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U.S. Securities and Exchange Commission: SEC Adopts Rules to Enhance and Standardize Climate-Related Disclosures for Investors
The SEC has officially adopted rules to enhance climate-related disclosures by public companies and in public offerings.
The rules aim to respond to investors' demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a company's operations.
SEC Chair Gary Gensler emphasized the importance of providing investors with complete and transparent disclosure regarding climate-related risks.
The final rules mandate material climate risk disclosures by public companies, specifying what companies must disclose and requiring climate risk disclosures in SEC filings.
Compliance dates for the rules will be phased in based on the registrant's filer status, with the rules becoming effective 60 days after publication in the Federal Register.
Deloitte provides a detailed summary of the new SEC climate disclosure rules, including a breakdown of the required data and metrics for disclosure.
Key changes from the proposed rule include exemptions from Scope 3 GHG emission disclosures and less extensive financial statement disclosure requirements.
Disclosures outside financial statements include governance of climate-related risks, impacts on business strategy, risk management processes, and climate targets.
The final rule aligns with various recent voluntary and mandatory climate and ESG-related disclosure requirements, leveraging existing frameworks such as those established by the GHG Protocol and the Task Force on Climate-Related Financial Disclosures (TCFD).
Unlike other standards like the IFRS Sustainability Disclosure Standards and the E.U. Corporate Sustainability Reporting Directive (CSRD), which address sustainability matters broadly, the SEC's final rule focuses specifically on climate-related disclosures.
Companies need to prepare for the significant expansion of disclosure requirements outlined in the final rule. Establishing or refining climate governance, understanding current climate-related information, identifying disclosure and control gaps, assessing reporting and data management, preparing for attestation (if applicable), developing an action plan, and executing each step are crucial for successful implementation. Deferring implementation until legal challenges are resolved may not provide sufficient time for preparation.
General ESG News
To effectively combat global warming, the world needs to ramp up carbon capture efforts significantly, aiming to capture about 1 gigaton of CO₂ annually by 2030, according to the International Energy Agency.
Carbon capture and storage (CCS) involves collecting CO₂ emissions from major pollution sources like power plants or industrial facilities and either using it elsewhere or storing it underground. Despite being discussed for decades, CCS remains expensive and has limited scalability.
Direct air capture (DAC) is another method for removing carbon from the atmosphere, but it is even more challenging and costly than CCS. Currently, fewer than two dozen DAC plants operate on a small scale, capturing a fraction of global emissions.
Despite the challenges, there are efforts to advance carbon capture technologies. For instance, recent US legislation has increased tax credits for CCS and DAC projects, aiming to incentivize their development and deployment across industries like power generation, cement production, and petrochemicals.
Additionally, governments and companies are investing significant funds into CCS and DAC initiatives, with the UK government committing billions of pounds to CCS projects. Companies like Stripe, Google, JPMorgan, and McKinsey are collaborating on the advance purchase of carbon removal credits from various startups (Frontier project).
Laurel Blatchford, Treasury’s chief implementation officer for the Inflation Reduction Act (IRA), discussed the 'elective pay' tax credit provision at the Rural Renaissance Roadshow in Bentonville, Arkansas, which brought together rural leaders from across the U.S.
The U.S. DOE announced over $366 million in funding for 17 projects across 20 states and 30 tribal nations to accelerate clean energy deployment in rural and remote areas, marking the largest investment in rural power in a century.
Rural communities, despite having ample resources for clean energy futures, face economic challenges and high energy burdens, with low-income households disproportionately affected.
The Rural Renaissance Roadshow aimed to connect rural leaders with resources for clean energy initiatives through practical workshops and partnerships with organizations like the Rural Climate Partnership and the Beneficial Electrification League.
The event showcased the potential for federal investments like the Bipartisan Infrastructure Law (BIL) and the Inflation Reduction Act to drive clean energy development in rural areas, with a vision for empowered rural communities to lead the transition to cleaner energy futures.
Sustainable Brands: EY: Boards Must Embolden C Suites to Embed Sustainability
The 2024 EY Europe Long-Term Value and Corporate Governance Survey indicates a concerning decline in company commitment to sustainability in the EU, despite ongoing environmental challenges.
Based on responses from 200 directors, CEOs, and C-suite heads across Europe, the survey reveals that many companies are not prioritizing sustainability as a driver for growth and differentiation.
Boards play a crucial role in promoting sustainability as a business imperative, with only a small percentage having a clear strategic view of how ESG priorities contribute to value creation.
The report suggests that Boards should adopt a beyond-compliance approach to regulation, aiming for a strategic advantage in sustainability rather than mere compliance.
