SEC Issues Proposed Rule on Climate-Related Financial Disclosures

Since the Biden administration took office, there have been multiple signals that companies could expect rigorous reporting standards on climate risk management. These include, for example, the US Securities and Exchange Commission’s (SEC) request for public input¹ regarding the sufficiency of current disclosures to inform investors about material climate risks and opportunities. They also include the administration’s Executive Order on Climate-Related Financial Risk², which required the Treasury Secretary and Financial Stability Oversight Council members to report on, among other things, the necessity of climate-related disclosures by regulated entities. On March 21, 2022, the SEC released its long-awaited proposed rule for climate-related financial disclosures³. As expected, these requirements, if adopted, will have a significant impact on financial institutions. The Partnership for Carbon Accounting Financials (PCAF), an industry-led initiative, will be critical in helping financial institutions fulfill their obligations under the proposed rule.

Under Proposed Rule, Financial Institutions Will be Required to Disclose Financed Emissions

The proposed rule is modeled off of the Task Force on Climate-related Financial Disclosures (“TCFD”) and would require registrants to disclose:

• Climate-related risks and their actual or likely material impact on business, strategy, and outlook
• Governance of climate-related risks, including oversight and governance by the board and management, and relevant risk management processes
• Greenhouse Gas (“GHG”) emissions, subject to assurance under certain circumstances
• Climate-related financial statement metrics and related disclosures; and
• Information regarding climate-related targets and goals and transition plan, if applicable

Importantly, the proposed rule would require registrants to disclose their Scope 1 and 2 GHG emissions and, if material or included in the company’s target setting, Scope 3 GHG emissions.  The proposed rule notes that, for financial institutions, disclosure of Scope 3 emissions will likely include the institution’s financed emissions. This is in fact consistent both with where the industry is already headed and with the global trend of regulators requiring more comprehensive climate disclosures.

The proposed rule would not come into effect until December 2022 at the earliest, and the requirements would be phased such that the first set of required disclosures would cover fiscal year 2023, but financial institutions should take stock now to better position themselves to meet the SEC’s standards when the time comes. Many industry players have already begun this journey.  For example, many institutions have already established climate risk management teams and incorporated climate risk into their enterprise risk management framework. These are important steps every financial institution will need to take to ensure they are adequately managing and reporting their climate risks and opportunities.

In addition, more than 230 financial institutions, including more than 30 in the United States⁴, have already joined PCAF, a global industry-led initiative to standardize the measurement and disclosure of financed emissions, many in part driven by the global push to reach Net Zero by no later than 2050. For financial institutions that are in the process of developing their Net Zero pathway and face the challenge of reporting their progress to the SEC and other regulators⁵, PCAF can serve as a critical tool to facilitate compliance in an evolving regulatory landscape. Indeed, the proposed rule itself, while stopping short of requiring a particular methodology, specifically noted that PCAF complements the protocol on which the SEC based its GHG disclosure requirements and has been used by financial institutions requiring support in the calculation of financed emissions.

How Guidehouse Can Help

Guidehouse is the Global Secretariat for PCAF and is uniquely positioned to support financial institutions in their efforts to measure, manage, and reduce the financed emissions within their portfolios, which then facilitates the next steps of target setting, strategy development, taking action, and disclosure. PCAF has developed standard methodologies across six different asset classes for assessing and disclosing the GHG emissions from their loans and investments, and methodologies for additional asset classes are forthcoming.

PCAF also provides useful guidance to financial institutions regarding data management, one of the biggest challenges they face as they seek to assess their current level of financed emissions. Specifically, PCAF provides in-depth guidance on managing data limitations, including the use of estimated or proxy data where reported data is not available, data quality scoring for increased transparency, and data quality improvements in both the medium- and long-term.

Between investor pressure, public sentiment regarding sustainability, and now, regulatory requirements, financial institutions should start making their portfolios greener, but do not necessarily have all the tools to do so.  Guidehouse has extensive experience assisting financial institutions in their application of PCAF’s industry-led and widely adopted standard, experts who can help financial institutions assess and strengthen their internal reporting controls, and a strong understanding of the climate environment in which financial institutions operate. Drawing on this experience, Guidehouse can help financial institutions pave the way to consistent, comparable, and actionable information that is decision-useful for investors and in compliance with applicable regulatory requirements.