Page 8 - Georgia Forestry - Issue 3 - Summer 2022

ECONOMY
The Financials
of Climate Change
Proposed SEC Rule Would
Add New Reporting Requirements
By Amanda Coyne
There are three pending actions from the Securities and Exchange Commission (SEC) aimed at increasing investor transparency into a company’s climate risks and Environmental Social and Governance (ESG) reporting. If these actions are adopted as proposed, they will have impacts on the forest sector.
The first would require publicly traded companies to disclose climate-related risks as part of their broader risk disclosures to investors. The second proposal would set more stringent rules for how investment funds are named in order to prevent “greenwashing.” The third would require disclosure of climate-related data for any investment funds that reference climate as part of a fund’s strategy.
A company “is already required [by the SEC] to disclose risk factors that have to do with environmental regulations and human capital,” said Alison Dimond Kardos, director of reporting strategy at reporting firm Buzzword. “This would be a significantly bigger step in requiring some environmental-related reporting in financial reporting specifically about climate.”
The information that would be required to be public under this rule includes greenhouse gas emissions and energy consumption. Companies would have to compile this information and have it verified by an outside source. Many compa- nies are already disclosing this information voluntarily in their ESG reports due to requests from large institutional investors and other stakeholders, but they are not currently required to do so.
Protecting Investors
In its proposal, the SEC recognizes that climate-related risks can have a significant impact on companies’ current or future performance and market position, making understanding of these risks important in investors’ decision-making.
“We are concerned that the existing disclosures of climate-related risks do not adequately protect investors,” the SEC’s proposal said. “For this reason, we believe that additional disclosure requirements may be necessary or appropriate to elicit climate-related disclosures and to improve the consistency, comparability and reli- ability of climate-related disclosures.”
These disclosures could not only make investors and the public more aware of companies’ climate impact, but shed light onto governance and risk management practices, the commission said in its report. Risk would include energy consumption, but also the risk of increasingly severe hurricanes or wildfire to a company’s business.
As climate change continues to impact the economy, a lack of comparable data across companies could undermine inves- tors’ decision-making ability. Self-dis- closed data is not subject to the rigorous standards put in place by agencies like the SEC. Some climate data is currently required to be reported by companies to government agencies including the Envi- ronmental Protection Agency, but not in a financial context.
“The big change is the question of climate risk financial information,” Kardos said. “It’s shifting this issue of climate and emissions performance into the world of financial materiality, which is a big change from it being a safety issue or an environmental issue.”
In the forestry sector, where climate change presents both risks and opportu- nities, this data could help characterize on a company-specific basis risks like wild- fires and drought, which are increasingly prevalent as temperatures rise. Forests “face some significant physical risks, but they are also part of the solution — their product is a carbon sink,” Kardos said. “They’re a unique industry to think about this policy.”
Mutual Funds & ETFS
Sustainable Fund Inflows and Total Assets
Estimated Net Flow Year-end Total Net Assets
2019 2020
$3 Trillion
2
1
0
Money held in sustainable mutual funds and ESG-focused exchange-traded funds rose globally by 53% last year to $2.7 trillion, with a net $596 billion flowing into the strategy, according to Morningstar Inc.
6 | GEORGIA FORESTRY
2021