own or manage more than $50 trillion in assets. We looked at their positions on key provisions in the SEC's proposed rule. Our analysis included direct letters sent to the SEC, as well as investors that signed this statement in support of a strong rule.
Our analysis pinpoints the solid support found in these investors' comments, giving the SEC a clear guidance of what investors want going forward:
320 Institutional Investors
Require disclosures in form 10-K.
Align the required disclosures with the recommendations of the Task Force on Climate- related Financial Disclosures (TCFD).
Require disclosure of Scope 1 and 2 GHG emissions.
Require disclosure of Scope 3 GHG emissions with safe harbor if it's material or if there is a target.
Require governance disclosures related to board and management oversight.
Require disclosure of climate-related targets and goals, if they exist.
Require attestation of Scopes 1 and 2 GHG emissions.
In their comment letters, at least 129 investors describe how they use climate-related data in investment decision-making and how standardized disclosure will improve the comparability, consistency, and reliability of this information.
Asset managers are bound by fiduciary duty to manage risks, including climate risk. Investors need to understand how climate risk is integrated into risk management frameworks and how risk analysis undertaken feeds into business decision making. Given scientifically based projections that climate change will disrupt social, ecological, and financial systems, this is particularly important to long-term time investment horizons.
Company financial performance is positively and negatively affected by material climate issues, over different time horizons. Investment decisions are better informed knowing a company's exposure to and transition readiness for impacts from physical and transition risks. Incomplete information can adversely impact companies' costs of capital and is increasingly relevant to top line revenues.
Climate disclosures contribute to informed capital allocation and business decisions by investors, resulting in improved value creation, risk mitigation, and effective portfolio design. This information is used during due diligence and securities selection to help compare one company's risk to its peers and, consistent with fiduciary duty, to determine position adjustment.
Investors need to understand the magnitude of company-specific risk exposures to prioritize engagements and inform proxy voting. The failure of companies to appropriately manage and comprehensively report climate risk may lead investors to withhold support from board members. When they adopt a rule on climate risk disclosure, the SEC will join a growing number of jurisdictions throughout the world requiring TCFD disclosures, contributing to a global baseline that will benefit investors and companies. The SEC's efforts will complement the work of the International Sustainability Standards Board, established last year by the IFRS Foundation. ISSB recently proposed a climate disclosure standard and is reviewing comments. 140 jurisdictions around the world currently follow the IFRS' global accounting standards.
Given the clear need highlighted by investors in their comments for comparable, complete, decision-useful information, demand for climate disclosures and international momentum is only going to keep growing. Last month, 532 institutional investors representing $39 trillion in assets issued the most ambitious investor call for government action on the crisis, including a call for mandatory climate disclosure globally.
Investors are speaking loudly and clearly. It is time to mandate standardized climate disclosure.
[Disclaimer: The comments from investors and others reflect significant nuance that cannot be properly captured in a short analysis. For additional information about the comments the SEC received please review the comments or see analyses by the Climate Risk Disclosure Lab, KPMG, and the Commonwealth Climate and Law Initiative. In addition, thousands of individual investors also commented, mostly using standardized letters.]
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