The Securities & Exchange Commission (SEC) published their proposed rules on climate disclosure for public companies in March 2022, a move that signaled a commitment to seriously address sustainability and ethical concerns among large companies. The proposed rules were created with the intention to standardize how companies report their ESG efforts and initiatives, based off of the Task Force on Climate-related Financial Disclosures (TCFD) and Greenhouse Gas Protocol (GHG Protocol), which are internationally developed standards with the goal of curbing the effects of climate change.
A breakdown of the climate disclosure proposed rules and their impact can be found in part 1 of our blog. But since May 25, a couple of amendments to the rules have been added, and because the public comment period has officially closed, all companies who planned to submit feedback have done so.
In a more robust attempt to prevent greenwashing, one of the updated proposals would require more stringent rules around Impact Funds - funds with the specific purpose of supporting a particular ESG focus - including fund documents, registration statements and annual reports. They could require that companies disclose two greenhouse gas emissions metrics in the funds’ annual reports, for example, or its progress on achieving its specific impact in qualitative measurements. Even integration funds, or those that use a combination of both non-ESG and ESG-related funds, would be subject to the disclosures.
Another amendment that was added addressed the current Names Rule, which states that if a company’s name suggests that it focuses on particular types of investments, then it must invest at lesat 80% of its value in assets in those investments. This proposed change would expand that mandate to apply to ESG-related funds. Therefore, if a fund has a name related to environmental sustainability, then it must invest at least 80% towards that. It would also be subject to the more stringent reporting requirements laid out in the rule as well, and integration funds would not be permitted to use ESG-focused names.
The proposed rules have received a lot of attention since they were first released earlier this year. Some are supporters of the direction the SEC is heading, but believe that the rules aren’t strict enough. For example, the rule only applies to public companies, and only those who already have ESG initiatives at that. That means that companies that choose not to develop and work towards any ESG initiatives do not have to start doing so. Hence, the proposal is a solid start towards preventing greenwashing - aka when a company is deceptive about their claims of being environmentally sustainable or socially ethical - but in order to really move the needle on climate change, many say that all companies must get involved. Still, companies like Salesforce, Dell Technologies, and Etsy have submitted comments generally in support of the rules.
But some are critical of the proposal albeit for a variety of reasons. One of the biggest concerns is around Scope 3 emissions data. The proposal has more stringent reporting requirements for these types of emissions, which, if curbed, would be the key to achieving sustainable supply chains. These mandates include more quantitative evaluations on GHG emissions, as well as methodology and time period used. But supply chain leaders claim that this data is much harder to track, as their suppliers may not be able to provide them with the necessary information, whether it’s due to their status as a private company, international firm or any other number of factors. Certain industries and companies - i.e., smaller organizations - may be disproportionately affected as well.
Even stronger critics of the proposal are looking for legal pathways to combat the rules, as they state it doesn’t fall under the purview of the SEC to instate these rules. Whether or not it is challenged in a court of law remains to be seen, but the large amount of support for the rules should signal to companies and particularly procurement teams that they should start preparing themselves for more ESG compliance via stronger supplier intelligence solutions.