While most organizations are responding to EU sustainability directives, only a fraction are taking a transformative approach, potentially limiting their ability to access sustainable finance and provide compelling narratives to investors.
The report emphasizes the importance of AI governance in driving sustainable business transformation, highlighting the need for proactive approaches to technology governance to unlock value and address environmental, societal, and ethical challenges.
EY proposes three key areas where Boards can lead: embedding sustainability into business strategy, adopting a strategic approach to regulation, and exploring AI's sustainability potential while ensuring responsible governance.
The U.S. Department of Energy (DOE) has earmarked $425 million in funding from the Bipartisan Infrastructure Law (BIL) to support clean energy manufacturing and industrial decarbonization projects in former coal communities.
This funding represents the second round of the Advanced Manufacturing and Recycling Grant Program, established to aid manufacturing projects in energy communities affected by coal mines or coal-fired power plant closures.
The program will prioritize Clean Energy Manufacturing and Recycling projects, focusing on establishing or expanding facilities for advanced energy production or recycling, as well as Industrial Decarbonization projects to reduce greenhouse gas emissions and create low-carbon materials.
Eligible projects must be in communities affected by coal mine or coal-fired power plant closures since 1999, and businesses with annual sales of less than $100 million and fewer than 500 employees at the plant site are eligible to participate.
U.S. Secretary of Energy Jennifer M. Granholm emphasized that these investments aim to support economic opportunities in former coal communities, enabling them to thrive in the clean energy transition while continuing to contribute to the nation's energy needs.
Financial Times: The uninsurable world: what climate change is costing homeowners
Homeowners in Virginia Beach are experiencing difficulties in securing affordable home insurance coverage, with premiums rising significantly or policies being canceled.
The global insurance affordability crisis is exacerbated by more frequent and severe extreme weather events due to global warming, leading insurers to exit certain areas and demand higher premiums elsewhere.
Insurance executives are increasingly acknowledging the link between climate change and rising insurance costs, with some referring to insurance premium increases as a "carbon price" resulting from unsustainable living practices.
The rise in natural catastrophes causing billion-dollar losses, such as severe storms and wildfires, is challenging the insurance sector's ability to provide affordable coverage.
Policymakers are grappling with the implications of the insurance affordability crisis, with discussions focusing on potential government interventions and the long-term viability of private insurance solutions in the face of climate change.
Companies are increasingly hesitant to discuss sustainability due to fears of backlash, but communicating sustainability efforts is crucial as consumers want to hear about them.
Aligning sustainability communication with business and marketing strategies helps mitigate potential backlash.
Nike's strategic decision to support Colin Kaepernick resulted in increased brand value and sales despite initial backlash, while Bud Light faced criticism for not aligning its marketing with its target audience's values.
Grounding sustainability communication efforts in materiality analysis helps identify key issues for stakeholders and aligns sustainability goals with business strategy, as seen in KIND Snacks' approach to almond growing sustainability.
Being authentic and true to the company's values is key to successfully navigating sustainability communication without facing significant backlash.
Large corporations are distancing themselves from the terms "environmental, social, and governance" (ESG), with a 20% decline in related public statements by financial sector companies in 2023.
Despite this distancing, core sustainability principles remain intact, evidenced by rigorous new corporate sustainability disclosure requirements, increased regulatory scrutiny, and the adoption of rules to enhance climate-related disclosures by the SEC.
The challenge for companies now lies in divorcing ESG from emotion and politics, instead linking sustainability initiatives to quantifiable business metrics and demonstrating their impact on real-world business risks and opportunities.
Hiding from ESG and sustainability is not a viable option for businesses, as it could lead to negative consequences such as regulatory non-compliance and shareholder dissatisfaction.
The solution lies in treating sustainability as a business challenge and taking systematic steps towards improvement.
ESG Ratings, Standards, and Reporting
The U.S. SEC adopted the Climate-Related Disclosure Rule after two years of drafting, mandating large publicly traded companies to disclose climate action, greenhouse gas emissions, and financial impacts of severe weather events.
Despite significant reductions from the original proposal, the rule is expected to face legal challenges and political pushback, with implementation phased in starting in 2026.
The vote on the rule was divided 3-2, with Commissioner Hester Peirce leading opposition, questioning the SEC's authority and estimating a 21% increase in disclosure costs for companies.
Scope 1 and Scope 2 reporting will be mandatory for larger publicly traded companies, while Scope 3 reporting, the most controversial aspect, has been removed from the final rule.
The U.S. materiality standard remains unchanged, focusing on financial materiality rather than impact materiality, and the rule requires disclosures to be filed directly with the SEC, not just posted on company websites. Additionally, footnote requirements are reduced, with changes made to the filing process and reporting standards.
