The SEC Speaks on Climate Change

March 23, 2022
Shlomo Bernartzi

Photo credit: Daniel Lloyd Blunk-Fernández

The Securities and Exchange Commission (SEC) gave initial approval on Monday to require public companies to disclose climate-related information

This is the first time the SEC may require companies to help investors understand how their investments impact the climate, and how climate change impacts their investments. 

Why did the SEC propose new climate rules? What do the proposed rules say? How will they impact the average investor? And how do these SEC rules relate to retirement saving via 401(k) and 403(b) plans? For answers to these questions and more, read on.

Why did the SEC propose new rules on climate disclosures?

Greenwashing has become a serious concern for investors and the federal government as the popularity of environmentally-friendly investing has skyrocketed in recent years. 

Until now, there have not been standard methods for financial firms or public companies to report environmental impact. Funds that brand themselves as ESG (that stands for Environment, Social, and Governance — finance industry parlance for values-aligned investing) may take into account climate or social equity concerns when making investment decisions. Alternatively, they may do neither and instead invest in companies that are least at risk of financial losses due to extreme weather events associated with climate change. 

Because no single entity has defined or regulated ESG reporting, each fund that brands itself as ESG uses a different strategy to implement its ESG mandate. 

This makes it hard for investors to understand what they are investing in, especially when investing via a 401(k) plan where not much information may be readily available on investment options.

The SEC has been developing proposed measures to create some standards and accountability around climate-related reporting for about a year now. Creating these standards can help asset managers and investors better understand what they are investing in, and whether the “green” claims that companies and financial products make are backed by data.

The biggest ESG ratings companies such as MSCI do not “even try to measure the impact of a corporation on the world. It’s all about whether the world might mess with the bottom line,” according to this Bloomberg piece that exposes the disconnect between what investors think they’re investing in vs. how the finance industry often makes ESG investment decisions. 

The SEC’s proposed rules are notable because they go beyond requiring disclosures on climate-related risk — they also require disclosures on climate impact, i.e. greenhouse gas emissions (GHG).

What does the SEC’s proposed climate rule say?

The SEC’s proposed rules can be broken into two categories: (1) climate risk-related disclosure requirements and (2) emissions-related disclosure requirements. 

In the first category, they would require companies to disclose information about: 

  • The oversight and governance of climate-related risks by the registrant’s board and management; 
  • How any climate-related risks have had or are likely to have a material impact on its business and consolidated financial statements; 
  • How climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; 
  • The impact of climate-related events and transition activities on the line items of their financial statements; 

In the second category, the rules require companies to disclose:

  • Scopes 1 and 2 GHG emissions metrics; 
  • Scope 3 GHG emissions, if material, or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions; and 
  • Any climate-related targets or goals, and transition plan, if any.

This second category is especially notable:

This is the first time  the SEC may require that public companies disclose their greenhouse gas emissions, so that investors can make informed decisions when their strategy is to minimize the climate impact of their investments.

How will this impact the average investor? 

Today’s investment environment can make it tough for investors to understand how to align their investments with their values. 

Oftentimes investment products are branded as environmentally friendly but use strategies that are not so environmentally friendly, like the Blackrock Carbon Transition ETF that broke records for the number of assets raised on its first day of trading but invests in oil pipeline company Kinder Morgan, along with Exxon and Chevron. 

The new rules will make it easier for investors to understand the climate-related impact of their investments and will improve the accuracy of climate impact claims that fund managers make.

How does the SEC rule relate to retirement saving via 401(k) and 403(b) plans?

Because the securities that the SEC regulates make their way into the investment products that are in retirement plans, improving the quality of the climate reporting of public companies will improve our understanding of the impact our retirement  investments have. 

In addition, the Department of Labor (DOL) regulates retirement savings plans in particular, and has been hard at work in a similar vein to the SEC, updating its guidance to specifically address climate change. 

The agency proposed new guidelines late last year stating that climate risk is a financial risk. The proposed guidelines direct employers to take climate change risk into account when deciding what investment options to give employees in their defined contribution plans. Public commentary submitted in response to the proposed updated guidance was overwhelmingly positive, and the guidelines are expected to become policy in the next few months. 

When that happens, employers will have a clear government mandate to offer climate-friendly investment options to employees, a big reversal from the currently-standing Trump administration-era guidance, which threw a wet blanket on employer efforts to offer values-aligned options in their retirement savings plans.

What’s next for the SEC’s proposed climate rule?

We now have two months to submit public comments on the proposed DOL rules — which the SEC will carefully review before finalizing the rules. If you have personal experiences or thoughts on this topic, now is the time to share them with the SEC. You can use this link to do so.

The DOL also has a request for comments open right now — this one focused on climate change-related risks in retirement savings. If you have stories, thoughts, or experiences to share related to values-aligned and climate-friendly investing in 401(k) or 403(b) plans, submit them here.

How else can you help?

Now is a great time to get the conversation started with your employer on adding a climate-friendly investment option to your retirement plan. Check out our example email to HR here for inspiration.

Or consider investing directly in a fossil-free investment fund, putting your money where your heart is.

And don’t hesitate to reach out with questions - via Twitter, LinkedIn, or directly at hello@oursphere.org.