SEC Promises Climate Scorecard to Pick Green Winners and Dirty Losers

SEC Promises Climate Scorecard to Pick Green Winners and Dirty Losers

The Biden Administration has pledged a "whole of government approach" to climate change. So far, that's included climate diplomacy and the Pentagon's efforts to decarbonize. But now, Securities and Exchange Commission (SEC) Chairman Gary Gensler has indicated a long-awaited initiative may soon become realized; Gensler says he's working with other commissioners on details of a draft climate risk disclosure mandate -- and he's dropping fresh hints about its direction.

Gensler posted a Twitter thread that makes the case for climate disclosure: "Like the Olympics, fans compare skiers across heats, countries, & generations. Investors today are asking for the ability to compare companies w/ each other.” He's suggesting making apples to apples comparisons between "clean" and "dirty" investments. If investors were to do that, it would send a market signal of epic proportions given the growing importance of ESG investing.

SEC: The SEC & Climate Risk Disclosure, July 28, 2021.

Why This Matters

A climate disclosure rule is part of a wider push by Biden-appointed financial regulators to expand analysis and disclosure of risks to various kinds of companies. If the SEC really is poised to make good on its promise to ramp up enforcement efforts in relation to climate risk and ESG disclosures, it will come at an important time -- months before a mid-term election could cost climate advocates control of Congress, making executive action even more critical.

The details don't appear to be final yet. For something so novel, it's not surprising that it's being reported that the SEC's Democratic majority is divided over the structure of the closely watched proposal.

The Big Picture

The SEC is a large independent agency of the US federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market manipulation. It also promotes transparency for investors, especially around the issue of risk.

Chairman Gensler is an American government official and former investment banker. Gensler previously led the Biden-Harris transition's Federal Reserve, Banking, and Securities Regulators agency review team.

Gensler's tweet and comments were just the latest indications that change is coming. Last year, the SEC's Division of Corporate Finance published a sample of a letter the agency may send to public companies asking for more information about climate change-related risks and ESG disclosures in their public filings.

In March 2021, the SEC announced that the agency had established an enforcement task force focused on identifying gaps in climate and ESG disclosures under existing requirements. Under Chair Gensler, public companies face increasing scrutiny at the SEC with respect to climate and ESG disclosures and should review their filings to ensure compliance.

CNBC: Nasdaq CEO on ESG - We are a disclosure economy, January 12, 2022.