Verena Ross, head of the European Union's securities watchdog, emphasizes the importance of a robust framework for ESG disclosure at the company level to attract more investment into the green transition.
The European Securities and Markets Authority (ESMA) is particularly concerned about greenwashing in financial products, where misleading claims may undermine credibility with sustainability-conscious investors.
ESMA's recent report highlighted the risk of funds making inaccurate or unsubstantiated claims regarding their ESG contributions, leading to forthcoming guidelines on proper ESG fund naming.
Ross stressed the significance of individual company disclosures as the foundation of the investment chain, noting the need for basic information to inform financial products and services.
The move toward unified, obligatory ESG disclosures across jurisdictions is underway, with new mandatory requirements for companies in the EU and around the world starting from 2024 annual reports onward.
Companies and Industries
The Science Based Targets initiative (SBTi) recently changed the status of 239 companies on its dashboard to "commitment removed," indicating the difficulty corporations face in defining strategies to meet net-zero goals.
SBTi was established in 2015 to give credibility to companies’ voluntary emissions reduction targets aligned with the Paris Agreement goal, with over 2,000 companies pursuing its validation for net-zero plans.
Prominent companies like Microsoft, Procter & Gamble, Unilever, and Walmart, representing over $4 trillion in market capitalization, are among those now listed as "commitment removed," although they continue to pursue aggressive emissions-reduction goals.
This change follows an SBTi 2023 policy, requiring companies to submit science-based targets for validation within 24 months of making a net-zero commitment. Those failing to meet this requirement by January 31 had their status changed.
Many companies struggle with meeting SBTi’s standards, with Intel and Nvidia not participating due to perceived limitations, while Amazon had its commitment removed last summer.
Scope 3 emissions pose the biggest challenge for companies in meeting SBTi’s goals, with about half of surveyed companies citing them as a significant barrier to setting net-zero targets.
SBTi is reviewing its Corporate Net-Zero Standard, considering revisions related to Scope 3 target setting and measurement, with potential changes expected by 2025.
Walmart, Microsoft, P&G, and Unilever responded to the removal of their net-zero commitments, stating their ongoing efforts and commitments to sustainability goals.
The "commitment removed" label by SBTi can be reversed if companies submit validated targets, and 60% of the affected companies still have near-term targets in place.
KnowESG: Danone’s Green Excellence Recognised
Danone is among only 10 companies out of 21,000 evaluated to achieve CDP's A List status across all environmental areas, highlighting the company’s strong commitment to sustainability.
In 2023, Danone reinforced its sustainability efforts through initiatives such as reducing methane emissions from fresh milk by 30% by 2030 and expanding regenerative agriculture practices.
The company approved 1.5°C science-based targets and released a Climate Transition Plan aiming to cut emissions by 35% by 2030, ultimately striving for net-zero emissions by 2050, alongside marking 25 years of partnership with the Ramsar Convention to protect wetlands.
China's EV industry dominance is growing rapidly, with Chinese brands accounting for half of global EV sales and BYD surpassing Tesla as the world's largest EV maker.
China's advantage lies in its dominance of the EV supply chain, particularly in batteries, where over 80% of EV battery cells are produced by Chinese manufacturers.
Other automakers are feeling the pressure as Chinese exports of EVs increase, especially in Europe and Asia, leading to a decline in market share for traditional Western carmakers.
Despite global EV sales still rising, growth is slowing due to economic challenges in China, waning government subsidies, and consumer concerns about EV prices and infrastructure.
Investment Trends
A survey conducted by Workiva found strong investor support for new sustainability-related reporting regulations such as the EU’s CSRD and the U.S. SEC’s climate reporting rules, with over 80% of North American investors favoring these regulations.
Investors believe that high-quality ESG data will enable better investment decisions, with approximately 90% agreeing that new sustainability reporting regulations will help them make more informed investment decisions.
Despite the political backlash against ESG reporting initiatives in the U.S., most investors have not changed how they make investment decisions, and a large majority support new and emerging ESG disclosure regulations.
Many companies anticipate challenges in complying with the new sustainability reporting obligations, with concerns primarily revolving around technology and regulatory reporting requirements.
Executives see significant value in integrating financial and ESG reporting, with the majority agreeing that integrated reporting makes it easier for companies to comply with regulatory reporting requirements.
Challenges facing companies in integrating financial and ESG data include the complexity of sustainability data collection, adapting to changes in regulatory reporting, obtaining assurance for ESG data, and limited sustainability expertise among staff.
Generative AI is seen as a key tool to help companies comply with regulatory reporting requirements, but concerns over data security limit its usage.
