ESG investing, which stands for environmental, social and corporate governance investing, has soared in popularity as individuals across the globe increase their demand for social accountability. Now, the Securities and Exchange Commission (SEC) has proposed for the first time that businesses disclose with their shareholders exactly how they affect the climate–a rule long-championed by environmental advocates.
While such disclosures would help hold companies accountable for their role in climate change, this climate-related transparency would also give investors even more leverage to support sustainable business practices. Here’s how the rule could affect investors.
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SEC Proposes Climate-Change Regulations
In a meeting on Mar. 21, 2022, the SEC approved a newly-proposed rule that would require domestic and foreign private registrants to include climate-related disclosures in their filings. Required information would detail climate-related risks and their impacts on the company’s business and strategy, as well as a registrant’s greenhouse gas emissions.
Greenhouse gas emissions are a commonly-used metric to measure a company’s climate-change impact, and the new rule would require companies to not only disclose direct emissions but also indirect emissions from purchased electricity or other energy. These include greenhouse gas emissions from both upstream and downstream activities in a company’s value chain.
“I am pleased to support today’s proposal because, if adopted, it would provide investors with…useful information for making their investment decisions,” said SEC Chair Gary Gensler. “Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.”
However, according to the New York Times, the proposed rule has already met opposition from business trade groups and may be challenged in court. Representative Patrick T. McHenry (R-NC), a ranking member on the House Financial Services Committee, has also dismissed the proposal, citing that climate risk is immaterial for most companies.
How Investors Can Take Advantage
By codifying climate-related disclosures, the SEC will be giving even more power to individual investors.
The rule is available to public comment for 60 days on Sec.gov, and if enacted, would build upon previous climate-related guidance issued by the SEC in 2010. In fact, some companies already include information about their greenhouse gas emissions; the SEC estimates that nearly 2,000 annual reports from 2019 and 2020 already included some climate-change disclosures.
Although a number of publicly-traded companies already disclose some information related to greenhouse gas emissions, the SEC’s newly-proposed rule would mandate more detailed descriptions of climate-related risks. If the SEC formally adopts these measures, it could boost a number of clean-energy companies. Among others, the world’s biggest wind-turbine maker, Denmark’s Vestas Wind Systems A/S (OTC: VWS) and America’s solar-energy First Solar (NASDAQ: FSLR) could benefit greatly.
Furthermore, since the new rule would require climate-related compliance and auditing risk analysis, companies that provide these services and make software that conduct similar assessments may also gain.
The SEC has approved a proposal that would require publicly-traded companies to disclose climate-related risks as well as greenhouse gas emissions all along their value chains. Some companies already disclose climate-change risks, but if this new rule is enacted, all businesses will be subject to the same obligation. As a result, clean energy companies and auditing or compliance firms may see a boost as socially-conscious investors flock to these ESG stocks.
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