As the impacts of climate change on our society and our economy continue to grow, more investors are looking for information on climate risks. In response, one of the main financial regulators in the US has proposed a series of rules to help everyday investors better understand the risks climate change poses to their investments.
Earlier this year, the Securities and Exchange Commission (SEC) proposed three rules to hold public companies and asset managers accountable for how they communicate climate risk to investors. These rules aim to increase transparency about how public companies like Apple (which raise money on the stock market) manage climate risk and the transition to a clean energy economy, and how asset managers like BlackRock (which handle our pensions, 401Ks, and Roth IRAs) manage our savings in the face of climate change and a shifting economy.
At a time when many companies are in denial about climate change and continue to rely on carbon-intensive business models, this greater transparency is essential for investors that want to put their money into companies that are well-positioned in the transition to a clean energy economy that is already underway.
The SEC is expected to release its final rules in the coming months. When passed, these proposed changes will provide clear and comparable information that helps guide everyday investors saving for college, retirement, and other major life events. The new rules will also ensure asset managers make climate-safe decisions about people’s investments — or risk losing business. Here’s a rundown of the proposed rules.
Climate Risk Disclosure Rule
The proposed Climate Risk Disclosure Rule would require all publicly traded companies to share more information about their greenhouse gas emissions and other climate risks. The overwhelming majority of institutional investors — over 95 percent, according to one analysis — strongly support the requirement for companies to disclose ALL emissions, whether it’s from their owned or operated facilities (Scopes 1 & 2), or the emissions in their supply chains (Scope 3). This will allow investors to understand if companies, particularly emissions-intensive companies, are taking the steps necessary to align with the goals of the Paris Climate Agreement to keep global warming to 1.5C.
Several large asset managers — including BlackRock and State Street — are also publicly traded companies, which means they would be required to disclose their financed emissions (Scope 3), which are the total greenhouse gas emissions of all the companies in their portfolios. This detail is very important, because major asset managers are shareholders at big US banks like JPMorgan Chase — which are some of the biggest fossil fuel financiers in the world.
The proposed requirement on Scope 3 disclosures is incredibly important for the SEC to finalize. Most of the time, companies hide the majority of their greenhouse gas emissions in their supply chains or their financed emissions — sometimes up to 90 percent. Without information on Scope 3 emissions, investors won’t have all the information they need to make informed decisions on exposure to climate risk.
Fund Names Rule
The proposed amendments to the Fund Names Rule aim to reduce greenwashing by ensuring fund names are not misleading to investors. It encourages funds to have names that accurately reflect the investment approach. Right now, some investment funds label themselves as “environmental, social, and governance” funds, or ESG for short. This label generally indicates a sustainable, socially-responsible investment. But it can be hard to know exactly what the fund focuses on. Is it climate change impacts? Human rights?
Changes to this rule will require funds to have clearer, more descriptive names. It will also place limits on how asset managers can market these funds to avoid misleading investors about which funds are truly ESG-oriented. This information will help reduce greenwashing and ensure everyday investors understand which funds take climate (and other ESG) risks seriously.
ESG Disclosure Rule
The proposed ESG Disclosure Rule would provide critical information to investors about how a fund’s actions align with its stated ESG goals. With this proposed rule, funds claiming ESG factors as key considerations in investment decisions, or funds claiming to pressure portfolio companies to undertake reforms, would be required to back up those claims with detailed disclosures.
Perhaps most importantly, funds claiming climate change as a key consideration in investment decisions would be required to disclose their financed emissions. Finalizing this portion of the rule is critical to helping investors understand whether, and how much, their portfolio might be exposed to climate risk.
Crucial Information for Everyday Investors
For decades, many of the world’s largest public companies and asset managers have greenwashed their climate efforts, attempting to convince the public they are doing all they can. But it doesn’t take much to look under the hood and see that they’re all talk.
Under the Climate Risk Disclosure rule, public companies failing to reduce their carbon emissions will be required to reveal their lack of a transition strategy. Under the Fund Names and ESG Disclosure rules, asset managers offering funds filled with unsustainable companies will be required to reveal these unwise investments to investors.
These proposed changes are necessary to provide clear and comparable information that will help guide everyday investors AND investment firms in making the best long-term, climate-smart decisions about their investments.
Read more about how asset managers BlackRock and Vanguard undermined these common sense proposals in our breakdown of their public comments to the Securities and Exchange Commission.