In March 2022, the US Securities and Exchange Commission (SEC) unveiled a proposal for mandatory climate disclosures. Following President Biden’s directive, the sweeping changes are designed to “advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk” for investors.
Under the Enhancement and Standardization of Climate-Related Disclosures for Investors (aka the Climate Disclosure Rules), any publicly listed company registered in the US — be it foreign or domestic — will be required to disclose environmental alongside financial information in their registration statements and periodic reports.
After a year of public consultation, pushback, and politicizing, the final rules are due to be published this month.
Prepare your carbon credit programThe SEC outlines six categories of disclosure that can be distilled into three pillars. Broadly aligned with the Task Force on Climate-Related Financial Disclosures (TCFD), these include:
- Material climate risks and implications
- Greenhouse-gas (GHG) emissions
- Targets or transition plans
“If, as part of its net emissions reduction strategy, a registrant uses carbon offsets or renewable energy credits or certificates (“RECs”), the proposed rules would require it to disclose the role [they] play in the registrant’s climate-related business strategy.
“It would be required to disclose the amount of carbon reduction represented by the offsets or the amount of generated renewable energy represented by the RECS, the source of the offsets or RECs, a description and location of the underlying projects, any registries or other authentication of the offsets or RECs, and the cost of the offsets or RECs.”
In other words, there are ramifications for carbon credit accounting across all three pillars.
- Material climate risks and implications, including those posed by exposure to the voluntary carbon market (VCM).
- Greenhouse-gas (GHG) emissions, not including carbon credit negations, which must be counted separately.
- Targets or transition plans, including, for any offset, its source, project, registration or authentication, and cost.
Should they be ratified, the rules will introduce a new level of transparency to carbon credits within corporate transition plans, if not to the VCM as a whole.
Risking greenwash to greenhushThe risk (as was raised by Nasdaq on behalf of its listed companies, as well as by other respondents) is that the burden of buyer liability prompts a retreat from net-zero commitments. Given the strength of the underlying tailwind — shareholder demand — we believe it’s an unlikely outcome, regardless of where the cards fall this month. We do, however, think the SEC could have better promoted climate and market integrity by encouraging companies to disclose not just their exposure to but also protection against VCM risks. Such a clause would foster credit quality without undermining market confidence. Fortunately, there’s reason to believe insurance may soon be a priority for regulators and investors alike. After all, the SEC argues that carbon credits present both transition and physical risks (p.79) — and those, as it argues elsewhere in the proposal (p.66), demand insurance solutions.
“For many investors, the availability of insurance and the potential exposure to damage, loss, and legal liability… may be a determining factor in their investment decision-making.”