Welcome back to our blog series on Banks, Borrowers and Climate Change. On March 6, 2024, the Securities and Exchange Commission (SEC) announced it had “adopted rules to enhance and standardize climate-related disclosures by public companies and in public offerings.” Despite the fact that the ruling was a much less rigorous version of what was originally proposed, due to the omission of Scope 3 (financed) emissions reporting, the AP stated, “Just hours after the SEC adopted the rule March 6, a coalition of 10 states including West Virginia, Alaska and Georgia announced they were filing a challenge with the U.S. Court of Appeals for the 11th Circuit.” A week later, the U.S. Chamber of Commerce also filed suit. As a result of the pending litigation, the SEC paused the implementation of the new rules. Where does that leave financial institutions when it comes to climate disclosure reporting? Perhaps not in a much different place than they are now.
Regardless of whatever legal challenges the SEC ruling currently faces, many businesses continue to move forward with preparing for compliance. Why? As attorney Michael Littenberg with Ropes & Gray notes, “Whatever the outcome, many companies will have to comply with similar rules in California and the European Union…” anyway. For instance, starting in 2026, any companies based in California that have more than $1 billion in revenue will have to report direct and indirect emissions. Beginning in 2027, reporting will also include Scope 3 emissions. The EU began implementing its Corporate Sustainability Reporting Directive (CSRD) this year, which will require nearly 50,000 businesses to submit sustainability reports that must include emissions reporting, including Scope 3 emissions. This requirement is not limited to EU companies; it also includes those non-EU companies which either have subsidiaries in the EU, or are “listed on EU regulated markets.”
Even without the need to adhere to existing or upcoming regulation, financial institutions and other establishments have reason to consider sustainability in their business practices. As far back as 2018, Forbes noted, “more than 90% of CEOs say that sustainability is fundamental for success.” Investors see climate risk as financial risk. Indeed, a post by Harvard Law School examined a paper by Sautner et al., and said a survey showed “51% of respondents believe that climate risk reporting is as important as traditional financial reporting.” By disclosing climate risk, corporations provide transparency and information that allows investors to make sound decisions. The interest in an organization’s sustainability is not just held by investors, as consumers are becoming increasingly interested in doing business with companies that have sustainability policies. A business or financial institution that implements procedures related to climate risk, even if they are not required to do so by governmental regulation, demonstrates to both investors and consumers a willingness to lead the effort toward sustainability and contributes toward the company’s ability to brand itself as sustainable.
Despite the pause in the SEC’s ruling on climate-risk disclosures, it would seem many companies see the proverbial writing on the wall and have decided to be proactive in executing policies to address climate risk. Aside from preparing for regulations that are being put into place now and certainly in the future, taking steps toward addressing climate risk allow businesses and financial institutions to demonstrate their leadership in implementing sustainability policies, thereby appealing to both investors and consumers.
Environmental Risk Innovations (ERI), a consulting firm which manages environmental risk for banks, and The EI Group, a multidisciplinary environmental engineering, occupational safety and health consulting firm whose primary focus is aimed at supporting Fortune 1000 corporations involved in manufacturing, energy production and transportation services, have formed an alliance to address the needs of publicly traded commercial lenders and those corporate borrowers targeted for commercial loans to assist their customers, both banks and corporations, in meeting the pending SEC rule requirements. As part of this initiative, ERI and The EI Group have launched a joint blog series which outlines the SEC rule in detail. To read the entire blog series, please go to Banks, Borrowers, and Climate Change.