A closer look at the impending ESG regulations in the United States
You’ve heard of it before, but what exactly are ESG regulations? Do they affect you as an investor or a trader? What are the possible consequences if you don’t adhere to them? In this series, we’ll look at the impending ESG regulations in the United States and try to clear up any questions you may have about them.
What are ESG regulations?
ESG investing has grown significantly in recent years as investors look for sustainable and ethical ventures. One in three dollars of US assets under professional management now has a sustainable investing strategy behind it. With this progress comes added concerns such as financial “greenwashing,” whereby companies mislead investors about the environmental impact of their operations or policies.
The Securities and Exchange Commission (SEC) seeks to safeguard investors, maintain fair and orderly markets, and encourage capital development. In pursuit of these goals, the SEC has issued a number of proposed rules that will aim to curtail irresponsible corporate behavior from companies within the United States and keep up with the fast-moving ESG industry. The proposed SEC rule for “The Enhancement and Standardization of Climate-Related Disclosures for Investors” is intended to accomplish just that by requiring more consistent, comparable, and reliable disclosure about climate-related risks.
Impending ESG regulations in the United States
While an increasing number of companies have opted to report on climate change risks voluntarily, their reports are often inconsistent and fragmentary. Due to a lacking uniform federal mandate, companies can pick and choose what data to report, allowing them to highlight the good and omit the bad information. With the proposed SEC rule, public domestic and foreign SEC-registrant companies would no longer be able to cherry-pick climate reporting. This gives investors a better sense of their exposure to material climate risks. The proposed rule changes would require publicly traded companies to report:
- Risks. Climate-related risks and their actual or likely material impacts on the company’s strategy, business model and outlook.
- Risk management/oversight process. Processes for identifying, assessing and managing climate-related risks, as well as board governance of climate-related risks and relevant risk management processes.
- GHG emissions. Greenhouse gas (“GHG”) emissions metrics, starting first with direct emissions and indirect emissions from power purchase and growing to include indirect emissions from upstream and downstream entities in its value chain.
- Targets/goals. Information regarding climate-related targets, goals, and transition plans, if any.
How can companies prepare for impending ESG regulations?
The public has until June 17th to provide input on the proposed rule. If adopted, the proposed rule’s implementation date of December 2022 would impose climate-related disclosure requirements on SEC-registrant companies as early as 2024.
Organizations can look to assess the strength of their corporate governance and oversight of ESG-related matters as they prepare for potential implementation of the SEC’s proposed climate-related disclosure rule. While it does not dictate the company’s governance structure or climate-related policy, the proposed rule seeks to unveil how the company handles climate-related issues. For example, is there a particular board committee dedicated to climate-related issues, and if so, what oversight does that committee hold and how is that handled? Will the board’s current disclosure policy adequately cover the more expansive and complex nature of the proposed rule?
Eventually, as stakeholder demand for social and governance transparency grows and merges with reporting regulations, federal mandates may extend to all ESG disclosures. Public and private companies should consider engaging third-party experts and legal counsel in the evaluation of their current reporting. At Christopher & Panasci, we’re here to help you make sense of the ever-evolving ESG landscape and implement best practices and strategies for your business long term.
About Violaine Panasci
Violaine Panasci, LL.M., studied law at the University of Ottawa before completing an LL.M. in New York with an emphasis in food systems and sustainable supply chains. Her practice areas include agricultural technology, cannabis, copyrights, data privacy, food & beverage, regulation, sustainable supply chains, and trademarks. V currently serves as a board member and Vice-Chair of the Governance Committee for the National Social Enterprise Alliance, a board member for the Nashville Social Enterprise Alliance, and a board member for the French American Chamber of Commerce of Tennessee. Read more about Violaine, connect with her, and Calendly her.