In March of 2022, the Securities and Exchange Commission (SEC) proposed the “Enhancement and Standardization of Climate-Related Disclosures for Investors.” Although it’s actually an amendment to the SEC’s current environmental, social and governance regulations, this proposal is often referred to as the “SEC’s proposed ESG rule.”
While some organizations support elements of the proposal, such as the SEC’s efforts to enhance climate-related disclosure, other investment advisers and those representing them have challenged the proposed amendment, arguing that the SEC is overreaching and attempting to exert more power than it should over investment firms and that the requirements are far too demanding of investment firms and are unclear.
As an investment adviser or an employee at an investment firm, you’re probably well aware of the controversy surrounding the SEC’s proposed ESG rule, but do you know how the amendment could affect your firm if it’s adopted?
What is the SEC’s proposed ESG rule amendment?
The SEC’s proposed ESG rule would require publicly traded companies to disclose to investors how their operations affect the climate and contribute to carbon emissions. This amendment is part of a broader push for greater transparency in ESG reporting and applies specifically to investment companies, investment firms and investment advisers.
How could the SEC’s proposed ESG rule amendment affect your investment firm?
Considering the launch of the Climate and ESG Task Force within the SEC’s Division of Enforcement and the SEC’s focus on ESG in this year’s onsite examinations, one can argue that it’s probable that the SEC will focus on ESG as a compliance priority. If the proposed amendment goes into effect, it could have significant implications for your investment firm’s compliance program. This change can affect your investment firm in the following ways:
- Additional tasks for your compliance team.
Your compliance team will need to establish a process of accurately reporting how your investment firm’s operations affect the climate and contribute to carbon emissions. Your investment firm will also need a climate transition plan in place to disclose to investors.
If you’re a part of a small investment firm where employees might be wearing several hats at a time, this could be particularly challenging. The services of a compliance consultant could be particularly helpful in this endeavor, as they could offer guidance to your compliance team on how to meet the requirements in a cost-effective manner.
- Increased scrutiny from regulators and investors.
The proposed amendment could also lead to increased scrutiny from regulators and investors. Investment firms which fail to comply with the new disclosure requirements could face penalties and damage to their reputation. The compliance team at your investment firm will have to ensure that your firm is prepared to meet the new disclosure requirements and that it has the necessary resources and support to do so.
It’s worth noting that the proposed amendment is still under review, and modifications may be made based on feedback from firms and investors. However, given the growing importance of ESG reporting and the SEC’s commitment to promoting transparency in this area, it’s likely that some form of climate-related disclosure requirements will be put in place in the near future.
For further guidance on how to help your firm navigate the ever-changing regulatory landscape, contact us today!