ESG Today: Canada Issues $4 Billion Green Bond
The Government of Canada has completed the issuance of a C$4 billion green bond, marking the country's second green bond issuance.
This green bond is the first by a sovereign issuer to include nuclear energy expenditures as eligible use for proceeds, following the release of the government's updated Green Bond Framework.
Despite controversy in some jurisdictions, such as in Europe, regarding the classification of nuclear energy as sustainable, it has been included in the EU Taxonomy and is expected to be included in the UK’s taxonomy as well.
Canada's inaugural green bond, issued in 2022, raised C$5 billion, with a significant portion allocated to investments in clean transportation, sustainable farming practices, and renewable energy projects.
The new green bond offering was oversubscribed, with a final order book exceeding $7.4 billion, demonstrating strong interest from environmentally and socially responsible investors, as well as institutional investors.
ESG investing is on the rise globally, with projections showing a significant increase in investments in environmental, social, and governance projects.
Despite the growing popularity of ESG investing, there is skepticism about its efficiency, especially in terms of investment returns.
Research suggests that ESG investing may not significantly impact the cost of capital or investment returns, contrary to common belief.
Critics argue that increasing investments in green assets may lower returns, but empirical studies indicate that returns in the green sector could potentially be higher due to positive externalities.
Financial Times: Risks grow for investors as a new economic framework emerges
Climate change, energy independence, and national security plans are creating uncertainty for investors.
The economic policy framework before the 2008 financial crisis was more transparent and predictable, focusing on managing demand and controlling public debt.
Current economic policy faces challenges due to various factors such as monetary, fiscal, regulatory, trade, and industrial policies, leading to potentially unexpected consequences.
Investors are dealing with prolonged uncertainty driven by the grouping of multiple policy objectives into one strategy, lack of coordination among policy measures, and defense-focused monetary and fiscal strategies.
Despite challenges, the global economy has shown resilience amidst the pandemic and volatile energy prices.
Government Policy
U.S. climate action, particularly in transportation decarbonization, may undergo changes depending on the outcome of the 2024 presidential election.
Sections 168 and 179 of the Internal Revenue Code (IRC) are being examined for their adverse effects on transport decarbonization, especially in incentivizing purchases of private jets and heavy vehicles.
Section 168(k) incentivizes private jet purchases through bonus depreciation, allowing significant tax benefits. Despite recent phase-outs, tax changes have led to increased sales of private jets, contributing to higher emissions.
Private jet usage, exemplified by figures like Taylor Swift, contributes substantially to carbon emissions, significantly exceeding average emissions per person in the U.S. and Europe.
Section 179 encourages the purchase of heavy SUVs and trucks, with specific deductions available for qualifying vehicles. Tax laws have contributed to a rise in SUV and pickup sales, impacting global pollution levels.
As the effects of the Tax Cuts and Jobs Act diminish and the 2024 election approaches, potential changes to tax policies related to transportation and climate action may emerge, depending on electoral outcomes.
European Parliament lawmakers voted overwhelmingly (467-65) in favor of rules to combat greenwashing, aiming to protect consumers from misleading environmental claims by companies.
The directive, part of the EU Commission's proposed "Directive on Green Claims," addresses concerns about unreliable and unsubstantiated environmental claims, backed by a study showing over half of such claims in the EU are vague or misleading.
The directive sets minimum requirements for businesses to substantiate, communicate, and verify their green claims, including independent verification and scientific evidence.
It also targets private environmental labels, mandating reliability, transparency, independent verification, and EU-level development for new labels.
The regulation includes penalties for violators, with fines of at least 4% of annual revenue and exclusions from public procurements, aiming to prevent potentially deceptive green claims and ensure consumers can make informed, sustainable choices.
The European Parliament and Council reached a provisional agreement on new rules banning products made with forced labor from EU market or export.
The proposal aims to address modern slavery globally, empowering customs authorities and member states to identify and remove such products.
New modifications include setting criteria for authority-leading investigations and mutual recognition of decisions across member states.
Regulation will now mandate the removal of goods made with forced labor, there will be fines for non-compliance, and it allow products to come back on the market if forced labor is eliminated from the supply chain; it also calls for the creation of a list of sectors with forced labor and a database to support assessments.
European Parliament voted 467-65 to approve rules combating greenwashing, requiring verification of environmental claims like "biodegradable" before use.
The Directive addresses vague or misleading green claims, with 40% found unsubstantiated, aiming to provide reliable information for consumers.
The Commission's proposal includes minimum requirements for substantiating green claims, independent verification, and regulation of private environmental labels.
Penalties for rule-breaking companies include fines of at least 4% of annual revenue and exclusions from public procurements, with exemptions for small and medium businesses and microenterprises under the proposed directive.