Return to search

Two ways the SEC’s climate proposal could impact private markets

The impact of a new SEC climate disclosure proposal for publicly traded companies could be felt in private markets.

The US Securities and Exchange Commission proposed new governance Monday that would require public companies to report the climate-related risks of their business activities. The new regulation would require corporations to report direct and indirect greenhouse gas emission – known as Scope 1 and 2 reporting – as well as Scope 3 “value-chain” emissions created from the production or use of a company’s operations.

The regulatory agency’s disclosure proposal is being described as a landmark moment for climate change accountability in the US. And while the SEC targeted public markets in its proposal, here are two ways the new rules could affect private markets investors:

  • ‘Getting your house in order’: A private company can enter public markets in two ways: initial public offerings or acquisition by another publicly traded company. Regardless of which exit ramp a private markets investor takes, both will require ensuring a company’s climate-related disclosure processes are in place, if the SEC’s proposal is enforced. “These disclosure requirements will require getting your house in order,” Fran Seegull, president of the US Impact Investing Alliance, tells affiliate title New Private Markets. Seegull added that the pending regulation could be “the tide that lifts the floor of reporting” in private markets.
  • A regulatory haven: Less stringent private markets disclosure requirements could deter investors from pushing those companies into public markets. This could lead to a “regulatory arbitrage” for asset managers seeking havens from US regulators, says Andrew Park, senior policy analyst at the advocacy group Americans for Financial Reform. “If there are more requirements imposed on public companies related to climate and human capital disclosures, [companies] may feel incentivized to be taken private to try to evade that additional level of scrutiny,” Park said during a webinar in the run up to the announcement.

Regardless of the regulatory imperative, forward-thinking managers are already taking steps to measure the carbon footprints of their portfolio companies. If the SEC’s new rules are enacted, expect to see the “starting point” for incorporating climate reporting become an earlier imperative, according to Fionna Ross, senior ESG analyst for US equities at Abrdn. “There’s going to be those that get a head start on data collection and disclosures; then there will be those that are more reluctant,” Ross tells New Private Markets. “It’s also worthwhile noting what the endgame is… Regardless of where regulation takes us, I think we’re still going to see increased pressure on companies, both public and private, to disclose additional climate data.”

The rules in detail

The climate disclosure rule will require larger listed companies to disclose any “material” value chain emissions, known as Scope 3 emissions, writes Paul Verney for affiliate title Responsible Investor. The landmark rule will also require companies to disclose Scope 3 emissions if they have included them in climate targets.

The proposed rule, which will now go out for public consultation before being finalized, requires companies with a market value of $700 million or more to disclose relevant Scope 3 emissions from the 2024 fiscal year. Smaller companies, those with a market value of $250 million or less, are exempt, and the companies that sit between the two will be required to disclose their value chain emissions from the 2025 fiscal year.

The rule also includes a “safe harbor for liability for Scope 3 emissions disclosure.” During the consultation on the rule, some big US companies – including Alphabet and Microsoft – expressed concerns that reporting ESG information in financial filings might leave them open to lawsuits if that information is found to be incorrect.

Speaking on a webinar in July, SEC chair Gary Gensler highlighted the fact that, as it stood, “companies could announce plans to be ‘Net Zero’ but not provide any information that stands behind that claim. For example, do they mean Net Zero with respect to Scope 1, Scope 2, or Scope 3 emissions?” he said.

All listed US companies will be required under the new proposed rule to disclose their Scope 1 & 2 emissions – those that arise from their activities and energy use – over the next three fiscal years, rolling out from the largest to the smallest firms.

By the 2026 fiscal year, following a phased-in approach, companies with a market value of $700 million or more will also be required to provide “reasonable assurance” on their Scope 1 & 2 disclosures. The same will apply, again on a phased in basis, to companies with a market value of less than $700 million the year later in the 2027 fiscal year.

That assurance should be undertaken by an “independent GHG emissions attestation provider,” the rule stipulates.

The new disclosure regime also requires companies to disclose in SEC filings a raft of information on risks posed to their businesses from climate change and their governance of them, including the use of scenarios analysis and whether they use an internal carbon price and its underlying assumptions.

Carbon offsets are also covered in the disclosure requirements when it comes to targets. Speaking on the webcast today, SEC commissioner Caroline Crenshaw said, “If companies claim they are reducing overall carbon emissions by other means, they need to tell investors how they are doing that. Commenters have indicated problems with offset verification, accuracy and quality, and they need better insight into how companies count offsets toward their climate goals.”

Subscribe to or register with Responsible Investor to read the full article.

This article first appeared in affiliate publication New Private Markets