SEC Commissioner Allison Herren Lee on Nov. 5, 2020, called for the commission to work toward a standardized climate risk disclosure regime for financial institutions. Lee made the remarks during the Practising Law Institute’s 52nd Annual Institute on Securities Regulation.
During the speech, which Lee delivered remotely, she warned of irreversible damage from a changing climate, and made the case for the SEC to focus on climate risk as a systemic risk, and to coordinate with other regulators, including the Financial Stability Oversight Council (FSOC).
Policy-makers and financial institutions need accurate and reliable climate data to make decisions, she said, a need that is “borne out by the extraordinary demand we see in markets today for climate-related disclosure.”
“And the demand is not limited to climate, but also includes demand for ESG-related information more broadly,” Lee said. “There is really no historical precedent for the magnitude of the shift in investor focus that we’ve witnessed over the last decade toward the analysis and use of climate and other ESG risks and impacts in investment decision-making.”
ESG is short for environmental, social, and governance, a broad and increasingly high-profile set of issues that includes climate risk, political spending disclosure and human capital management, among other areas. Investors are increasingly pushing public companies to make more detailed ESG disclosures on such items, while industry groups and the Trump Administration have pushed back, arguing the information is not material to investment decisions.
Lee said the SEC should “work with market participants toward a disclosure regime specifically tailored to ensure that financial institutions produce standardized, comparable, and reliable disclosure of their exposure to climate risks, including not just direct, but also indirect, greenhouse gas emissions associated with the financing they provide, referred to as Scope 3 emissions.”
Scope 3 emissions, as set out by the Greenhouse Gas (GHG) Protocol, are emissions that a company is not directly responsible for, but occur somewhere in a company’s value chain.
To help the SEC in its work, Lee said the SEC needs to “ensure we are cultivating relevant expertise, both by hiring climate and sustainability experts in various roles and by enhancing training opportunities for staff.”
Her remarks come less than a week after President Donald Trump’s Department of Labor issued a final rule, “Financial Factors in Selecting Plan Investments,” widely seen as designed to discourage retirement plan fiduciaries from investing in ESG vehicles.
The rule applies to plans under the Employee Retirement Income Security Act (ERISA). The amendments “require plan fiduciaries to select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action,” the rule states.
Activist groups blasted the DOL following the release of the final rule. The Center for American Progress cast the rule as “creating artificial bureaucratic barriers to ESG considerations,” while Public Citizen called it “a handout to huge corporations.”
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