A sneak peek at the SEC’s climate disclosure proposal

Hello from New York, where we were happy to see the return of the big St Patrick’s Day parade after Covid-19 stopped the show for the past two years.

The cheer provided a brief respite from the dreadful news from Ukraine. Russia’s invasion continues to have ripple effects for environmental, social and governance (ESG) investing. Equity ESG funds, which make up the bulk of funds focused on sustainable investing, saw inflows in February dip to $9.4bn, down 60 per cent from January, according to new data from Refinitiv. The MSCI World ESG Leaders index is down almost 10 per cent this year.

Labels on ESG funds and indices too often missed the point, said Ian Simm, founder and chief executive of Impax Asset Management, who stopped by our offices during a New York trip this week. 

The Russian invasion has become a significant driver for energy security in Europe, and that bodes well for clean energy and transport, whether or not you call it ESG. “Taken too literally, ESG can be confusing and unhelpful,” Simm said. It would be better to talk in terms of risk and return, he added. 

Expect the ESG debate to intensify in the US as the Securities and Exchange Commission on Monday unveils a long-delayed proposal for corporate emissions disclosures. Please see our article on that below. From Down Under, James Fernyhough writes about another punishing summer of extreme weather for Australians. And Kristen has a colourful piece from the South by Southwest conference in Austin, Texas. Patrick Temple-West

Sneak peek: what’s expected in the SEC’s big climate disclosure proposal

US companies for the first time would be required to have some of their carbon emissions audited and included in regulatory filings as part of long-delayed regulations the Securities and Exchange Commission is expected to propose on Monday.

While details about the proposal are under wraps for now, sources have told us it is likely that scope 1 and 2 greenhouse gas emissions will need to be included in the annual 10-K filing, and possibly audited too. Scope 1 emissions refer to a business’s direct emissions and scope 2 refers to emissions from electricity consumption.

Currently, companies might disclose risks about climate change, extreme weather and related litigation. But information about specific emissions is not standardised, if it is mentioned at all.

It remains unclear if the SEC will demand information about a company’s scope 3 emissions, the greenhouse gases emitted through its supply chains and the use of its products. This group of emissions is considered the biggest and broadest component of a company’s pollution — and difficult to measure. 

Regardless of scope 3 disclosures, audited requirements for certain GHG emissions “will be something of significance”, said Mellissa Campbell Duru, a special counsel at law firm Covington. Scope 1 and 2 emissions were easier for companies to collect and “get a little more comfortable” with disclosing, she said.

“The big step forward [for the SEC] is the inclusion of these metrics in a filed report.”

SEC’s proposal sets up a fight between companies and asset managers, which have been pushing hard for climate disclosures. Ultimately, the SEC’s final rule is expected to be challenged in court.

Europe is already galloping towards regulatory emissions disclosures. The US will still be playing catch-up, but for now the SEC has at least started the ignition. Patrick Temple-West and Stefania Palma

Australia’s catastrophic floods are a reminder of what is coming

When a freak “rain bomb” hit the east coast of Australia on February 28, the little town of Lismore found itself suddenly at the front line of the climate crisis. In just a few hours, the river rose 14.5 metres above its normal level — smashing the previous record by 2 metres — and flooded the town up to the eaves of roofs.

Lismore’s central business district lies in the worst part of the flood zone, and barely a single building escaped without significant physical damage. Who will pay for all the necessary repairs? Not insurance companies.

Traumatised business owners told me insurers had long priced themselves out of the market, knowing the risk of extreme rainfall in this flood-prone town is increasing as the atmosphere becomes warmer.

The financial damage to Lismore, though devastating, is contained. But what are the financial consequences when similarly destructive and unprecedented events occur in major international economic centres, such as London, Tokyo or Hong Kong?

Australia-based climate risk analysis company XDI asks that question in a new climate risk data set released this week.

XDI has collected an exhaustive list of more than 2mn assets belonging to 1,400 of the world’s biggest companies, listed on eight of the world’s major stock exchanges. It has subjected those assets to granular climate stress testing against a “business-as-usual” emissions scenario between 2020 and 2100, examining their exposure to everything from heatwaves to coastal inundation.

Of the eight indices, companies listed on Tokyo’s Nikkei 225, London’s FTSE 350 and Hong Kong’s Hang Seng index routinely fare the worst. Karl Mallon, XDI’s director of science and technology, says Japan’s coastal cities do especially badly towards the end of the century when sea-level rise starts to encroach on built environments.

UK companies, meanwhile, score poorly in part because so much valuable property lies near tidal rivers.

Take London, where Mallon said much was riding on the Thames Barrier’s ability to hold back high tides and storm surges. “But if you have coincidence between high sea events, storm tides and a lot of rain — which, hey, they often do come together — the Barrier actually acts as a buffer against the drainage of the system. So there are parts of London which are quite vulnerable, and that have a huge amount of capital value,” he added.

Mallon says companies are often surprised to find XDI, without being given any information, knows much more about their own climate risk exposure than they do. He says these sorts of companies often treat physical climate risk reporting as a box-ticking exercise, if they do it at all, and fundamentally fail to assess their real exposure — an approach he says needs to change. Lismore’s flood victims, who now know what it means to be caught unprepared by a climate catastrophe, might offer the same advice. James Fernyhough

Oil majors make a U-turn on road from CERAWeek to SXSW

South by Southwest is known for bringing together technology leaders, entrepreneurs, filmmakers and creatives. But another group, one that doesn’t quite fit in with the others, had a particularly strong showing at this year’s festival: oil majors. 

This week, representatives from companies such as Shell and BP descended on the 20,000-person Austin event in its first iteration since the beginning of the pandemic. Arriving on the heels of the CERAWeek energy conference in Houston the week before, oil majors were primed for the spotlight.

But as PR teams tried to refocus the dialogue on the energy transition after a hard pivot to “drill, baby, drill” in the corridors of the Houston conference hall, you wouldn’t be blamed for feeling some whiplash. Even PR reps were feeling it — upon introduction one representative requested I “promise not to ask about the Ukraine invasion . . . or last week”, referring to the Big Oil chest-thumping at CERAWeek.

Instead, visitors to Shell’s “lounge” (aka networking space) were invited to snap selfies in front of a “Decarbonizing the Future of Energy” placard, or devour Instagram-able “Net-Zero Future” cookies. (Yum?)

Oil and water would usually be an apt metaphor for the relationship between fossil fuel companies and the climate-conscious. But climate entrepreneurs clamoured for five minutes to speak to the energy companies’ venture arms at SXSW. One founder told Moral Money that Shell funding had given their company a “seal of approval” and opened doors for other venture funding opportunities. Further mingling of the groups was on display at the Greater Houston Partnership’s “transition on tap” happy hour.

“These worlds are colliding,” said Katie Mehnert, founder of ALLY Energy, a platform that helps energy companies recruit a diverse range of candidates. “They have largely existed in bubbles [energy and climate entrepreneurs].”

But clearly there is still friction between the two worlds. This week at SXSW, Mehnert was invited by Shell to moderate a panel focused on women in innovation with Walmart and Shell representatives. But she said in previous years, she was given the cold shoulder by corporate attendees while advocating for diverse leaders in the energy sector at CERAWeek. Kristen Talman

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