New Rules by SEC to Enhance and Standardize Climate-Related Disclosures for Investors

March 22, 2022
By CSE

Companies and investors alike demand sustainable investment opportunities and all stakeholders continue ask for access to comparable and reliable metrics to evaluate a particular investment or product. Indeed, the foregoing is driving rulemaking initiatives by various federal and state regulatory authorities, including the U.S. Securities and Exchange Commission (SEC). All these factors deserve the attention by boards of directors.

The constant improvement of understanding ESG investment targets is critical—especially in a rapidly growing space where interest is hot, and transformation is fast. ESG has evolved from a “nice-to-have differentiator” to an essential component of a company’s business model due to changing expectations of investors and stakeholders. If you don’t have an ESG strategy, you’re not attracting top talent, you’re not getting the eye of top-tier investors and advisors, and customers are also looking for this as an option.

Securities and Exchange Commission proposed rule changes that require from registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks. “I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers,” said SEC Chair Gary Gensler.

 

The proposed rule changes would require from a registrant to disclose information about (1) the registrant’s governance of climate-related risks and relevant risk management processes; (2) how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term; (3) how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and (4) the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

 

The markets continue to witness the evolution of financial products and commercial transactions that are underpinned by ESG principles. For example, commercial banks have begun to offer sustainability-linked lending products, including incentives to meet certain targets.

 

Boards of directors should be mindful of how they communicate with shareholders for their long-term strategic growth and operations. Both private and institutional investors regularly look at ESG ratings to inform their decision making. Indeed, recent research shows that that 65% of institutional investors look at ESG ratings at least once a week, and companies with high ESG ratings receive 15% more investment and 10% reduction in costs of capital.

 

Why ESG Management is important

 

Companies are under more pressure than ever to set clear targets to reduce risks, measure their progress effectively, and report in a transparent manner. No matter the size of your company, your industry, or your ESG score, integrating ESG factors into corporate decision-making is good risk management. ESG risk is regular business risk and ESG risk management should be part of a company’s standard risk reduction practices. Companies that experienced high to severe ESG incidents lost 6% of their market capitalization on average. Medium and smaller firms may not face the same stakeholder scrutiny or regulatory requirements, but the risk from ESG incidents applies to them as well. Without the backing of major investors, smaller companies may not be able to recover from harmful events.

Keep up with the latest trends and meet stakeholder demands with a winning business model! Stay competitive with new approaches on managing ESG risks and focus on long-term strategic growth. Enrol now in the upcoming online practitioner trainings Seattle, May 12-13&16 (advanced edition) and NYC, June 9-10 & 13 (leadership edition) and get all the necessary tools for your future success and impactful measurement of ESG performance.

 

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