Both True — What to Watch: Feds in Climate Finance Action

Over the last 18 months, Both True readers have been watching BlackRock closely, following the world’s largest asset manager pivot to prioritizing climate action for its portfolio companies. But BlackRock isn’t the only firm generating investor momentum around climate action:

  • During this period, a growing number of investment companies have also been raising concerns over climate risk. Critics have cited the inadequacy and inconsistency of current disclosure expectations.
  • As we discussed in our special report last week, numerous shareholder proposals on the topic were raised during the 2021 proxy season.
  • Additionally, a huge consortium of companies and investors have voiced support for enhanced disclosure requirements with financial regulators, stating, “We believe that disclosure of the material and systemic risks of climate change will help companies and investors to understand, price, and manage climate risks and opportunities. These activities are at the core of efficient securities markets…”

As investor focus on ESG persists and attention on climate remains center stage, the momentum continues to build for rigorous requirements to evaluate and disclose climate-related risks.

Cue the federal government.

Today we will look at how legislators and regulators are weighing in on climate finance action — and what this means for your risk mitigation strategy.

Both of these things are true

  • Agencies, the Biden Administration, legislators, and regulators are weighing in on climate-related finance disclosures. Sounds like the perfect storm — a regular red tape tsunami.
  • Climate-related financial risk disclosures instead present (another!) opportunity for oil and gas companies to showcase game-changing foresight in leading to the energy future..

The situation

It might be tempting to dismiss the federal government’s push for climate-risk disclosure as a political fad. Take it from Allison Lee, a Securities and Exchange Commission (SEC) commissioner, who conveyed that it is a myth that “climate and ESG are matters of social or ‘political’ concern, and not material to investment…” Here are the high points that comprise this newest activism-gone-mainstream disruption:

  • SEC scrutiny. The SEC is moving fast. In March, the commission announced it was soliciting public input on whether existing climate disclosure information adequately informs investors. The SEC requested feedback on topics ranging from disclosure metrics, embedding climate disclosure into regulatory frameworks, the merits of various disclosure guidelines, and connecting climate disclosure to employee and executive compensation. That same month, the SEC also announced the creation of a new Climate and Environmental Social and Governance (ESG) Task Force aimed at addressing ESG-related misconduct by identifying “any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.” The task force will also seek to identify compliance issues in the ESG strategies of investment advisors and funds.
  • Another executive order. After the SEC made its announcement, President Biden issued his own executive order stating that the policy of his administration is to advance the disclosure of climate-related financial risks. The order directs federal agencies to begin devising a government-wide strategy to identify financing needs for achieving a net-zero economy by 2050 and to assess financial risks posed by climate change to federal assets and operations. It also prompts federal financial regulators to begin integrating climate-risk considerations into oversight and regulatory decisions.
  • Congress on the move. Last week, the ESG Disclosure Simplification Act of 2021 passed in the U.S. House of Representatives. This bill would require the disclosure to shareholders of “certain environmental, social, and governance metrics and their connection to the long-term business strategy of the issuer.” It also directs the SEC to guide capital towards sustainable investments. In addition, this bill would direct the SEC to require every public company to annually disclose their climate-related risks and the actions that will be taken to reduce those risks. Companies would be required to report Scope 1, 2, and 3 emissions.

Seize the day

At first blush these incoming expectations look like so much new red tape. In fact, they can be a motivating (if inevitable) call to action — an opportunity for your company to think about, strategize, and engage in the climate conversation proactively and positively. Take advantage of this disruptor to deeply assess not only your climate risk, but your decarbonization leadership.

  • Get to work. These incoming financial disclosure requirements will roll down to companies of all sizes, whether publicly traded or privately held, throughout the value chain. It will no longer be sufficient to get started on your 3-year ESG strategy; your company must now begin assessing your unique climate-related risks and opportunities and deciding how to articulate them using a reliable, credible disclosure framework. We recommend you start by compiling a workgroup to identify your risks and opportunities. That workgroup can then collaborate with your executive team to devise a strategy for managing those risks at all levels of the company.
  • Channel some inspiration. Not sure what this looks like? Check out Pioneer’s 2020 Sustainability Report covered in this recent Both True. Pioneer committed to following the recommendations of the Task Force on Climate-Related Financial Disclosures (TFCD) and conducted the risk analysis — an analysis that investors will be expecting from you this year.
  • Lead into action. Disclosing climate change-related financial risks is not enough. Companies must also address the recurring question: What steps are you taking to reduce and mitigate those risks today? This question ties into your company’s larger decarbonization strategy and enterprise risk management. To explore how you might enhance your decarbonization toolbox, check out Anne Carto’s essential primer ESG Part 2: Everyone Needs a Decarbonization Strategy.
  • Talk to your investors. Not all investors want similar outcomes or have the same sense of urgency in this arena. Talking about this explicitly with your investors will allow your team to prioritize actions and set an appropriate time frame for phased execution.

Here’s how Adamantine kicks off this work with our clients — with a diagnostic assessment of their unique drivers, risks, and opportunities. This approach allows them to prioritize the right actions at the right pace. Reach out to schedule your diagnostic today.

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