The Securities and Exchange Commission (SEC) ESG rules could be out this fall, before presidential election campaigning gets underway, according to Jerome Devillers, partner, energy and infra and ESG practices leader at Mazars.
Speaking to ESG Clarity US about the long-awaited regulation, Devillers said disagreement about what should be included was causing the holdup, but that many financial advisers and asset managers are starting to prepare.
The SEC first announced plans to bring out rules on climate-related disclosures in March 2022. The proposal would make many public securities issuers disclose their carbon footprints, requiring Scope 1 and 2 emissions, or those that relate to their operations, to be verified by independent third parties. Wide-ranging Scope 3 emissions, which can pertain to everything a business sells, would also have to be reported by many large companies, as would their reliance on carbon offsets.
Since then there has been significant pushback, with a record-breaking 15,000 comments about Scope 3 reporting submitted to the regulator. “This is really what has caused the delay,” Devillers said. “All these comments, many of which were extremely strong in opposition.”
When the rules do finally arrive, Devillers, along with many others, including SEC chair Gary Gensler, expects there will be some changes.
First, he expects changes around where emissions disclosures are provided. In the current proposal, some information is required in financial statements, while other information is required in the SEC filing but outside the financial statements. The information included in the financial statements is subject to a higher level of diligence by the external auditor.
“We could see information requirements being shifted from the financial statements to the rest of the filing,” Devillers said.
Second, Devillers anticipates that the proposed definition of materiality may be watered down. “This is deemed to be a higher standard than the current definitions of materiality in the SEC financial disclosure area and inclusion of some information in the financial statements, capex plans for example, which would subject these disclosures to ICFR.”
Third, the timeline for reporting on Scope 3 emissions may be extended, as the timeline is currently “aggressive”. He said: “There is a level of maturity with Scope 1 and 2. The calculations are good enough; industry has been doing it for a number of years. All that is fairly doable. Scope 3 is a very different story. It is challenging.”
What asset managers and advisers can do
Despite potential changes, Devillers said preparation was already underway and that in order to fully get the benefits of these rules, reporting companies, asset managers and investors will need to build systems, processes and controls over new data.
A key challenge will be managing the cost of compliance and the potential impact on holdings’ performance. Devillers explained: “For financial advisers and asset managers, beyond the cost of creating these functions is a bigger challenge of managing expectations among their investor pool, which potentially has diverging views on the need to make these investments into new systems, and the return on investment.”
Another challenge will be having the right systems in place to analyze company data when it comes in.
“These changes are significant, they require time, and they require alignment of many different functions within an organization,” said Devillers.
However, he added the financial advice and asset management industries have been gearing up to respond to the growing demand for more non-financial data and that the typical readiness process includes: (i) education, (ii) change management strategy, planning and design, (iii) readiness assessment and action plan and (iv) transition and execution.
Ultimately, Devillers believes the new regulations, albeit with some significant tweaks, is good news for everyone and will help stamp out greenwashing.
“Establishing an ESG criteria would help investors. Part of what the SEC is doing is having a lot of discussions with a lot of people to gain consensus around some of these ESG buzz words that everyone wanted to hear. These regulations will impact marketing materials, which have had a lot of reference to the environment, where really a lot of claims were made when there wasn’t a lot of substance beyond it.”