Green Finance, Member Exclusive

Green Finance Briefing: The new SEC proposal and fossil fuel financing

  • The SEC issued a new proposal requiring companies to begin quantifying and reporting their greenhouse gas emissions.
  • This marks a step forward for embedding climate risks into business decisions, in a time when US banks are the top financiers of the global fossil fuel industry.

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Green Finance Briefing: The new SEC proposal and fossil fuel financing

SEC proposes new climate risk disclosure regulations

Climate-related risk disclosures are one step closer to becoming a reality in the US. Last week, the Securities and Exchange Commission issued a new proposal requiring companies to begin quantifying and reporting their greenhouse gas emissions. 

This represents an important milestone in the country’s path to a sustainable economy, bringing it closer to the climate conversation in Europe about what companies should know and disclose about their carbon footprints. 

However, the proposal does not enforce disclosures on indirect emissions, referred to as Scope 3 emissions – one of the most contentious factors that continues to get strong pushback. 

Under the new regulations, Scope 1 and Scope 2 emissions, which are direct emissions resulting from a company’s general operations and energy use, would have to be disclosed. 

But things get a bit more complicated with Scope 3 emissions – the indirect emissions generated by suppliers and customers – as they are hard to quantify and have sparked many debates over how to regulate them. 

Scope 3 emissions would be disclosed separately from Scope 1 and 2 if they are “material” or if the company has set an emissions reduction target that includes its Scope 2 emissions, according to the SEC. 

Some advocacy groups have criticized this approach, arguing that leaving it up to issuers to determine how material their Scope 3 emissions are would make it easy for companies not to disclose the majority of their emissions.

But there are challenges related to tracking and penalizing the misreporting of Scope 3 emissions. The reporting company might not be able to collect all of the necessary information, as there is a lot of third party data involved, making it difficult to require it to bear full responsibility. 

The Commission suggested that the rules would include an additional phase-in period of one year for Scope 3 emissions disclosures, as well as an exception for smaller reporting companies. 

“Investors get to decide which risks to take as long as public companies provide full and fair disclosure and are truthful in those disclosures,” SEC Chair Gary Gensler said at last week’s meeting.

For all three scopes, emissions data would be reported in gross terms, excluding any use of purchased or generated offsets, in order for investors to be able to assess the full magnitude of climate-related risks, the SEC said. Third-party data validation would be required to ensure the accuracy of the data. 

“How financial services firms decide to pull together the disparate data requirements and sources from the front office to the back office will ultimately determine how successful they are in efficiently managing their data needs for reporting purposes, with Scope 3 emissions being the biggest hurdle to overcome,” said Brandon Sutcliffe, sustainable finance leader at Ernst and Young.

Commissioners voted 3-1 along party lines to publish the proposal, which will be open for public comment for at least 60 days, and there is a desire to finalize the rule by the end of the year, according to Klaros senior advisor Tracy Basinger.

“In my humble opinion, this is a good first step for the US to start formalizing climate rules. But it will be very costly to implement and it seems to me that it is at risk of providing so much information that the sheer volume makes it less useful,” Basinger said. 

Chart of the week

US banks remain the largest financiers of fossil fuels, according to the new Banking on Climate Chaos report.  

The report examined commercial and investment bank financing for the fossil fuel industry — aggregating their leading roles in lending and underwriting debt and equity issuances.

Six US banks – JPMorgan Chase, Citi, Wells Fargo, Bank of America, Morgan Stanley, and Goldman Sachs – provided nearly 30% of the total fossil fuel financing in 2021 and since the Paris agreement

This finding is “incompatible with US aspirations to be a global leader in climate,” the report said. 

It seems like even in a year where net-zero commitments were being made left and right, the financial sector continued its business-as-usual... 

Food for thought

Not too long ago, Larry Fink was urging businesses to prepare for a carbon-free future and that BlackRock would “focus on sustainability not because we're environmentalists, but because we are capitalists and fiduciaries to our clients.”

However, an email was surfaced by the Bureau of Investigative Journalism, sent by the chairman of Texas’s oil and gas regulator to BlackRock executives after a meeting.

“It was nice to hear that BlackRock didn’t mean – or no longer believes – many of the disagreeable things the company and its CEO Mr. Fink have said about the oil and gas industry,” the chairman said in the email.

The email was uncovered via freedom of information requests sent by the Bureau and the think tank InfluenceMap. The story it reveals is that greenwashing is alive and well. 

What we're writing

The Net Zero transition: Banks are starting to engage in the climate conversation

The global financial system can finance the transition to a clean economy, but it will take leadership and cooperation, as well as new technological capabilities.

US investors brace for upcoming climate risk regulations 

US regulators are dialing down on climate change risks and their effects on the economy, aiming to improve financial disclosure requirements on how institutions manage their climate risk exposures internally.

What we're reading 

NatWest to pilot carbon tracking app with SMEs (Finextra)

‘This is a fossil fuel war’: Ukraine’s top climate scientist speaks out (Guardian)

Regulatory round-up (Sustainable Views)

A wartime imperative to speed up decarbonization (Bloomberg)

Funding pours into rapidly growing climate fintech scene across Europe and US (Fintech Futures)

Is climate finance going to be the next bubble? (Financial News)

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