Companies are on the cusp of a significant transformation in climate-related financial regulations. The US Securities and Exchange Commission (SEC) is gearing up to release the long-anticipated final version of its Climate Disclosure Rule. Meanwhile, California and the EU are moving forward with regulations that will require companies to disclose emissions data with or without a finalized rule from the SEC.
We break down what has transpired on the ESG reporting front over the last few months and what’s to come:
California’s Climate Disclosure Laws: Earlier this month, Governor Newsom signed two bills into law – SB 261 and SB 253 – that will require companies doing business in California to submit climate financial risk disclosures and greenhouse gas emissions reports. Companies will have to report on direct and indirect emissions, making this the most wide-reaching climate disclosure law in the country.
SEC Climate Disclosure Rule: Expected to be finalized this month or next, the SEC's climate financial risk disclosure regulation has been highly anticipated since the proposed rule was released in March 2022. The most controversial piece of this proposal is reporting Scope 3 (or indirect emissions) and, if finalized with Scope 3 reporting requirements, opponents will likely argue this is out of SEC’s scope. However, the new California laws somewhat change the dynamic given that so many companies – both public and private – will now have to report on this data with or without SEC regulations.
SEC Names Rule: The Securities and Exchange Commission (SEC) released a rule last month aimed at curbing misleading fund names used by investment companies to market their products. In response to the growing trend of investment funds branding themselves as ESG-focused, the rule mandates that if a fund's name implies a specific investment focus, at least 80% of its investments must align with that focus. Investment advisers must also include disclosures in their prospectuses to define the terms in their fund names and the criteria used for investment selection. Closed-end funds will require shareholder votes for changes in investment policies unless a tender or repurchase offer precedes the modification. The rule aims to prevent greenwashing and will affect a significant portion of funds, going into effect within 60 days of publication in the Federal Register, with compliance deadlines for different asset levels.
EU Climate Reporting Checklist: The European Commission recently adopted a checklist that mandates companies to disclose the impact of climate change and other environmental and social factors on their operations and locations. This decision follows appeals from asset managers and investors for stricter reporting standards, which will apply to both financial and non-financial companies. These new European Sustainability Reporting Standards will implement a "double materiality approach," requiring companies to report on their vulnerability to ESG risks and their impact on biodiversity, emissions, and local communities. Large companies must start reporting in 2025, while smaller ones have more time, and industry-specific disclosure requirements will be developed by EU authorities.