SEC’s climate proposals welcome, but face challenges

The U.S. Securities and Exchange Commission’s (SEC) proposed introduction of tough new climate-risk disclosure requirements will be good for banks and investors, but may prove tricky to implement, says Moody’s Investors Service.

In a new report, the rating agency said that the SEC’s climate-risk disclosure proposals, which are out for comment until May 20, would enhance firms’ reporting of the financial effects of climate-related risks.

The proposals would make companies’ climate disclosures “more useful and reliable for investors” by increasing the volume and value of those kinds of disclosures, Moody’s said.

The disclosure of greenhouse gas emissions data will also help financial institutions “assess their own climate risks, which are largely indirect through their loan and investment portfolios, and better integrate the risks into their lending and investment decisions,” the report said.

“However, consistency and comparability across companies will likely be a near-term hurdle,” the report noted — adding that companies’ divergent “understanding and incorporation of climate risks is another hurdle.”

Additionally, the requirements will add “considerable compliance costs and liability concerns,” it said.

As a result, the rating agency indicated that it expects “rigorous opposition to the proposal and that a court challenge is highly likely.”

If the proposal overcomes those obstacles and is adopted this year, it will apply to most public companies in their annual reports for fiscal 2023, Moody’s said.

The Canadian Securities Administrators (CSA) have proposed their own set of climate-risk disclosure requirements — which are less stringent than the SEC’s proposals in several respects — and generated extensive feedback from companies, and investor and environmental groups alike.

That recently completed consultation left regulators with no clear consensus as to how they should proceed. Several commenters recommended that the CSA seek to align its own requirements with the SEC’s proposals, which hadn’t yet been issued at the time.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.